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Cablegate: Hambantota Port Complex: Will Sri Lanka Realize

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UNCLAS SECTION 01 OF 04 COLOMBO 000103

SIPDIS

DEPARTMENT FOR SCA/INSB

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAIR ELTN EWWT PGOV CH CE
SUBJECT: HAMBANTOTA PORT COMPLEX: WILL SRI LANKA REALIZE
THE DREAM?

REF: A. A. COLOMBO 01125
B. B. COLOMBO 01007

1. (SBU) SUMMARY: Sri Lanka is betting on becoming a global
trading hub, and a key part of its strategy is developing a
giant port and industry facility in the southern rural area
of Hambantota. Robust development in Hambantota,
specifically the seaport and the international airport, is
progressing at a rapid pace. Chinese support has been key to
the development boom, and Chinese companies are deeply
involved in infrastructure projects throughout greater
Hambantota. The Port of Hambantota is the centerpiece of
current development efforts, but construction of the new
airport as well as numerous smaller projects in Hambantota
proper are key to the region's potential future viability.
There seems to be a disconnect between the level of
development and the, as yet, lack of long-term
commercial-investment interest in the area. Hambantota may
very well succeed in building a city with an airport and
seaport that do not live up to their potential and local
infrastructure that benefits average citizens but does not
spark a local economic boom. It is likely that corruption
and political patronage are significant factors playing into
the focus on Hambantota. Often when Chinese companies win
contracts, their success is due in part on their widespread
distribution of graft to senior Sri Lankan government
officials. While it is currently unknown to what extent
President Mahinda Rajapaksa is involved in Hambantota
development, it seems logical that his hand is also out when
commercial enterprises, especially the Chinese, jockey for
contracts and projects. END SUMMARY.


THE JEWEL OF HAMBANTOTA

2. (SBU) Construction of the Port of Hambantota and
development of the greater Hambantota district continues to
move ahead at a breakneck pace. The port is scheduled to
open in November 2010, one year ahead of schedule. The port
will occupy an area of more than 1,700 hectares, making it
the largest regional port in South Asia in terms of square
footage. For example, the port will be six times larger than
the Port of Colombo. The Sri Lanka Ports Authority (SLPA) is
hoping to garner significant business from the 70,000-80,000
ships that pass Sri Lanka's southern tip each year.
Currently, only 6,500 call on the Port of Colombo. The SLPA
hopes to attract up to 10,000 additional vessels each year,
with a significant portion of those berthing at Hambantota.
The first phase of construction at the Port of Hambantota,
costing USD 471 million, will be funded in large part by a
USD 307 million loan from the Chinese Export-Import Bank
(EXIM). China Harbor Engineering and Syno-Hydro Corporation
are responsible for the port's construction. Both companies
have embarked on an ambitious around the clock construction
regimen. According to Colombo-based Chinese diplomats, China
Harbor employees regularly work twelve hour shifts six days
per week, and they generally work through local and Chinese
holidays.

3. (U) Once completed, the port will have a 16-meter depth,
Two-way entry channel, a 16-17-meter harbor basin (compared
with Colombo's 15-meter basin), and will be capable of
handling larger vessels than currently are accommodated at
the Port of Colombo. With concurrent construction of an oil
tank farm, the port will initially be capable of refueling,
handling of bulk cargo such as cement and fertilizer, bulk
trans-shipment, and the bunkering of 80,000 gallons of fuel,
6,000 metric tons of LP gas, and 10,000 metric tons of

COLOMBO 00000103 002 OF 004


aviation fuel. Future construction plans at the port call
for the addition of ship repair and overhaul facilities,
construction of limited container facilities, and additional
commercial berthing. China Harbor owns the contract for
these future construction projects.


CAN THE PORT OF HAMBANTOTA ATTRACT INVESTMENT?

4. (SBU) The SLPA has invited investors from the cement,
fertilizer, warehousing, gas, ship repair, port services,
off-shore services, and food processing industries to
consider placing facilities at the Port of Hambantota.
Investors will have the choice of obtaining property at the
port on a lease basis, via entering into a joint-venture
with the SLPA, or purchasing land outright with payments of
royalties to the SLPA based on production or volume. Chinese
companies involved in the construction of the port may be
given preferential terms should they desire to build
commercial facilities after completion of port construction.
Preferential terms may include low rent leases, extended tax
holidays, and provision of small tracts of land for their own
use/development.

5. (SBU) With completion of phase 1 of the Port of
Hambantota, the SLPA and the Government of Sri Lanka hope to
grab a share of the existing trade between India and China.
Trade between the two countries is currently channeled
through either Dubai or Singapore. Hambantota also would
like to position itself as a primary bulk cargo handler for
shipments to/from Pakistan and Bangladesh. While the SLPA
has grand plans for the Port of Hambantota, it must weigh
this with the future physical expansion and increased
capacities of the Port of Colombo and possible competition
from other developing Indian ports. While initially
Hambantota will focus on bulk rather than container traffic,
long-term viability will need to see the port running in
competition with Colombo rather than operating as a
complement to it.

6. (SBU) There has not yet been private investment in the
Hambantota Region, which could be a hard sell. Hambantota is
located in the rural south, far from Colombo, there are no
significant industrial industries nearby, so at least
initially Hambantota will not benefit from local exports and
imports. The Hambantota project has been government directed,
although private investment could emerge later if the project
becomes commercially viable.


THE REST OF THE HAMBANTOTA PROJECT

7. (SBU) The Government of Sri Lanka (GSL) is quickly working
to integrate the Port of Hambantota with air and rail links.
Construction of the Hambantota International Airport (HIA) is
underway and the southern railroad is being extended to the
airport with an additional rail extension being developed
that will reach the port. The GSL envisions using an
integrated-transport system rapidly to ship goods to
locations throughout Sri Lanka. This effort is being
supported by further Chinese EXIM bank loans, and China
Harbor owns the contract to construct HIA and the rail links.
Plans are also on paper to construct a six-lane southern
expressway connecting the greater Hambantota area to western
and central Sri Lanka. Highway overpasses will be
constructed at major junctions to minimize traffic congestion
on the expressway. No specific completion timeline has been
set for this project. Given Sri Lanka's past track record,

COLOMBO 00000103 003 OF 004


construction of an expressway could take years.

8. (U) The Sri Lankan Urban Development Authority (UDA) has
nicknamed Hambantota the "Gateway to Asia". The GSL has
designated Hambantota as a priority metropolitan area and an
urban development zone. In addition to the construction of
the international airport and seaport, and expansion of the
road and rail network, the GSL has begun a major
modernization effort in Hambantota proper. A Korean company
is building a 1,650-person convention center and the
Hambantota District Administrative center via a loan and
grant respectively from the Korean Development Agency.
Additionally, construction is underway on a new international
cricket stadium, an auditorium, several libraries, a zoo east
of the city, and a 300-acre botanical garden. The UDA has
zoned space for six new Hambantota hotels. A Hambantota
sewage and drainage plan has been established and approved by
the GSL; however, a timeline for implementation of this plan
has yet to materialize. The UDA has received an additional
360 requests for zoning approval for small scale projects.
The Government of Iran is assisting the GSL with a major
ongoing irrigation and canal project in greater Hambantota,
aimed at significantly boosting local agricultural output. A
special task force has been established to ensure coordinated
development of Hambantota and the city was recently added to
the national fiscal plan as one of the five cities in the
country designated to receive the lions share of funding for
infrastructure development (Batticoloa, Colombo, Jaffna, and
Trincomolee are the others). The GSL hopes to develop
Hambantota into a tourism hub and the UDA notes that there
are more than 328 elephants in the greater Hambantota region,
as well as archeological ruins, sand dunes, bird sanctuaries,
and national parks.


WHY HAMBANTOTA?

9. (SBU) The GSL claims it chose Hambantota for development
for business reasons: its proximity to international shipping
lanes; the Port of Colombo has insufficient capacity to
accommodate increased maritime traffic; the need for a second
international airport; and the ready availability of land in
greater Hambantota. The GSL also hopes to address regional
economic imbalances by reducing poverty in the rural south.
While Hambantota does have close proximity to international
shipping lanes, most of the ships transiting the area are
container ships. Hambantota, at least initially, will not
have a container traffic capability. Additionally, the Port
of Colombo has ample existing capacity to handle a spike in
additional vessel traffic. With the planned construction of
three additional terminals at the Port of Colombo, there will
be even more capacity added to that port and the SLPA has not
yet identified additional business to fill it. There are
some sights to see in/around Hambantota and land is
available, but this is also the case in many other areas of
Sri Lanka. Greater Hambantota, however, is President
Rajapaksa's home region and political base, and this may play
prominently in the drive to develop the region.


10. (SBU) Comment. With Chinese and other foreign
assistance, the GSL, SLPA, and UDA are pushing ahead with
plans rapidly and robustly to develop Hambantota. When the
GSL master plan is completed, Hambantota will have a new
seaport, international airport, rail links, roads, and local
infrastructure. Despite this, there are no near-term
prospects for significant commercial investment. The
'international' airport will only be used for charter flights

COLOMBO 00000103 004 OF 004


given that there is little domestic airline presence and no
international interest in using the airport for either
passenger or cargo traffic. The SLPA hopes the Port of
Hambantota will be used, but it has no specific indications
that international bulk cargo handlers will relocates
some/all of their shipments to Hambantota or transship
through the port. Development of greater Hambantota can, in
theory, help the local populace with a better standard of
living as well as increased economic prospects, this can only
happen if the GSL can attract people and business to the
city's hotels, convention center, cricket grounds, or other
new facilities. Chinese interests are well positioned as
they have the majority of projects in Hambantota. The
Chinese will have preference at both the Port of Hambantota
and HIA once they are completed.
FOWLER

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