India and Sri Lanka as two immediate neighbours enjoy broad sustained bilateral ties. Over the two thousand years of coexistence, whole range of issues have dominated the bilateral ties many arising out of the dynamic domestic environment and some from extra regional exigencies. While both states continue to profess amity and cooperation, points of friction continue to often overwhelm the bilateral ties. Underlying bilateral tension over issues of fisherman and fishing rights, issues over the minority ethnic Tamil population simmer amongst some others. But the recent Sri Lankan decision over enabling China to entrench themselves more closely with the island country, pose serious and long-term consequences for the future of Indo-Sri Lankan bilateral ties.

While Beijing and Colombo have been close partners for long, and their broad-based engagement is not unknown, the Colombo Port City Economic Commission Bill that was passed by the Sri Lankan Parliament (24 May 2021) has been especially significant for not only Sri Lanka but for India and the South Asian region too. The Bill was challenged in the Supreme Court in terms of Article 121 (1) of the Constitution. The Court had taken into consideration the petitions that were raised regarding several issues, including about the constitutional integrity of the panel overseen by the president, the lack of oversight by regulators including the Central Bank of Sri Lanka.¹ However, the Government accepted all the amendments that were ordered by the Supreme Court. Further Prime Minister Mahinda Rajapaksa assured that the Colombo Port City Economic Commission (CPCEC) Bill was to be amended, allowing for 75 per cent of the jobs created by the Port City to be reserved for Sri Lankans, and the Port City Economic Commission will relax the conditions of employment for Sri Lankans who did not have the required special skills.²

The Colombo Port Project was launched during Chinese President Xi Jinping’s visit to Sri Lanka in 2014, and will include a Special Economic Zone (SEZ) where it will be free to operate in any currency. The Port City to be built over 5.7 million square meters on a reclaimed land from the Indian Ocean has been designed to invite multinational enterprises, corporate headquarters, amongst otherlocal stakeholder. The Colombo Port City project is part of a greater plan that was envisioned by the Rajapakse government and would host the naval and financial hub. It would also have hospitals, shopping malls and apartments too.

It will be the catalyst for a modern services hub that will help Sri Lanka’s transformation into a services-led growth model and elevate the economy to high-income status.³ According to the government it would provide employment to nearly 200,000 in the first five years, and is expected to attract at least USD 15 billion in investments over the next five years. This Port City adjoining Colombo Port, South Asia’s biggest transshipment port, lends clear advantages to China. It also essentially amounts to China having control of the ongoing SEZ project. The SEZ will facilitate business and new industry, and it will be possible for China to create jobs and support many of the other Chinese production facilities outside Sri Lanka.

The Opposition had raised concerns over the infringement of sovereignty and measures to create a ‘Chinese enclave.’ The Sri Lankan government dismissed them saying the bill would be a turning point for Sri Lankan economy, Ajith Nivard Cabraal, Sri Lankan State Minister for Finance, has also assured that Sri Lanka holds jurisdiction over the project. ‘Jurisdiction is exercised through the Port Commission law. Not that they are released from all jurisdiction they have to comply the laws of the country through the Port Commission Act, not any other Act.’⁴ It was also explained that on this project, the Sri Lankan government has been able to attract huge private investments without any capital spending.⁵

Interestingly, while some have questioned the immediate possibilities of investment flows given the pandemic economy, the Port City functioning as an offshore Financial Center has greater business potential. In fact the author argues that the demand for services offered by this OFC especially from the new billionaires emerging from developing countries, mostly from China.⁶

But this project is much more than just what seems apparent. Surely, commercial and business activities do not have many reasons to be seen as any threat to another neighbour, but China’s interest in the region is not new and it goes beyond just building infrastructural projects in South Asia. Much of China’s sustained bilateral relationships in this region have centred on building and helping develop roads, bridges, ports and other physical infrastructure that these states required and those with a strategic element. Sri Lanka is one of the major benefactors of this Chinese policy.

It is important to recall that China had provided US$ 7 billion in loans, including for the construction of a Sri Lankan port in Hambantota. This has been one of the most talked-about projects, given that Colombo in 2017 was forced to hand over the lease of the underused port to a Chinese company for 99 years on its inability to cover the loans it had received from Beijing. This is despite that fact that Colombo will still have to pay off five loans obtained from the Exim Bank of China to construct the Hambantota port. In that sense, the port lease cannot be interpreted as a debt-equity swap, which refers to a cancellation of debt in exchange for the equity of an asset. In this case there was no cancellation of the debt.⁷ Interestingly, this experience has not thwarted them from working on future projects together and the Port City is one of the latest. In fact within weeks of this decision the Sri Lankan awarded yet another major project for building a key expressway in its capital Colombo to the same Chinese firm that was awarded contract in the Port City.⁸

Further, China has promised around $24 billion worth of investment in Sri Lanka under the Maritime Silk Route initiative through which it seeks to build connectivity routes links Asia to Europe and Africa in a revival of the ancient Silk Road trading routes. China has made no secret of its intention to dominate the Indian Ocean through its maritime and strategic initiatives. While China is trying to ensure its stronger presence, India has also increased its bilateral and multilateral exercises in the Indian Ocean. Also its strategic intention in Sri Lanka seems evident given the nature of its investment some of which have very limited commercial value, including the building of cricket stadium and convention halls. China has also lent political support, especially during the time when Sri Lanka became increasingly isolated by accusations of human rights abuses. Under Rajapakse, Sri Lanka relied heavily on China for economic support, military equipment and political cover at the United Nations to block potential sanctions.⁹

But more importantly, given the history of Sino-Indian tension and sustained Chinese interest in the region it would be not out of place to argue much of what Beijing plans in the region has an Indian context. Much of its measures has pointed to China attempting to marginalizing Indian interest in the region and at the same time leverage its growing influence in the South Asian neighbourhood. Also this port project is less than 300 kilometres from Indian coasts, a critical space for both India and China as well as many other Indian Ocean region states. The Indian fears have aggravated over Colombo’s decision to cancel the tripartite agreement on developing the East Container Terminal of Colombo Port. India, Japan, and Sri Lanka were to jointly develop this project, estimated $500-$700 million. Citing public resentment over this, Sri Lanka offered the West Container Terminal (WCT) Port to India. While Adani Ports from India is developing this WCT, Government of India has preferred to stay away from the project. Also as it has been pointed out, New Delhi feels that this affects its security concerns and also is a violation of the 1987 accord between Sri Lanka and India that promises that neither country will let its ports be used for activities that would affect the other’s “unity, integrity and security.”¹⁰

India and Sri Lanka are examining ways to deepening their economic and trade relations and as member countries on several sub regional and regional grouping, have an abiding interest in sustaining if not improving the level of bilateral and multilateral interaction. But to take the relationship to a higher level it is imperative that Colombo understand and adequately address Indian apprehensions about Colombo’s lack of adequate sensitivity towards India’s security interests. Both the neighbours need to rethink their working relationship beyond the rhetoric and examine ways to strengthen their ties. Mere verbal assurance cannot be enough when core security interests are at stake. Clear communication between two friendly neighbours to address the underlying tension has to be an immediate priority.

Endnotes

1. Anusha Ondaatjie, ‘Inconsistencies Spur Sri Lanka to Amend Bill on China -Built Port’, Bloomberg‘19 May 2020 at https://www.bloombergquint.com/global-economics/inconsistencies-spur-sri-lanka-to-amend-bill-on-china-built-port
2. Gagani Weerakoon, Govt accused of rushing Port City Bill, Ceylon Today, at 21 May 2020 at https://ceylontoday.lk/news/govt-accused-of-rushing-port-city-bill
3. Project company welcomes Cabinet approval to establish Special Economic Zone at Port City,Daily Mirror, 26 March 2021, at https://www.portcitycolombo.lk/press/2021/03/26/project-company-welcomes-cabinet-approval-to-establish-special-economic-zone-at-port-city.html
4. Sri Lanka government dismisses concerns that Colombo Port City would become a Chinese colony, Colombo Page, 16 Apr 2021, at http://www.colombopage.com/archive_21A/Apr16_1618588905CH.php
5. ‘China-funded Colombo Port City good example of public-private partnership: Sri Lankan minister’,XINHUANET.COM6 Oct 2020 at https://www.portcitycolombo.lk/press/2020/10/06/china-funded-colombo-port-city-good-example-of-public-private-partnership-sri-lankan-minister.html
6. Indika Hettiarachchi, ‘Can Colombo Port City become South Asia’s new offshore financial center?’,South Asia Monitor, May 29, 2021 at https://www.southasiamonitor.org/index.php/spotlight/can-colombo-port-city-become-south-asias-new-offshore-financial-center#:~:text=It%20is%20also%20expected%20to,threat%20to%20Sri%20Lanka's%20sovereignty.
7. Umesh Moramudali,The Hambantota Port Deal: Myths and Realities
   The Diplomat,1 Jan 2020 at https://thediplomat.com/2020/01/the-hambantota-port-deal-myths-and-realities/
8. China Harbor Engineering Cooperation, a subsidiary of China’s majority state-owned Chinese Communications Construction Company (CCCC), will build an elevated expressway in Colombo, connecting the Athurugiriya Interchange and the New Kelani Bridge.
9. Maria Abi-Habib, ‘How China got Sri Lanka to cough up a port’, New York Times, 25 June 2018 at
   https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html
10. Gunjan Singh, ‘Hambantota Port and Indian security Concerns’Asia Times, 6 July 2018 at https://asiatimes.com/2018/07/hambantota-port-and-indian-security-concerns/

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