Sri Lanka has reversed a year-old decision, and given the green light on the Chinese-funded $1.4 billion Colombo Port City project. The contractor, China Harbor Engineering Corp., has resumed work that had been stalled by a government decision following disputes over land rights and environmental issues.

The turnaround came during Sri Lankan Prime Minister Ranil Wickremeshighe's recent visit of  to Beijing. The development opened the door for a range of Chinese investments in Sri Lanka’s infrastructure sector, which Chinese companies are eager to carry out.

At another level, Chinese Foreign Minister Wang Yi flew to Myanmar to revive relations with the recently elected democratic government, and persuade leaders there to revive a Chinese funded $3.6-billion Myitsone hydroelectric project stalled since 2011.

"Myself and Foreign Minister (Aung San) Suu Kyi reached a consensus, that all problems can find an appropriate resolution via friendly consultations," Wang said without mentioning specific projects.

The hydro dam is an important project for Beijing because 90 percent of the expected electricity generation is meant for transmission and use in China.

Myanmar leaders gave no public assurances about the stalled project, and there are signs Wang returned empty handed for the time being. The two countries are expected to reexamine different aspects of the project before deciding whether to resume it.

In Beijing, officials from China and Sri Lanka put together a series of different agreements for construction of new railway, road, port and airport projects that would be constructed by Chinese companies. Wickremeshighe appended his signature to the new set of deals.

The Colombo Port City project, which would be built on 230 hectares of land reclaimed by city, is planned as a high-end entertainment and commercial complex with a Formula One track, five-star hotels, shopping arcade, water sports area, mini golf course, recreation centers and apartment buildings. A proposed gambling center was scrapped after a public uproar.

"We welcome the resumption of the Colombo Port City project, and stand ready to work with Sri Lanka to push forward the construction steadily,” Chinese Premier Li Keqiang said.

The decision came amid intense debate about whether a poor developing economy such as Sri Lanka's should be concentrating on high-end townships. Two Chinese-built projects, the seaport and airport in the country’s Hambantota area, have remained largely unused because the region does not have sufficient industry and trade to support them. In fact, the airport premises have been used for a long time to store grain.

But supporters of these projects say the country needs major projects for economic revival. “Developing countries like Sri Lanka needs luxury cities,” Saman Kelegama, Executive Director of the Colombo based, Institute of Policy Studies of Sri Lanka told ENR. The project will help the country develop its tourism industry, which is the third largest foreign exchange earner. “Singapore has the Marina bay, Dubai has the Palm Grove, etc. Why not Sri Lanka? Hambantota ports may time to take off. It is too early to write them off,” Kelegama said.

A conference hall built by Chinese in 1970s was not seen as essential to the Sri Lankan economy at that time. But it is now a dynamic conference center in Colombo, he pointed out.

Unresolved controversy

But Wickremeshighe’s Beijing visit has not solved an important piece of the puzzle. One of the important reasons why the project was stalled was a dispute concerning the ownership of the land on which it is being built.

Critics say the Sri Lankan government has signed away its sovereignty to a foreign country in a sensitive area inside the country’s capital. Neighboring India, which is also a major source of trade and investments for Sri Lanka, has been concerned about the security risks involved in Chinese presence very close to its own shores.

Both Sri Lankan and Chinese officials have remained tight-lipped on whether the agreements signed in Beijing covered this crucial aspect. Chaminda Hettiarachchi, lecturer and researcher at the Colombo University, said he expected the government to renegotiate this aspect of the deal, and ensure that the ownership of the project land remains with Sri Lanka.

Another unresolved issue is a compensation of $2.6 million being sought by the Chinese contractor, which is claiming damages caused due to work stoppage for over a year. Colombo wants this payment to be waived.

Hettiarachchi said the government was pushed into making the deal because it is in severe financial crunch and expects China to bail it out with some assistance. "The Sri Lankan government almost bankrupt," he said. "It needs Chinese money at least in the short term. This is why it has agreed to sign the port city deal. But Chinese projects are not useful to the Sri Lankan people.” 

Two international ratings firms, Fitch and Standard & Poor’s, reduced the island nation’s credit rating in February and March. This has made it extremely difficult for Colombo to raise funds from the market at reasonable rates.

Colombo is trying to persuade Beijing to reschedule past loans amounting to about $5 billion, and extend fresh loans. This includes $1.6 billion in Chinese financing for a seaport and an airport in Hambantota. But there have been no specific assurances from Beijing so far.