'Locked-In' to China: The Colombo Port City Project

This case looks at the predicament of a small nation burdened by Chinese debt, accumulated by infrastructure projects under the aegis of China’s One Belt One Road initiative. By 2016, the government of Sri Lanka owed China $8 billion (almost 10% of GDP) mainly from loans taken to construct a series of infrastructure projects, many of which proved commercially unviable. Most of these were approved by the previous government under President Rajapaksa. The Colombo Port City project was the grandest and most ambitious of them all. Conceived as a project to create high-end real estate through off shore land reclamation, it was hastily approved as a joint venture between a Chinese SOE and the Sri Lankan government in 2014. This project proved controversial from the beginning due to its purported effect on the environment and gave rise to vigorous public protests. There were also serious concerns that the deal placed onerous obligations on the Sri Lankan government, including a compromise of its sovereignty. The latter is of special concern to Sri Lanka’s largest trading partner and influential neighbor — India.  

In early 2015, a new government came to power having promised to suspend this project and promptly did so within a few months. However, this was done without realizing the full implications of the deal signed in 2014. This entitled the Chinese company to seek compensation for the suspension — a consequential amount for a country already burdened with debt. Further, they began to face significant diplomatic pressure from China. Therefore, the new government is now faced with the delicate task of renegotiating the deal to ensure it is more palatable, both publicly and geopolitically, within the limited room for maneuvering available. What strategy must Sri Lanka deploy and what must it prioritize in this negotiation?