India Sri Lanka Finance Adani Ports
Exclusive: Adani-led port proposal violated India – Sri Lanka – Japan agreement
In February 2021, the Sri Lankan government walked away from a proposal to lease a major port terminal in Colombo to a consortium involving the Adani Group. India accused Sri Lanka of reneging on a tripartite agreement it had made with Japan and India regarding the port. However, AdaniWatch can reveal that the deal fell over because the Adani-led consortium’s proposal went counter to terms agreed by the governments of India, Sri Lanka and Japan.
(UPDATE 4 March 2021: A media report from 3 March 2021 says that Sri Lanka is now formally negotiating with Adani Ports over development of the adjacent West Colombo container terminal)
New Delhi, 22 February 2021: On 2 February 2021, the Indian government reacted with outrage at reports that Sri Lanka was ‘pulling out’ of an agreement in which a consortium led by an Indian company in the Adani group would be given the right to take over and expand the East Container Terminal (ECT) in the Port of Colombo in the island nation’s capital city. The Indian government and media accused Sri Lanka of reneging on a tripartite geostrategic agreement signed by India, Japan and Sri Lanka in 2019 relating to the ECT project.
While India’s embassy in Sri Lanka told Indian news channel NDTV ‘all sides should continue to abide by the existing understandings and commitment’, India’s External Affairs Ministry’s spokesperson said in a press conference on 5 February that ‘our High Commissioner in Colombo is in discussion with the Government of Sri Lanka including on the importance of adhering to International commitments.’
Late last year, negotiations on the deal picked up after a pandemic-induced slowdown. In 2020 and early 2021, top Indian officials, including Ajit Doval, India’s national security advisor, and S Jaishankar, India’s Foreign Minister, and the then US Secretary of State Mike Pompeo visited Sri Lanka for discussions about the port. Subsequently, the Indian media and government have sought to portray Sri Lanka’s cancellation of the deal as a unilateral decision by the Sri Lankan government.
In Sri Lanka on the other hand, President Gotabaya Rajapaksa’s government has pointed to growing political opposition to the deal among a coalition of trade and workers unions, opposition political parties and sections of the country’s influential Buddhist clergy.
The Cabinet decision announced on 2 February 2021 stated that the Sri Lankan government had decided that the government-owned Sri Lanka Ports Authority (SLPA) will fully own and develop the ECT with no participation of foreign companies, while another terminal at the same port – the West Container Terminal – will be offered to the nominees of India and Japan to finance and develop.
AdaniWatch has learned that this came after meetings held by a Cabinet-Appointed Negotiation Committee of the Sri Lankan government on 27 and 28 January with representatives of the consortium led by Adani Ports and Special Economic Zones (APSEZ).
AdaniWatch is exclusively releasing minutes of those meetings and a Cabinet Memorandum (see below) prepared by Sri Lanka’s Ministry of Ports and Shipping. The minutes show that negotiations between the Sri Lankan committee and the consortium led by Adani Group representatives broke down as the consortium’s proposal demanded different terms from those specified in the government-to-government agreements signed by India, Japan and Sri Lanka for the ECT development in 2019 and 2020.
The agreed terms for the East Colombo Terminal
In a previous article, AdaniWatch exclusively revealed the terms agreed by the three governments for the ECT development.
A Memorandum of Cooperation (MoC) signed by the three governments in May 2019 after discussions between the respective heads of state through 2018 laid out the framework: the SLPA would retain majority ownership (a 51% stake) of the Terminal Operation Company (TOC) that would be set up in partnership with a consortium of private companies nominated by India and Japan. The private developers given a 49% minority stake in the company would be granted a 35-year build-operate-transfer (BOT) lease for the terminal, and Japanese investors would finance the project through a Yen-denominated loan to the SLPA.
The agreed terms changed partly after a change in the Sri Lankan government after elections in 2020. The new Sri Lankan government led by President Gotabaya Rajapaksa informed India and Japan that Sri Lanka would not be able to take on any debt for the ECT project because of prevailing economic conditions in Sri Lanka but would support Foreign Direct Investment by India and Japan’s nominee companies. The structure of the TOC remained unchanged: SLPA would still retain majority ownership.
In June 2020 India finalised the Adani group’s APSEZ as its nominee, and Adani roped in Sri Lankan company John Keels Holdings to submit a joint proposal to the Sri Lankan government for the port development. In October 2020, Sri Lanka’s Cabinet set up a Cabinet Appointed Negotiation Committee (CANC) to receive and evaluate the Adani-led consortium’s proposal. The Cabinet also in the same meeting set up a Project Committee to oversee the process of negotiating the deal. The Project Committee drafted a BOT agreement that was approved by the CANC and sent to the Indian and Japanese embassies. That draft BOT laid out the following commitments that it expected the investor to make:
‘The Terminal Operator shall undertake the following commitment to SLPA
- Make the full payment of SLPA cost for construction of the existing ECT terminal
- Make annual land lease payment
iii. Make Royalty payment for annual throughput handled along with minimum Guaranteed Throughput more than the rates given by the highest of the two private container terminals operated in SLPA
- Make one time upfront payment
- Make landing and delivery charge for the Local throughput handled for imports and exports.
- Guarantee a maximum share of feeder vessels connected with ULCC vessels handled at ECT to SLA operated container Terminal (JCT).’
The Proposal by the Adani-led Consortium
The minutes of the meeting of the CANC on 27 and 28 January (published below) record the proposal that was submitted by the APSEZ-led private consortium.
The APSEZ led consortium, that also included Sri Lankan companies John Keells Holdings and Nithya Partners, ‘insisted that the same terms, conditions and the rates [that] applied to CICT should be applied to ECT.’
The Colombo International Container Terminal, or CICT, is the biggest operational container terminal at the Colombo Port. Completed in 2014, the terminal was developed through a joint venture between Chinese state-controlled company China Merchant Holdings (CMH) and Sri Lankan Aitken Spence. From its very inception, the SLPA held only a minority stake in the company, with CMH being given a majority 55 percent share, and Aitken Spence a further 30 percent. Aitken Spence later sold out its stake in the project, and at present, CMH is the majority stakeholder with 78.4 percent of the CICT’s shares, while SLPA holds the minority stake.
According to the CANC’s minutes, there are crucial differences between the CICT and the ECT that made this proposal by the Adani-led consortium unacceptable to the Sri Lankan government. At the time that the contract for the CICT was put in place, in 2009 soon after the global financial crisis, the minutes explain, ‘the breakwater [for the terminal] was still being constructed and the investor was expected to commence construction [of the terminal] in parallel with the breakwater construction works.’ In the case of the ECT however, the situation is ‘very much improved, with developed infrastructure ready for any new investor to come in.’
Construction of a container berth as part of the first phase of the ECT was in fact completed in 2015 by the SLPA. However, the berth did not begin operations until October 2020 after port workers’ unions alleged that the Sri Lankan government was holding off operations in anticipation of the deal with India and Japan.
Given this, the CANC says ‘the same rates [offered to CICT in 2009] cannot be applied to ECT.’
But there were even more fundamental problems with the Adani-led proposal. ‘The most important financial terms and exclusivity were not able to reach to acceptable level,’ the minutes say.
‘The investor insisted the royalty, upfront payment and land lease payment to be same as the values given in the first-year of the BOT agreement for CICT and follow the same increments. The cost incurred by SLPA for the development of ECT to present level was considered by the investor as part of Government share. Further, the investor stated that their calculations show that the project IRR and equity IRR are negative for the values proposed by SLPA.’
In other words, the Adani-led consortium was claiming that it was expecting not to be able to make up its investment in the ECT, and as a result was demanding that the Sri Lankan government make up the difference by reducing how much the Adani-led consortium would have to pay the Sri Lankan government for the deal.
Finally, according to the minutes, the Adani-led consortium ‘had ... concerns with the structuring of the company.’
The minutes note: ‘SLPA holding majority share in the company and being a Government owned company, the investor had the following concerns with the structuring of the company.
- The requirement for the concessionaire to have operational flexibility to operate as a commercially competitive manner in line with the other private operators.
- Subjected to auditing by the Government Auditor General and being answerable to the Parliament.
- Reluctance in publishing certain information.
- Possible Fundamental Rights jurisdiction.’
Faced with these clear deviations from the 2019 agreement between Sri Lanka, India and Japan, and the terms for the project proposal communicated earlier by the Sri Lankan government in the draft BOT agreement prepared by the Project Committee, the CANC ‘observed that it is not fruitful to proceed with the negotiation on the proposal submitted by the investor.’
‘As such, the first round of negotiations was completed without reaching any agreement for fundamentals especially on royalty, upfront payment, land lease payment and exclusivity clauses to Sri Lanka Port Authority. No flexibility was shown [by the investor] but [the investor] stressed to stick to the financial values given in the BOT agreement of CICT,’ the minutes noted.
After the news of Sri Lanka’s decision had broken, Ports and Shipping Minister Rohitha Abeygunawardena said on 13 February, responding to a question by the opposition in Sri Lanka’s Parliament, ‘we entered talks from a favourable position to us, then that company (the Adani-led consortium) refused to go ahead with our conditions.’
An Alternative Offer to India
Faced with the negotiation committee’s recommendation not to proceed with the Adani-led proposal, the cabinet of the Sri Lankan government sought a creative way to end the impasse. The geo-strategic agreement that it signed with India and Japan stated unambiguously that there was a need for a deep-water container terminal at the port of Colombo to be developed and operated by Indian and Japanese nominees.
With the ECT negotiations breaking down due to the negotiation committee’s perception of the Adani-led consortium’s intransigence, the Sri Lankan cabinet is seeking to offer the desired terms – equal to those of the Chinese controlled CICT – at another greenfield terminal project at the Colombo port, the West Container Terminal (WCT).
Shipping sources in Sri Lanka told AdaniWatch that the WCT project is more suited to such terms because, like the CICT at the time of its contract award, it is mostly undeveloped, and a foreign investor like Adani would have to undertake much of the terminal development work, including breakwater construction and dredging, from scratch.
Nalaka Godahewa, the Sri Lankan minister for urban development, was quoted by a report in the Indian news website ThePrint saying that the suggestion that the WCT be offered to India and Japan in lieu of the ECT was made by the Adani-led consortium itself.
‘We asked them (Adani group and its local partner John Keells) for other options. They themselves asked us whether we could look at WCT but, with the same equity ratio (85%:15%) that was given to China to develop the CICT. Commercially, it would be a better option, they said,’ it quotes Godahewa as saying.
Did the Indian government back the Adani-led consortium’s proposal?
While India’s official statements by the Embassy in Sri Lanka and the Ministry of External Affairs have not specifically commented on the issues over which negotiations broke down, the same report in ThePrint quoted an un-named ‘high-ranking’ Indian official on the subject. The official’s comments are an indication of the Indian government’s stand.
First, the official raises doubts on whether the opposition to the deal within Sri Lanka is genuine. ‘Have you noticed that most of these protesting groups — even the Buddhist clergy — are somehow affiliated to the Government of Sri Lanka itself? So, they are in no way a political opposition, as is being suggested,’ ThePrint was told.
In the sequence of events outlined by the official ‘initial discussions had revolved around managing the ECT along the same equity divide (85%:15%) as China was given at the CICT’ the report continues. Then the official says, ‘discussions picked up again last year. Then, protests began and there was suddenly the proposal that the Sri Lanka government retain 51% and offer only 49% to us foreign investors. We told them that the ECT would then become a state-run entity and turn private investors off. We also said that it is silly to have different templates for different terminals at the same port, so we suggested we keep talking.’
‘The big question is, if that equity share was possible for China, why not with India and Japan over the ECT?’ the official concluded, according to the report.
Even as late as July 2020, when the Sri Lankan cabinet noted that the Indian government had nominated APSEZ as its nominee for the ECT project, it still mentioned that the ownership structure of the TOC would be as per the terms of the three-country agreement signed in 2019 – that is, with SLPA retaining the 51 percent majority stake, as was revealed by AdaniWatch.
Response from SLPA Chairman
General Daya Ratnayeke, Chairman of the SLPA, spoke to AdaniWatch in a telephone call.
‘The negotiations with the investors broke down over differences regarding the fundamental financial terms and conditions, including the rates of upfront payment, land lease payment, royalties, and the exclusivity clause to the SLPA. The negotiations did not proceed beyond these issues as the investor was unwilling to adhere to the MoC and the Sri Lankan government’s terms and conditions laid out in the draft BOT agreement,’ he said.
‘The Sri Lankan government has decided to offer the West Container Terminal (WCT) to the Indian and Japanese governments. SLPA has not received any communication regarding a formal response by the Indian and Japanese governments relating to this proposal. However, I have been told that while there were some initial concerns, things have stabilised now in the discussions at the government-to-government level,’ he added.
‘The SLPA has not been informed whether the Indian and Japanese governments have nominated any investor companies for the WCT proposal. While in the case of the ECT, the Indian government nominated APSEZ and the Japanese government nominated JOIN (Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development, a Japanese government-private sponsored infrastructure investment fund), if the negotiations on the WCT project commence, we would expect the Indian and Japanese governments to inform Sri Lanka of their nominees once again,’ Ratnayeke concluded.
It is important to note that by making this offer, Sri Lanka is effectively sacrificing potential future earnings if the WCT development contract were granted through an open international tendering process.
However, whether the Indian side is persuaded by Sri Lanka’s reasoning or continues to stake a claim to the moral high ground in the dispute remains to be seen.
AdaniWatch has reached out for comment for this article to the Adani Group and to Sri Lanka’s Ministry of Ports and Shipping. No comments from either were received at the time of publication. This article will be updated with any comments that are received. The author is an independent journalist based in New Delhi.
Minutes of the Cabinet Appointed Negotiating Committee (CANC) meeting of 27, 28 January 2021
Sri Lankan Government Cabinet Memorandum 31 January 2021