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Explained: The Colombo port setback for India

What was the 2019 India-Sri Lanka agreement to develop the East Container Terminal at Colombo Port? What went wrong, and why? What happens now?

Written by Arun Janardhanan , Nirupama Subramanian | Chennai, Mumbai |
Updated: February 4, 2021 4:48:29 pm
Prime Minister Narendra Modi and Sri Lankan President Gotabaya Rajapaksa at Hyderabad House in New Delhi in 2019. (Express Photo By Praveen Khanna)

After strong opposition from trade unions across the country, Sri Lanka has unilaterally pulled out of a 2019 agreement with India and Japan for developing the strategic East Container Terminal (ECT) at the Colombo Port.

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Japan proved no insurance

In 2019, India and Sri Lanka signed a memorandum of understanding for “co-operation on economic projects”. The development and operation of the container terminal was one of the projects in the MoU: “A Container Terminal in Colombo Port as a Joint Venture, which includes Indian investments considering that majority of transshipment in Colombo Port is related to India. GOSL will announce the award of the contract…by end May 2017”.

The MoU did not mention the Eastern Container Terminal, but India and Sri Lanka had already been in discussion for its development and operation.

Although India and Sri Lanka have seemingly friendly ties and much cultural affinity and people-to-people contact, the relationship is complex — and the majority Sinhala-Buddhist public opinion is layered with the memory of Indian intervention in the ethnic conflict.

Unlike Chinese projects, big projects by India have always faced opposition in Sri Lanka. Sinhala-Buddhist politicians either ride such opposition opportunistically when it suits them, sometimes using this as a pretext over the real reason, or are reluctant to go counter to the public sentiment for fear of being attacked for surrendering to “big brother India”.

For this reason, India had roped Japan into at least two of the projects listed in the MoU – the ECT, and an LNG Terminal/Floating Storage Regasification Unit (FSRU) in Kerawalapitiya/Colombo with a piped gas distribution system along with retail outlets for CNG etc — believing this would ensure the project comes through. Japan was the biggest donor to Sri Lanka through the years of conflict. The Geoffrey Bawa-built Sri Lankan parliament, which came up at the height of the conflict, was funded by Japan. It continues to give Sri Lanka substantial financial support even now.

However, the old relationship between Sri Lanka and Japan has undergone changes as China’s footprint over Colombo has grown. Late last year, the Rajapaksa government unilaterally cancelled a Japanese project for a commuter rail in Colombo.

Contentious from the start

As many as 223 Sri Lankan trade unions and civil societies groups were backing the Sri Lanka port trade unions demand to cancel the ECT agreement.

As per a Memorandum of Co-operation signed by the previous Maithripala Sirisena-Ranil Wickremesinghe administration, the Sri Lanka Ports Authority would have 100 per cent ownership of the ECT. The Terminal Operations Company (TOC) conducting all East Container Terminal operations was to be jointly owned, with Sri Lanka retaining a 51% stake, and the joint venture partners 49%, according to a statement by the Ports and Shipping Ministry at the time. A 40-year loan at an interest rate of 0.1% from Japan was expected to fund the development of the ECT.

“The envisaged Japanese loan carries one of the best loan terms Sri Lanka has obtained. The 51% stake is also one of the best in SLPA joint ownership endeavours. SLPA’s majority ownership in the new TOC represents a significant step in prioritising national interests,” the statement had said.

But Sirisena too was opposed to an Indian stake in the ECT project. That was one of the flashpoints in the breakdown between Sirisena and Wickremesinghe, who was pushing for it.

Just before the 2020 elections, port workers striking against the agreement ended their protest only after (now Prime Minister) Mahinda Rajapaksa assured them that there would be no Indian involvement in the port.

Last month, when External Affairs Minister S Jaishankar visited Colombo, the Prime Minister and President Gotabaya Rajapaksa sent out differing messages on Sri Lanka’s commitment to implementing the MoC on the ECT.

However days after the Indian Minister’s visit, President Rajapaksa assured port workers that the ECT was not going to be sold or leased, and that there would be an “investment” in the ECT by the Indian Adani group. Clearly, this did not mollify the trade unions resisting the development.

Sri Lanka’s consolation offer

After Prime Minister Rajapaksa announced the Sri Lankan government decision that the ECT would be developed and operated as a “wholly owned container terminal of the Sri Lanka Ports Authority (SLPA)”, a cabinet meeting approved a proposal to develop the West Terminal at the Colombo Port as a Public Private Partnership with India and Japan, seen as a bid to compensate for taking away the ECT. India has not commented on this offer.

The Sri Lankan side believes it can persuade India and Japan that the West terminal is strategically no different from the East, and commercially even better. One official told The Indian Express that the developers could hold as much as 85 per cent stake in the West terminal as opposed to just 49 per cent in ECT. It would be a much better option for Adani, the official said. And the unions are said to be on board the proposal to invite India and Japan to participate in the development and operation of the west terminal.

India and Japan reactions

India’s response was that Colombo should not be taking a unilateral decision on an existing tripartite agreement.

“The commitment of the Government of Sri Lanka in this regard has been conveyed several times in the recent past, including at the leadership level. Sri Lanka’s Cabinet also took a decision three months ago to implement the project with foreign investors. All sides should continue to abide by the existing understandings and commitment,” the MEA spokesman said.

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Japan has called the decision “regrettable”.

For India, the ECT deal was important as between 60 and 70 per cent of transhipment that takes place through it is India-linked. The ECT is also considered more strategic than any other in Colombo Port. It is located next to the Colombo International Container Terminal (CICT) project, a joint venture between China Merchants Port Holdings Company Ltd. and SLPA. India had been offered the Western Container Terminal earlier, but had refused. The ECT is already operational, while the WCT has to be built from scratch.

The implementation of the ECT agreement was high on Jaishankar’s agenda when he visited Colombo in January.

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