BY S VENKAT NARAYAN

Our Special Correspondent

NEW DELHI, February 6:

The unilateral scrapping by Sri Lanka of the trilateral agreement on developing the strategic East Container Terminal (ECT) at the Colombo Port has upset both India and Japan.

Last week, Sri Lanka unilaterally pulled out of the 2019 agreement with India and Japan after as many as 223 Sri Lankan trade unions and civil societies groups backed the Sri Lanka port trade unions demand to cancel the ECT agreement.

Said a top Indian source: “The ECT pact was a trilateral government-to-government agreement between the Government of Sri Lanka and the Governments of India and Japan. If Sri Lanka pulls out of such a G2G agreement unilaterally, what message will it convey to other governments and private investors? Will it not shake their confidence in the Sri Lankan Government’s ability to honour signed agreements? Who will want to invest in a country whose government is not able to honour a multi-billion dollar G2G agreement?”

After the Sri Lankan decision reneging on the 2019 agreement, the country’s cabinet has approved a proposal to develop the West Container Terminal (WCT) of the Colombo port as a Public Private Partnership with Japan and India. Two top sources in the Sri Lankan government said Indian response to the compensatory offer was “ambiguous” and “almost rejecting.” But Indian officials said there was no formal communication about WCT till Tuesday noon.

The Indian Express quoted an unidentified Sri Lankan official as saying: “Commercially, the West Terminal offer is better for India as it gives 85% stake for developers of the West Terminal against the 49% in ECT. Even if this is the better deal for the investor (including Adani), the final decision has to come from the Indian government. And geopolitically too, West Terminal is almost the same if they consider the security aspect and the necessity to have a port terminal in Sri Lanka.”

He went on: “And the West Terminal is no smaller in size or depth compared to the East Terminal… If Indian response remains uncertain to this proposal, I am sure it was not communicated (from the Sri Lankan side) properly to India. There is no difference between East and West Terminals except for the fact that development of the ECT is partially completed while the development of the West Terminal has to start from scratch.”

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.

xAlthough 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 in the late 1980s.

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”.

This was perhaps why India had invited Japan to work with it in 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. The expectation was that this would ensure that the projects come 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.

As per a Memorandum of Co-operation (MoC) signed by the previous Maithripala Sirisena-Ranil Wickremesinghe administration, the Sri Lanka Ports Authority (SLPA) 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.

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, he said.

For New Delhi, the ECT deal is important as between 60 and 70 per cent of transshipment 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.

There are reports circulating in diplomatic circles that China had played a role in instigating port unions’ protest against India’s interest. New Delhi and Tokyo have desisted from commenting on such reports. But an Indian source quipped: “The Sri Lankan Government has done nothing so far to deny such reports.”

A senior SLPP minister said: “Gota (President Gotabya Rajapaksa) is a man who never changes his word. But he had to agree to cancel the ECT agreement as it was almost reaching up to the level of shaking his Presidential chair.”

Will there be similar protests and crises if India and Japan accept the West Terminal offer?

The Sri Lanka government sources rules out chances of any further trouble on the cabinet-proposed West Terminal offer.

“There were talks held at this point and the Sri Lanka government authorities received the feedback that John Keells Holding PLC (JKH), largest public listed conglomerate in Sri Lanka, and India’s Adani group may agree with WTC offer as a compromise formula with a promise that the private stake will be 85% in WTC instead of 49% at ECT,” said a top Sri Lanka Ports Authority (SLPA) official.

The Sri Lanka government also got the written consent of unions in this regard. Out of 23 unions, 22 signed and gave a letter agreeing to support the government in its plans to develop the West Terminal with private investment. The consent letter of unions said: “We will support a good investment decision that the government would take in future in relation to the West Terminal.”

Viyath Maga (Professionals for a Better Future), a network of academics, professionals and entrepreneurs, had played a key role in the final round of negotiations between the unions and the government, which had led to the latest WTC proposal.

Nalaka Godahewa of Viyath Maga, who was the former chairman of SLPA and the current state minister of Urban Development, told the Indian Express in a telephone interview that Sri Lanka is not pushing India away from the deal. “Instead, we being professionals, we volunteered to talk and find an agreeable ground through dialogues ensuring that it would respect the Indian interests as well. It is a win-win solution now,” he said.