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Hitting China's great wall

Sri Lanka has presented some unlikely roadblocks to China's Silk Road project

The city of Hambantota in Sri Lanka could present an unlikely obstacle in the way of the otherwise relentless progress of China's giant Belt and Road project—part of the country's modern Silk Road initiative. This already encompasses many energy-based and other infrastructure projects in the Asia-Pacific region.

In a direct affront to Beijing's long-term strategy, India has assumed the operation of a Chinese-built airport near the town that was intended to be part of a Belt and Road complex linked with an adjacent seaport. This is also Chinese-built and near one of the world's busiest shipping lanes.

Just as surprisingly, in October the Sri Lankan government rejected China's offer to build a 100,000-barrels-a-day oil refinery near the seaport. The aim of the planned facility was to boost output from the Sapugaskanda refinery, the only one in Sri Lanka to produce finished petroleum products; but the government cited competition with two domestic fuel distributors in dismissing the bid.

The airport, about 240km (150 miles) by road from the capital Colombo, was built by China at a cost of $253m, mostly in EXIM-funded loans payable by the Sri Lankan government. It has been a financial white elephant ever since. Dubbed "the world's emptiest airport", it handles just one flight a day, from Dubai.

As India's Economic Times points out, the airport has become a millstone around the neck of the domestic economy. And so has the deep-sea port for which China loaned over $300m at an interest rate of 6.3%, many times higher than the rates available from the World Bank and Asian Development Bank.

India, one of the few countries in the region to express serious concerns about Belt and Road, now intends to build the airport into a profitable operation that will pay its own way. China had also put in a bid to operate the airport but couldn't agree on financial terms with the new Sri Lankan government. The original agreement to construct the airport was made with the former government.

The refinery, in particular, is a significant setback for China. Along with other countries, China has expressed interest in funding new oil and gas infrastructure in Sri Lanka, which is anxious to modernise a creaking industry and boost domestic refining. According to the Ministry of Petroleum Resources's latest annual report (released in 2015), the Sapugaskanda refinery meets about a third of the country's total fuel requirements, while the rest is imported. But this puts China out in the cold.

India's takeover of the airport's operations comes at a time of mounting concern over the many debt-funded projects agreed under Belt and Road. India and Japan are combining to fund their own infrastructure projects in the region, including energy-based ones, under the rival Freedom Corridor initiative.

Unveiled late last year, Freedom Corridor was triggered in large part by both countries' misgivings about Belt and Road. "India and Japan's deepening economic partnership has been prompted by a recognition of China's efforts to enhance its influence by funding development projects in its neighbourhood," argued Darshana Baruah, research analyst with New Delhi-based Carnegie India, in a paper earlier this year.

Misgivings are mounting elsewhere. At May's Belt and Road summit in Beijing, attended by the UN, World Bank, IMF and delegates from over 100 countries, China pledged more than $50bn in special lending schemes to speed up progress of the giant programme. However, India and Japan declined to attend the summit and, as the European Council on Foreign Relations's Angela Stanzel pointed out in an analysis: "[The summit] revealed profound disagreements between Europeans and Beijing on the shape of future cooperation under the Silk Road framework." Several states, including the UK, refused to sign the final joint communique because of concerns about its failure to include social and environmental issues.

In the meantime, China's reaction to losing control of the airport and the refinery contract at Hambantota will be closely watched. It is clear the more independent-minded Sri Lankan government has decided to deal with other countries in advancing its oil and gas industry rather than with a harder-headed China.

The Economic Times expects dozens of similar scenarios in Asia as one nation after another sees the danger in signing up to debt-funded Belt and Road projects. "Touted as a global partnership by China, [Belt and Road] is actually an exploitative colonial stratagem to gain vital assets in small countries," warns the Economic Times. It added that China ended up acquiring controlling stakes by default when governments couldn't meet the loan repayments.

For example, about $8bn of Sri Lanka's estimated national debt of $65bn is owed to China, a disproportionately high percentage that the new government obviously see as a long-term danger.

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