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Sri Lanka’s China-backed tax haven clears final hurdle


A Chinese-funded tax-free enclave cleared the final legal hurdle in Sri Lanka as the Supreme Court in Colombo ruled it could go ahead with only minor tweaks.


GS-II: International Relations (India’s neighbors, Economic relations and Landmark agreements affecting India’s Interests)

Dimensions of the Article:

  1. About the Colombo Port City
  2. About Sri Lanka’s recent decision regarding ECT at Colombo Port
  3. Geopolitical Significance of Sri Lanka

About the Colombo Port City

  • Colombo International Financial City (CIFC) is a special financial zone and International Financial Centre currently under construction in Colombo, Sri Lanka. The project is part of China’s Belt and Road initiative.
  • After the former planned ‘Port City’ was rejected by the new incoming government, a tripartite agreement was signed repackaging the project as the Colombo International Financial City (CIFC).
  • The modern Port City is an unsolicited proposal submitted by China Harbour Engineering Company based on previous proposals.
  • Construction of the Colombo Port City project was launched on 17 September 2014 by Sri Lankan President Mahinda Rajapaksa and Chinese President Xi Jinping. The port city was suspended after the fall of the Rajapaksa government due to issues related to sovereignty of Sri Lanka and adverse environmental impacts. In 2017, it was predicted that the city would be completed by 2041.
  • Named the “Colombo Port City” because of its proximity to Colombo’s main harbour, the sea reclamation — carried out with considerable Chinese labour — completed in 2019 has doubled the size of Colombo’s financial district by adding 269 hectares.
  • In December 2020, Sri Lankan conglomerate LOLC Group signed an agreement with China Harbour Engineering for a mixed development project, with the investment value totalling $1 billion.
  • The project includes residential, commercial and retail assets set to break ground in mid-2021. This is the first major investment in Colombo Port City.

About Sri Lanka’s recent decision regarding ECT at Colombo Port

  • The Sri Lankan government offers the West Container Terminal (WCT) to India for possible investments, however, does not want any foreign involvement in the development of the East Container Terminal (ECT) at the Colombo Port.
  • This decision comes amid mounting pressure from Port union workers against any foreign role or investment in the ECT project, where nearly 70% of the transshipment business is linked to India.
  • Even though Sri Lankan government has announced the decision, there is a tripartite agreement on it between India, Sri Lanka and Japan, so any action upon the development would be considered unilateral.

India’s role in development of ECT

  • For New Delhi, the strategic ECT project in Colombo has been high on priority.
  • The Adani Group – Government of India’s nominee – was set to invest in the terminal which would not be “sold or leased” to any foreign entity.
  • The Sri Lanka Ports Authority (SLPA) was to hold 51 % stake in the operations, while India and Japan together would hold 49 %, as per the 2019 Memorandum of Cooperation (MOC).

About the New Offer for WCT at Colombo port

  • The Rajapaksa government has offered India and Japan the WCT as an alternative, allowing higher stakes.
  • In the WCT proposal, India and Japan will be accorded 85% stake – this is similar to the 85% stake given to China Merchants Port Holdings Company Limited in the nearby Colombo International Container Terminal (CICT).
  • As opposed to the ECT, the WCT West Container Terminal, however, has to be built from scratch, requiring a much higher investment.
  • Colombo’s alternative offer also comes at a time when Sri Lanka is seeking support at the ongoing UN Human Right Council session, where a resolution on the country’s rights record will soon be put to vote.

Geopolitical Significance of Sri Lanka

  • Sri Lanka’s location in the Indian Ocean region as an island State has been of strategic geopolitical relevance to several major powers.
  • Some examples that highlight Western interests in Sri Lanka’s strategic location are the British Defence and External Affairs Agreement of 1948, and the Maritime Agreement with USSR of 1962.
  • Even during the J.R Jayewardene (1978-1989) and Ranasinghe Premadasa (1989-1993) tenures, Sri Lanka was chosen to build the Voice of America transmitting station (suspected of being used for intelligence gathering purposes and electronic surveillance of the Indian Ocean).
  • It was the massive Chinese involvement during the Rajapaksa tenure that garnered the deepest controversy in recent years.
  • China is building state of the art gigantic modern ports all along the Indian Ocean to the south of it, in Gwadar (Pakistan), Chittagong (Bangladesh, Kyauk Phru (Myanmar) and Hambantota (Sri Lanka).
  • China’s string of pearl’s strategy is aimed at encircling India to establish dominance in the Indian Ocean.
  • Post 2015, Sri Lanka still relies heavily on China for Port city project and for continuation of Chinese funded infrastructure projects in Sri Lanka.
  • Although the Hambantota harbour is reportedly making losses, it too has potential for development due to its strategic location.
  • Sri Lanka has a list of highly strategic ports located among busiest sea lanes of communication.
  • Sri Lanka’s Colombo Port is the 25th busiest container port in the world and the natural deep-water harbor at Trincomalee is the fifth largest natural harbour in the world.
  • Port city of Trincomalee was the main base for Eastern Fleet and British Royal Navy during the Second World War.
  • Sri Lanka’s location can thus serve both commercial and industrial purposes and be used as a military base.

-Source: The Hindu

November 2023