Local banks and Chinese financial institutions talks in February :

Sri Lanka targets US $ 1.5 b from China

Central Bank Governor Arjuna Mahendran discusses a range of issues with Chandani Jayatilleke, from bringing Chinese investments, implementing agricultural reforms, to reviving exports.

Sri Lanka hopes to get US $1.5 billion from China almost immediately, through the proposed Sino-Lanka joint ventures (JVs). These JVs include the Colombo Port City project, Mattala airport and Hambantota port management project.

The Memorandum of Understandings (MoUs) in connection with these projects are due to be signed during Prime Minister Ranil Wickremesinghe's visit to China on April 7 and 8.

A group of top Sri Lankan bankers met Chinese banking officials in China in February to discuss the investment and funding opportunities.

The Chinese banks included the Bank of China, China Exim Bank, China Development Bank, Industrial and Commercial Bank of China, China Construction Bank and Bank of Communications, Central Bank Governor, Arjuna Mahendran, who led the Sri Lankan delegation, told Sunday Observer Business.

The Chinese banks expressed a keen interest in investing and supporting Chinese and Sri Lankan investors by providing financial facilities.

"I hope we would be able to identify and prioritise these projects during the visit of Prime Minister Wickremesinghe to China, so that our bankers can coordinate with their Chinese counterparts to set out the modalities for fund transfers," Governor Mahendran said.

He added although the previous government has borrowed USD 8-9 billion dollars from China, the present government wants China to invest in Sri Lankan projects in equity.

"We told the Chinese authorities that in the future we would prefer equity instead of debts. We want China to invest in shares rather than give us loans. That will take the burden off the government paying interest on long-term basis. On the other hand the project risks can be shared by the two investing parties."

Listing on the stock exchange

"In the future we hope to get some of the Chinese funded projects such as highways and the Hambantota port listed on the Colombo Stock Exchange. Through this, Sri Lankans can also become stakeholders of these projects by investing in shares. We have have begun discussions with the Chinese investors regarding this. They are in favour of the idea.

"Listing these companies would be a good option given the interests of all parties involved in it. When the companies are listed there are operational needs to fulfil - the companies need to be run professionally and business opportunities need to be generated.

"The Chinese investors also want to build a dry dock in Hambantota. We also invite other countries - such as India and Japan to invest here. There shouldn't be a monopoly in development projects. India's Tata has shown interest in expanding its hotels and tea plantations in Sri Lanka."

From borrowings to PPPs

The Ports Authority will call tenders to set up a joint venture to run the East terminal of the new Port of Colombo. China already operates the South terminal. "We hope Japanese or Indian port operates will also bid. We should not fund these projects with new borrowings. We should get equity as far as possible."

"The proposed port city project will be funded by equity and not by loans. That would be one of the several projects the government will not have to borrow. We can then reduce our borrowings gradually. Initially we will have to continue to borrow- since we have to repay some of the earlier loans. For the past five years we have been borrowing heavily. Some of these loans are now overdue for payment.

Reviving exports

"As we don't have the resources to pay back those loans, we have to take new loans to pay back the earlier loans. We have discussed this matter with China and they accepted it. We can't stop borrowing abruptly. We have to continue to borrow for a few more years. But we hope to taper it down - as low as possible - and to go for public-private partnerships (PPPs) with equity in the future. It is essential as we cannot sustain this type of borrowing for a long time."

"Sri Lanka badly needs to improve its export earnings. Exports is a weak point of the economy. I think the import substitution policy of the previous government was a bad decision. It never worked. We are an importing nation - flour, wheat and most of the other things we eat, we import. We do not have the capacity to grow all that rice and wheat and sugar for our consumption.

"As a result of the import substitution policy, our exports have fallen to about 9% of GDP and is a huge structural damage to the economy. The export sector has not been nurtured to the fullest potential.

"Reviving exports is a huge challenge for Sri Lanka now. If this is done, we can repay all the foreign loans and it will create a surplus for our country to thrive and prosper in the long term. As we are at the 'bad credit card' situation - we have no money to settle credit card debts. It has been like that for the past few years.

Apparel sector

"Our exports depend a lot on the apparel sector. However, it is time that we modernised the entire apparel sector to match the advanced technology and systems in the world.

As far as industries are concerned we cannot afford to have only foreign investors. "We need to look at modernising local industries and make our industrialists as competitive as the foreigners. We hope to meet local industrialists and find out how the government can help to develop industries immediately in terms of support for improvement and technology enhancement so that they could reach a level where they no longer feel threatened by the presence of foreign investments.

"The government hopes to support them in many different ways over the next five to 10 years and allow them to ward off any feeling of competition. We have already begun a dialogue with the Chambers and business organisations.

"As far as the export sectors of the future are concerned, we hope to look at ship-building, the yacht industry, IT, professional services (back-end services), accountancy, architectecture and medical sectors (real time advice to doctors). We need to go beyond the apparel sector - it is crucial for us.

"Japan is talking to us about setting up a ship repair and refitting facility in Colombo. Japan's Mitsui wants to come to Colombo for this purpose. The harbour will be expanded northwards to Wattala, by building a breakwater along the way. This expansion project is also a part of the Megapolis project.

Commercial agriculture

"To increase exports in the agriculture sector we need to look at agri products that can be grown as commercial crops. We are also looking at opportunities to introduce investments in this area as well.

"Hong Kong's Shangri La Group which also owns Singapore-listed Wilmar International Ltd hopes to build a massive sugar refinery in Hambantota. Wilmar is the world's biggest processor of palm oil and the eighth-biggest sugar producer. Talks are under way at present. They want to arrange an out-grower arrangement to buy sugarcane from our farmers. The project is due to commence in the second half of the year.

"Prima wants to grow maize in Sri Lanka and to have a buy back arrangement. To do commercial farming we need to link our farmers with a big buyer - who can educate the farmers on the use of modern technology. Today there are incentives for farmers to grow individually and they end up with no proper market for their products.

"What we grow today has no market in the world. For instance the rice we grow is not the right kind of commercial crop. We need to grow commercially viable rice varieties," he said.