The location of Sri Lanka is unique. The tiny nation is present in the centre of the Indian Ocean Region. Thus, making Sri Lanka a key player in the India-China hostility.
INTRODUCTION
In India-China geopolitical rivalry, Sri Lanka is very crucial because the strategic location of the nation draws the attention of both Delhi and Beijing.
The primary reasons for this are:
First, all major trade routes pass through this island nation.
Second, without Sri Lanka, the security of the Indian Ocean Region is unimaginable.
Therefore, to dominate the Indian Ocean Region, the two Asian superpowers desire to have a great hold over the resources and facilities of the island country. Thus, beginning the India-China ‘acquisition game’ in Sri Lanka.
HAMBANTOTA PORT: CHINESE MOVE IN INDIA-CHINA CONTEST
The Hambantota International Port (HIP) is a deep-water port in Hambantota, Sri Lanka. The port is also known as Magampura Mahindra Rajapaksa Port. Furthermore, it is the second-largest port after the port of Colombo. In 2010, the port opened.
To emphasize, the geographic location of the HIP is crucial for both the Shipping and the Import/Export business industry.
Another critical point is that the location of Hambantota Port is very geostrategic. The port is close to the International Maritime trade routes- the Suez Canal and the Strait of Malacca.
To point out, the distance between the port and the trade routes (Suez Canal and Strait of Malacca) is just 6 to 10 Nautical Miles (19KM).
Due to this reason, the port provides the following:
- The proximity to the shipping lanes.
- Helps in easy access to Asian and European markets.
- Saves about three days of sailing time and fuel.
Notably, around 36,000 ships and 4,500 tankers use the maritime routes passing through Hambantota. Thus, making it a vital asset for Colombo.
HIP: THE BENEFICIAL FACTORS
A few factors mentioned below give HIP a competitive advantage in developing as a regional maritime logistics hub.
- The port has a deep-sea terminal facility. Due to this, it can berth a large number of ships conveniently and efficiently.
- It has competitive labour costs/expenses.
- It has free port services.
- The port has abundant space for storage.
- The weather is dry all year round.
- The port is becoming a Ro-Ro Transshipment hub.
- RoRo facility allows the products such as cars and tractors to be loaded and discharged from a vessel. Most importantly, the Ro-Ro facility permits the product to be rolled on and off the ships. Rather than being lifted by a crane.
- The port offers services such as container handling, general cargo transportation, passenger transportation, bulk terminal and bunkering. Bunkering is the supply of fuel for use by ships.
- Additionally, the port provides a shorter timeline to travel.
- It also allows experienced handling of ships and trans-shipment of goods to almost any destination.
In fact, at Hambantota, ships arriving from India, Korea, and Japan are off-loaded. And further prepared for trans-shipment to the Middle East, South Africa, and South America.
HIP PROJECT: A FAILURE?
For the past three decades, the HIP project was under the pipeline. However, after the victory of Mahinda Rajapaksa in the 2005 Presidential election, Rajapaksa focused on the development of the HIP.
To point out, China was the first to respond to the development of the port. Chinese Exim Bank financed the construction of HIP. Notably, The total cost of the port construction was $1.3 Billion.
However, The Central Bank of Sri Lanka studied the growth chart of the HIP for the years 2015 and 2016. After the in-depth observation, the Central Bank presented a report stating that the only port in Sri Lanka with a negative growth rate is Hambantota. The report further noted that the vessel arrival rate was declining at Hambantota.
Sri Lanka developed HIP with the hope of increased trade and economic growth. But, all the hopes got quashed. Thus, plunging Sri Lanka into debt to China.
To point out, Sri Lanka owed China $8 billion as the Sri Lankan government failed to pay back the capital debt to China. Consequently, in 2017, the Sri Lankan government decided to hand over 80% of the port ownership to China Merchants Port Holdings (CMPort) over a lease period of 99 years in return for $1.1 billion. Along with 1,235 acres of land and a payment of US$1.12 billion. On the contrary, only a 20% stake in the port was with Sri Lanka Ports Authority (SLPA).
Notably, CMPort spent around $1.12 billion under a public-private partnership to revive the port. Furthermore, CMPort again exhausted at least $700-800 million or more to bring the port to the operational level at its capacity.
INDIA-CHINA CONTEST: CHINESE ASPIRATION IN IOR
The HIP project is a part of China’s 21st Century Maritime Silk Road initiative. Notably, the Maritime Silk Road is a Chinese maritime route project of the Belt and Road Initiative.
Interestingly, Beijing runs a project known as “String of Pearls“. The ‘String of Pearls’ refers to a geopolitical theory of the network of Chinese military and commercial facilities developed by China in the India Ocean Region (IOR).
Under this policy, Beijing aims to control geostrategic ports along the world’s most important maritime trade routes, starting from the Strait of Malacca to the Indian Ocean. The dominance of IOR is a significant factor in the India-China geopolitical rivalry.
To emphasize, China aspires to become a maritime superpower. By acquiring control over Hambantota, China is now only strategically a few kilometres away from India.
Indeed, Chinese naval submarines have been docking in Hambantota as a Chinese strategy to encircle India under its ‘String of Pearl’ project. Thus, leading to the escalation of the India-China feud.
Generally speaking, the time has come that Delhi should be more alert and aware of the Chinese threat.
TRINCOMALEE PORT: INDIAN MOVE IN INDIA-CHINA CONTEST
Trincomalee is a port city located on the Northeast coast of Sri Lanka. The port is famous for its WW2-era oil storage tank and is one of the world’s finest deep-water natural harbours.
To Explain, during World War II, the Britishers built oil tank farms as refuelling stations for the Royal Navy ships. Significantly, the oil tank farm has 99 storage tanks in total.
The location of the tanks is in the upper and lower tank farms. Each tank has a capacity of 12,000 Kiloliters. Therefore, the total capacity is around 1 million tonnes.
The oil tank farm is located in China Bay and is close to the Trincomalee deep-water natural harbour. Notably, the Trincomalee port is the nearest port to Chennai, India.
SIGNIFICANCE OF TRINCOMALEE FARM
- Geographic location – The position of the oil tank farm is near the deep-water natural harbour.
Most importantly, the location of the oil tank farms is along the world’s busiest and most important sea lanes. Thus, making it geostrategically crucial.
- Economic benefit – The presence of a well-developed oil storage facility and refinery near the Trincomalee port would be an added monetary gain for both India and Sri Lanka.
RAJIV-JAYAWARDENA ACCORD
In fact, In 1987, During the peak of the Sri Lankan Civil war, Prime Minister Rajiv Gandhi and President J.R. Jayawardene signed an accord. It was known as the India-Lanka accord or the Rajiv-Jayawardene Accord (PDF).
The accord primarily focused on:
- Indian and Sri Lankan strategic interests.
- The interest of people of Indian origin in Sri Lanka.
- Tamil minority rights concerns in Sri Lanka.
- A joint venture between India and Sri Lanka to develop the Trincomalee oil tank farms.
However, the accord remained dormant as Sri Lanka was engaged in a Civil War for 20 years.
In 2002, the Civil War halted due to a ceasefire between LTTE-Sri Lankan Government. But the ceasefire duration was short.
Surprisingly, in 2002, the US requested Sri Lanka to provide the Trincomalee port to them. The US wanted to make the port a Naval base, to support its forces fighting in Afghanistan.
As a result, this alerted New Delhi, and then Indian High Commissioner, Gopalkrishna Gandhi, visited the facility.
THE TRINCOMALEE DEAL: DELAYS IN THE IMPLEMENTATION
In 2003, after 35 years of the pact, the Indian Oil Corporation set up its Sri Lankan subsidiary, named Lanka IOC. The LIOC got established to work on the Trincomalee oil farm. Moreover, The primary role of LIOC was the retail distribution of petrol.
In 2003, three stakeholders — CPC (Ceylon Petroleum Corporation), LIOC and the Sri Lankan government — prepared a framework agreement.
As per the 2003 agreement, LIOC was to be given the entire farm for 35 years with an annual rent of $1,00,000. However, political equations changed in Sri Lanka. Thus, causing strong resistance in Colombo over the complete handover of the farm to India.
As a result, the lease agreement remained unsigned. Although, LIOC kept functioning and expanded its petrol pump base from 150 to 200. In addition, the LIOC restored 14 of the oil tanks and, later on, also refurbished two more tanks.
To emphasize, the Indian government avoided making an enormous investment in the Trincomalee oil farm earlier. However, after the Hambantota port deal between Colombo and Beijing, Delhi started pushing for the oil farm project.
In 2015, during Indian PM Narendra Modi’s visit to Sri Lanka, both sides decided to form a joint task force to draw up plans to create a petroleum hub in Trincomalee.
Furthermore, In 2017, many MoU were signed between Sri Lankan and the Indian Government. The MoU even included the restoration of the Trincomalee oil farm, which focussed on sub-leasing a few tanks from LIOC. However, again the accord failed to materialize.
2022: THE FINAL DEAL
Ultimately, in January 2022, the Sri Lanka government nodded to the Joint development of the Trincomalee oil farm by signing three lease agreements.
The Sri Lankan government, IOC subsidiary LIOC, and CPC (Ceylon petroleum corporation) signed three agreements.
Given below are the details:
- CPC and LIOC signed two agreements.
-One agreement for the joint development.
-Another agreement for the transfer of the 24 tanks to CPC. - The Sri Lankan government and LIOC signed the third agreement.
According to the deal:
- CPC and LIOC will refurbish 61 out of 99 tanks jointly.
- Out of the rest, CPC will run 24 oil tanks & LIOC will run 14 oil tanks.
- The agreement will be valid for 50 years.
- Moreover, there are provisions in the contract to protect investment done by the oil farms.
Furthermore, CPC formed a company named Trinco Petroleum Terminals Ltd.(TPTL) for the project.
Notably, Sri Lankan Energy Minister Udaya Gammanpila reported that,
“the Indian Oil Subsidiary, Lanka IOC (LIOC) would be given 49% stake in the joint development of the Trincomalee oil tank farm, with Ceylon Petroleum Corporation keeping 51%.”
The signing of the new agreement led to the termination of the previous 2003 agreement created by the SL government, LIOC and CPC.
In conclusion, the new accord assured that the Sri Lankan now have a stake in 85 of the tanks present on the oil tank farm.
TRINCOMALEE DEAL: AN IMPORTANT FACTOR
The Tricanomalee port deal has mutual benefits for Delhi and Colombo. Given below are a few benefits:
- The Trincomalee project will broaden the mutually beneficial economic partnership between India and Sri Lanka.
- The deal will ensure energy security for both nations.
Benefits from a Sri Lankan point of view:
- Firstly, the deal will help develop Trincomalee as an energy and transport hub.
- Secondly, as Sri Lanka is in a deep financial crisis, this project will provide much-needed financial assistance to Sri Lanka.
Benefits from an Indian point of view:
- Firstly, the cooperation in energy security between India and Sri Lanka is a part of the Indian policy of “Neighbourhood First“.
- Secondly, keeping the Chinese acquisition of Hambantota harbour in mind, the Trincomalee oil farm project is crucial for India’s stance in IOR geopolitically, under the recent India-China rivalry.
THE SRI LANKA FINANCIAL CRISIS
The economy of Sri Lanka has faced severe blows over the past three years. To point out, Tourism plays a crucial role in the Sri Lankan economy.
The Sri Lankan tourism industry was affected due to 2 reasons:
First, the Easter bombing.
On April 21, 2019, The island nation witnessed one of the bloodiest bombings in its history. It was an Eastern day suicide bombing.
On this horrifying day, eight explosions occurred in multiple cities and locations. Most importantly, all the explosion sites were near churches and hotels. The bombing killed 300 persons and injured 500 persons. The Bombings primarily focused on Christians and tourists.
To point out, a few days later, Islamic State in Iraq and the Levant (ISIL or ISIS) claimed responsibility. ISIS also released photographs of the alleged bombers.
Second, the onset of the Covid pandemic.
CAUSE OF FINANCIAL CRISIS: CHINESE DEBT TRAP?
The reasons for the financial crisis were:
- Lack of Foreign currency.
- Due to the lack of foreign currency, the Sri Lankan government cannot pay for its staple food and fuels. Thus, resulting in a shortage of food along with very high hikes.
- Ban on chemical fertilizer.
- The Rajapaksa government banned the usage of chemical fertilizers. As a result, this affected the Sri Lankan agricultural sector. The step severely affected rice production.
- Tax cuts.
- In 2019, the Rajapaksa government promised deep tax cuts. Therefore, this step wiped out the Sri Lankan economy.
- To elaborate, The government reduced VAT from 15% to 8%. In addition, the government also deducted seven more taxes. Consequently, this led to low tax collection.
- Pandemic.
- The Covid pandemic led to the halt of tourism. Notably, The tourism industry is a crucial source of forex for the country. Tourism accounts for a 4.9% share of Sri Lankan GDP.
- Debt-trap.
- The country was highly dependent on foreign debt as it wanted to run its economy smoothly. To point out, Sri Lanka’s outstanding debt with China is 10% ($3.5 BN). Whereas, for India, it is only 2%.
Therefore, over-dependence on Chinese loans was the leading cause of Sri Lanka falling into a debt trap. These circumstances led to a credit rating downgrade. Hence, resulting in the alienation of Colombo from the International financial market.
Likewise, Sri Lanka stopped external debt payments due to the non-availability of foreign exchange (currency) with the government. The government wanted enough cash reserve for emergency supplies such as gas, fuel, medicine, food and other essential items for its citizens.
Important to realize that Colombo needs between $3 billion-$4 billion this year to pull out of this financial mess.
INDIA’S AID: A TRUMP CARD IN INDIA-CHINA FEUD
With its “Neighbourhood First” policy, India has provided the following aid to Colombo:
- $500 Million for Sri Lanka’s fuel imports.
- $1 billion credit line to buy food, medicines and essential items.
- Delivery of Over 2,70,000 metric tonnes of diesel and Petrol.
- Delivery of 40,000 tonnes of rice under a $1.2 billion credit facility.
- Again, delivery of 11,000 MT of rice on the occasion of Sinhalese and Tamil new year.
- Due to the ban on chemical fertilizers in Sri Lanka, India gave 100 Tonnes of nano-nitro fertilizers.
- RBI extended a $400 million currency swap under the SAARC facility. And deferred payment of $515 million owed by the CBS (Central Bank of Sri Lanka) Under the Asia clearing Union.
- Occasionally, India has sent vegetables, sugar, rice, and wheat as aid to citizens of Sri Lanka who are battling a crisis.
To conclude, the financial assistance given to Colombo will surely help Delhi in keeping an upper edge in the India-China acquisition game. Thus, maintaining its geopolitical dominance in the IOR.