The Emperor’s New Road: China and the Project of the Century

by Jonathan E. Hillman

  “Higher than the Himalayas”

  Slowly, CPEC is beginning to echo Haqqani’s summary of U.S.-Pakistani relations. Expectations have been nothing if not exaggerated. Promises have been broken, as only a fraction of CPEC’s projects have materialized. Prime Minister Imran Khan, who assumed office in 2018, has put most of CPEC’s remaining projects on hold. “Perhaps we can stretch CPEC out over another five years or so,” Abdul Razak Dawood, Khan’s commerce and industry adviser, said in September 2018.114 Khan’s administration has blamed the previous government for negotiating bad deals that benefit Chinese companies at the expense of Pakistani companies. But it is hard to escape the unstated implication that China took advantage of Pakistan’s weakness.

  China’s list of grievances is growing as well. Chinese firms have complained about corruption within the initiative, delays in procurement and licensing processes, and failures by Pakistan to make payments on time.115 Pakistani businesses have pressed their provincial governments to delay the creation of special economic zones, which the Chinese government is eager to set up. In 2017, China signaled its displeasure with Pakistan’s stewardship of CPEC by temporarily halting funding for multiple projects.116

  So far, China and Pakistan have avoided dangerous misunderstandings. Even as expectations are not met, new promises are made that allow officials on both sides to maintain optimism. Pakistan has few alternatives, and with nearly two-thirds of its population below the age of thirty, its demographic clock is ticking. Without tangible results, enthusiasm for Chinese investment and tolerance for Chinese workers could turn into resentment.

  China faces many of the same challenges that plagued U.S. efforts in Pakistan, but its interests are more direct and enduring. U.S. involvement in Pakistan has never really been first and foremost about Pakistan but about some larger battle in which Pakistan’s cooperation was needed. For China, CPEC is more direct. It lives there and does not enjoy the United States’ geography of splendid isolation. Even if China wanted to, it cannot leave entirely.

  The balance of power is in China’s favor, but in the struggle to define CPEC on the ground, Pakistan has more experience. During the twentieth century, China was never as heavily involved with foreign development as the United States was during its high points. Pakistan has been working with, and against, outside partners since it became independent. Its leaders are adept at attracting outside support without bending too much to outside pressure, for better or, quite often, for worse. In the basic contest between development and independence, they have favored the latter at the expense of the former. They have resisted change, often to protect the interests of elites. On its home turf, Pakistan has a long streak of winning without winning.

  CPEC has been advertised as a “game changer,” but it has allowed old games to continue. The tragedy is that the policies to develop Pakistan have been known for some time. Despite decades of advice and billions of dollars in assistance from international donors, for example, Pakistan has been unable to fix its energy sector. Distortions to the sector, caused by bad policies, cost 6.5 percent of the country’s GDP each year.117 Khan’s election signals more continuity than change. His coalition was backed by Pakistan’s army, which is the strongest defender of the status quo.118

  The parallels with Pakistan’s early days are even personal. In October 2018, Khan’s minister of power, Omar Ayub Khan, traveled to Suzhou, China, for a Belt and Road conference. “One of the most important countries in the One Belt One Road Project is Pakistan. The Karakoram Highway that connects Pakistan and China is one of the pivots of CPEC,” he told the conference.119 He did not mention that his grandfather, General Ayub Khan, presided over the chaotic construction of the KKH. Like General Khan, who pressed the U.S. Congress for support in 1961 before turning to China, he was there to reassure his foreign sponsors and, of course, to ask for more investment.

  China, for its part, has been repeating the mistakes of the powers that came before it. It has failed to make its investments contingent on difficult reforms. Rather than encouraging Pakistan to set stricter priorities, it has been willing to pick from expansive wish lists of projects. China’s approach to projects in Pakistan has been based far too much on its own experience. Like the Western economists who advised Pakistan, Chinese officials have overestimated their abilities. Chinese officials have been surprised when projects in Pakistan have been halted for reasons that would not stop projects in China.120 These mistakes are all the more remarkable because China has chosen to make CPEC the BRI’s flagship.

  China has entered a contest from which it will be even more difficult to withdraw. Proximity is an asset when things are going well, but it makes cutting losses in Pakistan more difficult. China’s lighter engagement in the past allowed it to maintain a steadier course in its relations with Pakistan, inspiring officials to declare that their friendship “is higher than the Himalayas and deeper than the deepest sea in the world, and sweeter than honey.”121 But with deeper engagement comes greater turbulence, and that saying also carries a warning. Honey is sweet, but like spending on megaprojects, it provides a temporary boost that soon wears off. Mountains are high, and oceans are deep; but like large amounts of debt, they are dangerous.

  Sri Lanka

  Center for Strategic and International Studies, Reconnecting Asia Project

  CHAPTER EIGHT

  Game of Loans

  Sri Lanka

  OVERLOOKING SRI LANKA’S SOUTHERN coast, Hambantota’s Martello Tower is a monument to a violent past and a witness to a struggle still unfolding. Round and stout, at only twenty-five feet tall the tower gets its height from the quiet hill on which it is perched. It was built by British soldiers in the early 1800s, a tactical outpost and statement of their intentions to stay. Their arrival brought an end to the Kandy Kingdom, which had ruled the area for nearly four centuries. In the 1990s, four decades after the British left, the tower was rebuilt, incongruously, as part of a fisheries museum. Inside, light leaks through the gun holes that British soldiers once peered out of and streams down from the ceiling, where a hatch opens to the roof.

  There are two views from the top of the tower. Look south, into the Indian Ocean, and hulking ships move smoothly and slowly. Each plots its own course, but all are locked in the same larger dance. Tankers filled with oil are heading east toward China. Massive container ships, their decks stacked and colored with Lego-like precision, carry goods toward Europe. The largest of them are more than half a football field wide and longer than the Empire State Building is tall. Altogether, some sixty thousand ships pass by each year. The mantra for real estate is generally true for ports: location, location, location. Hambantota is a mere ten nautical miles away from one of the world’s busiest shipping lanes.

  Look west, down the coastline, and gigantic state-of-the art shipping cranes, each costing $30 million, rise above a Chinese owned and operated port. Until construction started in 2008, the area was mostly jungle. Wild elephants still roam nearby, coming out of their protected areas and into contact with humans as new construction shrinks their habitat. Sri Lanka has some of the world’s best natural harbors, but curiously, this port was carved out of the coast. A logistics and industrial zone with refueling services, cargo transshipment, and ship repair was unveiled in 2017 with promises that it would create one hundred thousand jobs.1 Such prosperity would transform Hambantota, a fishing town of sixty thousand people.

  The problem is that these two images—the world’s busiest shipping lanes and Sri Lanka’s gamble to tap into them—remain miles apart. In 2017, the port handled less than 1 percent of Sri Lanka’s total traffic. To create activity, shipments of cars are diverted from Colombo, Sri Lanka’s capital and the home of its busiest port, which is thriving and has plans to expand further in the coming years. When Hambantota’s modest cargo is unloaded, much of it is driven north toward Colombo and other urban areas, where most Sri Lan-kans live. It is a classic example of poorly targeted government intervention, increasing ineff
iciency rather than addressing its root causes.

  Rather than fueling local development, Hambantota Port has become the poster child for the dangers of Chinese lending. The port was never intended to be Chinese owned and operated, but it was Chinese financed and built, adding to Sri Lanka’s crippling debt. U.S. officials have seized on the example to illustrate the perils of borrowing from China. As U.S. Vice President Mike Pence said in October 2018, “China uses so-called ‘debt diplomacy’ to expand its influence. . . . Just ask Sri Lanka, which took on massive debt to let Chinese state companies build a port of questionable commercial value.”2

  As a former speechwriter, I can appreciate the chest-thumping appeal of those lines, particularly for an American audience. But as an analyst, thinking about how they sound to a global audience, I wish that someone had cut them. Sri Lanka’s complexities have been turned into a cheap spy novel, reframed as a simple zero-sum competition between outside powers rather than a messy, and mostly domestic, human drama.

  The Merchant of Hambantota

  Behind Hambantota Port is a tale of reckless ambition that Shakespeare would recognize. In the opening scene of The Merchant of Venice, Bassanio, an ambitious and spendthrift nobleman, is broke and desperate to secure a loan for his courtship of Portia, a rich heiress. “How much I have disabled mine estate / By something showing a more swelling port / Than my faint means would grant continuance,” he says. Even more than the nautical similarities, it is the relationship between Bassanio’s drive and dangerous debt that Hambantota evokes. Bassanio is driven less by love than by ego, and Portia is his shortcut to the top of society. His friend Antonio, a wealthy merchant, agrees to guarantee the loan. The deal comes with a famous condition: if Antonio cannot repay the loan, the lender may take a pound of his flesh.

  In Sri Lanka’s case, the ambitious nobleman was Mahinda Rajapaksa, and the ending was not as kind to the people of Sri Lanka, who continue to pay for his unchecked drive. Rajapaksa was born to a well-known political family in Hambantota, and his father served in the Sri Lankan parliament for nearly two decades. When the elder Rajapaksa died in 1967, it fell to Mahinda to carry on the family tradition. In 1970, at only twenty-four years old, he campaigned for his father’s seat in parliament and won, becoming the youngest member of parliament in Sri Lanka’s history. He served for seven years before losing his seat and joining a law practice in Tangalle, a large fishing town in Hambantota District. In 1983, he married Shiranthi Wickramasinghe, a former beauty queen whose connections would help his quest for higher office.

  No one can accuse Rajapaksa of forgetting where he came from because he never misses an opportunity to remind everyone. Draped over traditional white garb, his trademark maroon shawl is supposedly inspired by his uncle, who as a public attorney for Hambantota wore a brown shawl that represented finger millet, a local crop. Rajapaksa has cast himself as a savior of Sri Lankan farmers.3 It is a savvy move for a politician with a rural base, and somehow, the act continued even while his wealth grew in the public eye. He loves jewelry and has been called “Lord of the Rings” for wearing up to eight rings at once.

  Rajapaksa reentered politics in 1989, winning a seat in parliament and later serving as minister of labor and minister of fisheries. As a cabinet member, he funneled state money to pet projects, including turning Hambantota’s Martello Tower into a fisheries museum. He also promised to bring big ships to Hambantota.4 In 2002, Rajapaksa became leader of the main opposition party, a challenger in waiting for the nation’s highest office.

  Later that year, the ruling coalition government, led by Chandrika Kumaratunga and Ranil Wickremesinghe, unveiled a sweeping development plan. Released in December 2002, “Regaining Sri Lanka” has clues for the chaos that would later unfold.5 It reads more like a wish list than a coherent plan or strategy. One part of the document notes that developing Hambantota Port is a “longer-term” priority, while another says it is a “medium-term” priority. Part of the confusion might have stemmed from the fact that the port had not been studied yet in any great detail.

  Feasibility studies are essential for planning large projects, but they are a mix of art and science, allowing for honest mistakes as well as manipulation. Reasonable people can disagree about which assumptions to use and how to interpret results. Less objectively, these studies can be massaged to support a preferred course of action, and the sponsor always has the option of seeking a different study. “Regaining Sri Lanka” noted that SNC Lavalin, a Canadian engineering firm, would complete a feasibility study for the port.

  Evaluating projects that are intended to develop rural areas is especially hazardous. Like Khorgos Gateway and Gwadar Port, examined in Chapters 3 and 7, Hambantota was conceived as a game-changing engine for growth. The appeal of bringing economic opportunities to disadvantaged areas is so powerful that it can mask related costs. A new port in an underdeveloped area often needs better local and national roads, power generation and distribution, and water services. Many of these expenses are not captured in the cost of the port itself and normally would be viewed as disadvantages when comparing sites for the port. But when rural development is a primary goal, these challenges become justifications for the project.

  Initially, the Sri Lankan government made the right call. In 2003, a government-appointed task force reviewed and ultimately rejected the SNC study, faulting it for ignoring the port’s potential impact on Colombo Port.6 A natural trade hub for centuries, Colombo’s port was developed under British rule and then modernized to accommodate shipping containers in the 1970s. In 2016, it was ranked among the top twenty-five busiest ports in the world.7 It has the capacity to handle even more cargo, and if that runs out, it has space and plans to expand.8 The biggest threat to the success of Hambantota Port has always come from within Sri Lanka.

  Ideas for megaprojects come and go, but they rarely die. Before the Suez Canal became a reality, it was dreamt up, studied, and abandoned by a succession of leaders from Egypt’s pharaohs to Napoleon. Proposals for an extensive U.S. highway system emerged in the early 1800s, but it took the threat of the Soviet Union for Eisenhower to sell the U.S. Congress on supporting it. Projects can resurface with a new urgency when technology opens new possibilities, when greater financial resources emerge, or because domestic politics demand it. Every big project needs a strong political patron, and in 2003, Hambantota Port did not have enough support. The idea was studied and declined but not buried.

  When Rajapaksa ran for the presidency in 2005, he capitalized on two disasters, one natural and one manmade. A tsunami in December 2004 killed more than thirty-five thousand Sri Lankans, including many in Rajapaksa’s base of support. In the north, the country was mired in a civil war between Tamil Tigers and the Sri Lanka government. On election day, Rajapaksa emerged from a polling booth and made two promises. First, he would “bring about an honourable peace” to Sri Lanka.9 Second, he would “build a new Sri Lanka.”10 When the votes were tallied, Rajapaksa narrowly won, capturing just over half the vote. After decades of climbing, Hambantota’s man had reached the top.

  “Helping Hambantota”

  As president, Rajapaksa was as generous to his family and friends as he was merciless to his enemies and adversaries. He appointed fifty-two cabinet ministers, setting a world record for the largest cabinet.11 Among those were three of his five brothers, giving the Rajapaksa family control over 80 percent of the national budget.12 As defense secretary, his brother Gotabaya oversaw a military campaign to end the Tamil conflict. More than one hundred thousand people died, including forty thousand Tamil civilians killed by government forces, according to the UN.13 Rajapaksa was a villain in the eyes of the minority Tamils but a hero to many Sinhalese citizens, who make up three-quarters of the population.14

  While conflict raged in the north, Rajapaksa wasted little time building, especially in the south. An investigation by a journalist, Sonali Samarasinghe, alleged that Rajapaksa and his aides embezzled $1 million from international donations desi
gnated for the tsunami relief efforts by moving funds into a private account labeled “Helping Hambantota.”15 The government launched an investigation, but the Supreme Court ordered an end to it, a decision that the chief justice publicly regretted.16 Samarasinghe and her husband, Lasantha Wickrematunge, endured harassment from the government until 2009, when Lasantha was killed, forcing her to leave the country.17

  Rajapaksa continued to help Hambantota by helping himself. Hambantota Port is the best known of his projects, but its hand-over to Chinese owners would not have occurred without the pursuit of other dubious projects at the same time. Each new project added to Sri Lanka’s growing debt, and many did not produce enough economic activity to cover the loans. The worst of these big-ticket projects had three things in common: they used Chinese financing, Chinese contractors, and Rajapaksa’s name. Years later, they have a fourth thing in common: they are barely used.

  Enough people believed these projects could succeed, or were willing to say so, before they failed. In 2006, the Danish consulting firm Ramboll completed a second feasibility study on Hambantota Port. It took a relatively optimistic view of the port’s potential, basing traffic projections on Sri Lanka’s future growth and overflow from existing ports at Colombo, Galle, and Trincomalee.18 By 2040, it estimated, the port would handle nearly six and a half times as many containers as the Port of Colombo did in 2006.19

  Even with the optimistic assessment, Rajapaksa struggled to find the money to pay for the port. India, Sri Lanka’s largest trading partner at the time, declined to finance it. The Asian Development Bank (ADB) declined. That left China, which was willing not only to finance the project but to pursue an even more ambitious version of it. Early plans for Hambantota focused on offering fuel services, but under Rajapaksa, it was scaled up to include other activities, many of them already carried out at Colombo. This duplication would have been difficult for Chinese authorities to miss, let alone Sri Lankan authorities, given that they were also helping to expand Colombo and later began operating one of its container terminals.