Chinese dredgers and excavators have been working day and night off Colombo’s iconic sea front for months, eliciting mixed emotions among the thousands of passers-by crowding the promenade on any given day. After months of delays and controversies, they set off to reclaim as many as 269 hectares of sea water to lay the foundations of a new financial centre expected to rise from the Indian Ocean, touching the shore of Sri Lanka’s commercial capital. With the total investment reaching up to $15bn, Chinese developer CHEC Port City Colombo does not hide its ambitions of making the Colombo International Financial City (CIFC) a game-changing project.
“It’s the equivalent of Canary Wharf,” says Liang Thow Ming, the company's marketing officer, referring to the planned 1.5 million square metres of available office and retail space – as much as in London’s iconic, post-modern financial district, which began to rise from the ashes of the West India Docks 29 years ago.
Finding a balance
Nevertheless, CHEC Port City Colombo will have to strike a delicate balance between financial and political interests for the project to be successful. In fact, the whole project came to a standstill for at time when the new government, led by president Maithripala Sirisena, championed a mounting popular malaise towards the numerous, multi-billion Chinese-backed projects signed by his predecessor Mahinda Rajapaksa, and forced the developer to accept new, more constraining terms for the overall concession. However, large numbers of the population still see the CIFC and other projects as a sell-out.
The CIFC, originally known as the Port City, will stand at the northern end of the Galle Face, the city’s crowded sea front. CHEC Port City Colombo, a wholly owned subsidiary of China's largest state-owned contractor, China Communications Construction Company, is now in the early stages of a development that will combine a financial district with residential and commercial areas, as well as a central park and marina. It will become a real city within the city, with special jurisdiction and authorities.
“We are talking about building a world class city for south Asia,” says Mr Ming. “Because of the size of the project, we are not targeting Sri Lanka only, but looking at south Asia as a whole, to cater to its high-net-worth individuals [HNWIs].”
The overall vision is to replicate the model of Singapore and Dubai to become to the financial hub of reference in south Asia and make Colombo the base for the wealth management and business dealings of HNWIs from the region.
The project is already breaking records as CHEC Port City Colombo committed to investing $1.4bn into land reclamation and other preparation works, which makes it the largest FDI project ever undertaken in Sri Lanka.
This initial investment is intended to pave the way for the development of not only the 1.5 million square metres of office and commercial space, but also 21,000 residential units for a total estimated local population of 80,000 – plus another 250,000 expected to commute to the area daily. Once reclamation and preparation works are over in 2018, the company will make plots of lands available to investors willing to develop them on their own, or in a joint venture. The state will also retain dozens of hectares to develop public and private functions. Overall, Mr Ming expects total investment in property development to the tune of $13bn.
Following a groundbreaking ceremony initiating the project in 2014, in the presence of then president Mr Rajapaksa and his Chinese counterpart Xi Jinping, it did not take long for CHEC Port City Colombo to experience the volatility of Sri Lanka’s internal politics when Mr Rajapaksa's successor, Mr Sirisena, first threatened to scrap the project altogether in 2015, then locked horns with the company over the terms of its concession, stalling the work for 18 months.
“The last government was being accommodating towards Chinese investment because there was so much corruption involved and they used it to fit their own purposes,” former finance minister Ravi Karunanayake told fDi Magazine in January. “On the other hand, we got in touch with the Chinese government to make it a win-win situation for both countries since the outset.”
The peace dividend
The government converted the freehold originally granted to CHEC Port City Colombo into a 99-year lease and rebooted the project under the new name of Colombo International Financial Centre. However, the issue once again highlighted the thin line authorities in Colombo have been walking for years in an attempt to bring in fresh capital to spur development across the country.
Sri Lanka’s $67bn economy has hardly been a champion of foreign investment, with the civil unrest stemming from the power struggle between the majority Sinhalese population and the Tamil community living in the north of the island, deterring foreign investment for decades. However, the country finally increased its investment appeal after Mr Rajapaksa orchestrated a peace agreement with the Tamil Tigers in 2009.
Long-awaited stability unleashed economic growth and attracted major foreign companies across the board, from infrastructure to manufacturing, but most of those developments were funded through concessional and commercial loans. Total external debt more than doubled to $47.3bn, or 58.7% of GDP, at the end of September 2016, from $21.4bn at the end of 2010 (43.3% of GDP), according to figures from the central bank.
In a country with a narrow fiscal base such as Sri Lanka, servicing that level of debt proved impossible, prompting the government to secure a $1.5bn rescue package from the IMF in 2016. On the other hand, fiscal incentives failed to shore up FDI, which has remained below the regional average over the years and stood at $898m in 2016, or 1.1% of GDP, against a south Asia average of 1.8%, according to World Bank figures.
China accounted for almost half of the concessional loans signed between 2010 and 2015 as Sri Lanka emerged as a key trading nexus along the maritime leg of Beijing’s Belt and Road initiative. Chinese money backed the development of the infrastructure projects envisioned by Mr Rajapaksa, who signed what many claimed were very generous concessions for the development of Colombo’s new financial district, but also the ports in Colombo and Hambantota.
Mr Rajapaksa’s alleged leniency towards Chinese investors, combined with the claims of large-scale corruption involved in those deals, eventually stirred the ire of the population and cost him the 2015 presidential elections, when former ally Mr Sirisena emerged victorious on a platform promising to challenge the growing Chinese influence on the island.
The new government thus set off to renegotiate iconic contracts from the previous era, such as Port City Colombo, or the concession of the Hambantota port. At the same time, it launched a public-private partnership programme and other initiatives to promote more FDI into the country and loosen its dependence on concessional loans.
Chinese investors are now back at work as the government looks for new investors in India, Asia and elsewhere. However, they will have to tread carefully to preserve the delicate political endorsement they finally achieved in Sri Lanka after months of negotiations, to lure possible partners for projects such as the CIFC and, eventually, win over the hearts of the population, which still view them more with suspicion than awe.