Sri Lanka has blamed Adani Group for the failure of a tripartite memorandum of cooperation (MoC) signed in May 2019 with Japan and India for the joint development of the Eastern Container Terminal (ECT) in the port of Colombo, citing the Indian firm’s lack of flexibility in “adhering to key financial clauses” determined by the island state, according to government documents.
During the negotiations appointed by the Sri Lankan Cabinet by the Negotiating Committee (CANC) on January 27 and 28, the ports of Adani and Special Economic Zone Ltd (APSEZ), nominated by the Indian government for ECT development, “insisted” on the same terms, the conditions, rates, lease fees and land for the lease of the Port of Sri Lanka (SLPA) set for the International Container Terminals in Colombo Ltd (CICT) should also apply to ECT.
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China Merchants Port Holdings Company Ltd holds an 85 percent stake in CICT, a joint venture term it manages with the Port of Sri Lanka Authority (SLPA).
But CANC rejected Adani’s request and approved it by the Sri Lankan cabinet on February 1.
“The team from Sri Lanka explained (to Adaniya) that the request for a proposal (RFP) for CICT was processed during the recession in 2009, and the breakwater was built, and the investor had to start construction (CICT) in parallel with the breakwater works.” , according to a January 31 government memorandum prepared by the Sri Lankan Ministry of Ports and Shipping.
“However, the current situation has significantly improved with a developed infrastructure ready for the entry of any new investor (in ECT). Further, port activity is currently established by verified records. Therefore, the same payment that SLPA received from CICT cannot be applied to ECT. The expected financial return from the ECT to the SLPA will be much higher than expected from the CICT, ”the government memorandum said.
The first round of negotiations that CANC conducted with Adani was unsuccessful and did not reach any agreement on the basic terms of the project, such as copyright, advance payment, SLPA land lease payment and exclusivity clauses.
“He did not show flexibility (Adani), but (emphasized) to adhere to the financial values given in the agreement on construction, operation and transmission (BOT) for CICT,” the government letter reads, referring to the talks held by CANC.
The tripartite memorandum of co-operation provided for the formation of a company that manages the terminal, 51 per cent owned by SLPA and 49 per cent, from Indian and Japanese entities.
Although “MoC indicates that ECT will be developed on a loan provided by the Japanese government to SLPA, the current government has decided to develop ECT as an investment project (by (refraining) from obtaining credit.”)
The ECT consists of 1,320 meters of waterfront wall, a 76-hectare terminal area, 18 meters of deep berths and a container stacking yard with an annual capacity of 2.4 million equivalent twenty feet (TEU). SLPA developed 440 meters of quay wall, 20 hectares of yards and connected the facilities with a loan from the Ceylon Bank of 80 million dollars.
During the negotiations held by CANC on January 27 and 28, the Sri Lankan side stressed that the costs incurred by the SLPA on ECT will be reimbursed in advance by Indian and Japanese investors.
However, APSEZ wanted the costs incurred due to the partial development of ECT to be considered a “government stake in the project”.
CANC further said that the concession agreement for ECT “will offer nothing more than what is already available to CICT”.
CANC also sought “golden shareholder status” for the Sri Lankan government in the “strategic national interest”.
Adani is sad that the IRR for the project and the capital IRR were “negative”, according to his calculations based on the values proposed by the SLPA.
Thus, the minutes of the CANC negotiations noted: “It is not fruitful to continue negotiations on the proposal submitted by the APSEZ, because they were not flexible to adhere to key financial clauses.”
Therefore, the government memorandum recommended the development and operation of the ECT as a fully container SLPA terminal and that the terminal development work be completed in three years.
The Ministry of Ports and Shipping has also proposed to the Cabinet “to establish a Western Container Terminal (WCT) in parallel with the ECT as a BOT-based public-private partnership (PPP) project over a period of 35 years by a joint venture to SLPA and Indian government candidates and Japan based on the framework used in the development of the CICT ”.
The CICT framework included a 35-year BOT mandate, a one-time advance payment, an annual payment of land lease, and fees based on containers handled at the terminal. Based on the CICT framework, the then Sri Lankan government decided that this “model could be successfully used to develop container terminals, reviewing the payments SLPA would receive based on the comparative size of the terminal area and improved business opportunities in the port of Colombo.”
The WCT will have a 1,400-meter-long quay wall, a water depth of 20 meters, a terminal area of about 64 hectares with an annual capacity of 2.6 million TEUs.
The WCT was offered as an alternative to India and Japan as a “responsible government that respects international agreements reached between countries, the Sri Lankan government is expected to be responsible for respecting such international agreements.”
While approving the proposal submitted by the Ministry of Ports and Shipping, the cabinet also decided to establish a CANC and a project committee to evaluate the proposal of the Indo-Japanese WCT team.
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