Why Two USD4.1 Bn Chinese Investments Hit a Dead End in Sri Lanka

Two more major Chinese-backed projects, both geopolitically sensitive and involving years of negotiations, have reached a dead end in Sri Lanka in two months or so, bringing the proposed investment of approximately USD 4.1 billion into question. The two projects – the USD3.7 billion Sinopec oil refinery in Hambantota and the USD392 million South Asia Commercial and Logistics Hub (SACLH) at the Colombo Port, involving China Merchants Port Holdings (CMPort) – represented a combined proposed investment of USD4.092 billion that did not take off under the National People’s Party (NPP) leadership.

While China injected USD26 million for the logistic hub, the remaining investors in the South Asia Commercial and Logistics Hub (SACLH) were the Sri Lanka Ports Authority (SLPA) and Access Engineering PLC. Together, the three shareholders injected USD37.14 million in initial equity, while the remaining cost was planned to come from future phased equity and project debt financing that was never raised.

China has been a major development partner of Sri Lanka, particularly in the post-war period, financing and undertaking several large-scale infrastructure projects. India’s involvement in Sri Lanka’s development landscape gained greater prominence right after the Chinese set their foot in Sri Lanka, particularly as the strategic competition between the two Asian powers intensified in the Indian Ocean.

The origins of this relationship can be traced to the development of Hambantota Port. Following the end of the war, former President Mahinda Rajapaksa told the writer personally that he had approached India to develop the port, which was considered strategically located along the busy east-west maritime shipping route. However, India did not consider the project commercially viable at that time, while its lengthy bureaucratic and approval processes were also seen as obstacles to its immediate implementation.

China subsequently emerged as the alternative development partner, agreeing to finance and construct the port. The original expectation was that the facility would eventually be handed over to Sri Lanka. China’s initial financial commitment for developing the Hambantota Port was a USD306.7 million (approx. USD307 million) commercial loan provided by the Export-Import Bank of China (China Exim Bank) in 2007 for Phase I of the project. However, mounting debt obligations and Sri Lanka’s inability to meet repayment commitments created a financial dilemma. In 2017, the government under the leadership of Ranil Wickremesinghe entered into a 99-year lease arrangement with China Merchants Port Holdings, handing over operational control of the port in exchange for USD1.12 bn.

The agreement attracted international criticism, with allegations that Sri Lanka had fallen into a Chinese debt trap and that the Rajapaksa administration had compromised national sovereignty. These controversies continue to influence the political and geopolitical debate surrounding Chinese investments in Sri Lanka to date.

Nevertheless, Hambantota International Port has gradually expanded its operations, particularly in roll-on/roll-off (Ro-Ro) cargo handling and vehicle transshipment. It has also been exploring further business opportunities. However, questions remain over whether the port has delivered the broader economic transformation originally envisaged, particularly in attracting substantial industrial and commercial activity to Hambantota. Sri Lanka retains a 15% stake in the port venture, while China holds the controlling interest. Despite more than 15 years having passed since the original development initiative, the port’s full economic potential remains ‘work in progress’.

Against this background, the NPP government’s handling of two other major Chinese-backed investments has raised fresh questions about the future of China’s development partnership with Sri Lanka.

The first was the proposed USD392 million Colombo Port Logistics Hub inside the high-security zone of the Colombo Port. The project was conceived as a major logistics and warehousing facility intended to strengthen Colombo’s position as a regional maritime hub. However, the project faced considerable geopolitical scrutiny, particularly from India, the United States and Japan, given the strategic importance of Colombo Port and the prospect of a Chinese-controlled logistics operation within its premises. It must be underlined that most of the transshipment comes from India, and they had raised concerns too. Port trade unions also raised objections, while concerns were taken to court over the allocation of strategically important port land. Practical difficulties further undermined the project. The original 13-acre allocation was reduced to approximately 10 acres following highway development requirements affecting container access to and from the port. With Colombo Port already facing congestion and space constraints, questions emerged over whether the reduced land area was commercially sufficient for the proposed facility.

After years of negotiations, the NPP government concluded that the project, in its existing form, was not viable. The Chinese partner eventually withdrew, leaving the proposed investment without a clear path forward. They demanded the government reimburse the cost. The second and considerably larger setback involved Sinopec's USD3.7 bn oil refinery proposed for Hambantota. The project was considered strategically attractive because of its proximity to Hambantota Port, offering opportunities to export refined petroleum products through the facility.

Although the project had been discussed under the previous administration, the NPP government initially appeared keen to revive it. Following its engagement with China, the government announced that the memorandum of understanding had been activated, raising expectations that the refinery would become its first major international investment success. However, negotiations subsequently became complicated by disagreements over several commercial and regulatory conditions.

The original proposal required Sinopec to export 80% of its refined output and allocate 20% to the domestic market. Sinopec reportedly sought to increase its domestic allocation to 40%, a proposal that raised concerns among Sri Lankan authorities about the potential impact on the existing petroleum market and the state-owned Ceylon Petroleum Corporation (CPC).

Further disagreements emerged over tax concessions. Sinopec sought Strategic Development Project status, which could have provided extensive tax exemptions for 15 to 25 years. The government faced difficulties accommodating these demands amid commitments under the USD2.9 bn International Monetary Fund programme to strengthen revenue collection and limit tax exemptions. Negotiations also reportedly stalled over requests for a 99-year lease on an expanded 700-acre land allocation and additional water supply commitments.

The Cabinet-Appointed Negotiating Committee (CANC) subsequently recommended terminating the project and considering fresh competitive proposals. The government also explored strengthening the existing Sapugaskanda refinery as an alternative that would retain greater state control over the country’s petroleum sector.

Ultimately, both projects were not merely commercial ventures; they carried significant geopolitical implications that could have complicated Sri Lanka’s relationships with its regional partners and disturbed the country’s longstanding policy of strategic neutrality. Their location, scale and the degree of operational control envisaged for Chinese state-owned enterprises raised concerns about how far Sri Lanka could accommodate such investments without unsettling the strategic sensitivities of India and other international partners. The NPP government may have found itself compelled to reconsider or abandon these projects in the face of commercial, diplomatic and geopolitical pressures. It is also speculated that the Chinese are no more interested in investing in Sri Lanka due to its bureaucracy and disputes and vying for projects on the African continent and farther.

Going forward, the country needs a more transparent, diversified and strategically balanced investment policy, welcoming capital not only from China but also from India, Japan, the United States, Europe and other partners. Such investments must serve Sri Lanka’s economic interests, strengthen its development prospects and, above all, safeguard the strategic neutrality that the NPP government repeatedly assures the international community it is committed to upholding.
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The writer is an award-winning journalist and the Deputy Editor of The Morning Newspaper. She can be contactable on [email protected]