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China Merchants to lease ‘white elephant’ port for $1.12bn

The state-owned company will run a facility in the south of Sri Lanka that the current government has described as not financially viable.

The Sri Lankan government is set to lease a majority stake in Hambantota port, an indebted facility in the country’s south, to a Chinese state-owned company.

The Cabinet of Ministers this week gave its go-ahead to the deal, which will see China Merchants Port Holdings, a Hong Kong-based subsidiary of China Merchants Group, pay $1.12 billion for an 80 percent stake in the port under a 99-year lease agreement. The remaining 20 percent stake will be retained by the port authority.

The deep-water port, located on the island’s southern coast, is considered as a strategic asset since it sits close to one of the world’s busiest trade routes linking Asia to the Middle East. The Indian Ocean nation launched the project in 2008 with financing support from China, which covered over 80 percent of the $1 billion development costs.

The port ministry said the government preferred putting the port on lease instead of selling its ownership even though Ministers have described the facility as “a white elegant” built by the previous administration.

Two Chinese companies had submitted bids for the port lease, according to the ministry. One offer valued the port stake at $750 million, while the other bid priced it at $1.08 billion.

Proceeds from the lease are expected to help shave off a chunk of the port’s current $1.35 billion debt burden.

Over the past few years, China has been ramping up investments in key Sri Lankan infrastructure schemes, backing ports, airports, roads and the country’s first coal-fired power plant. In 2013, China emerged as the single largest source of foreign direct investment into the Indian Ocean island, according to the Sri Lankan government.

China Merchants’ core business lies in port operations and port-related activities in Hong Kong and China. This January, the company paid $555m for a 20 percent stake in Dalian Port, the largest in northeastern China. In 2014, the group teamed up with Australia’s Hastings Funds Management to acquire the 98-year lease of Port of Newcastle in New South Wales for A$1.2 billion.

China Merchants had not responded to requests for comments at press time.