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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Economics of the Colombo Port City Project

Economics of the Colombo Port City Project

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
The government recently took a cabinet decision to go ahead with the $15 billion Colombo Port City Project (CPCP). Cabinet spokesperson Dr. Rajitha Senaratne, trying to justify the decision told the media that it was a “business venture” done together with one of Sri Lanka’s “long-standing friends,” China. A day later Prime Minster Ranil Wickramasinghe in a statement to parliament drew back from the announcement that Senaratne made. The Prime Minister had stated that the information on the project was “incomplete” and that some environmental reports were missing. This indicates some indecision and reservation about the project.

Several commentators have already drawn attention to the unresolved environmental problems surrounding the CPCP. They have rightly noted that Mr. Maithripala Sirisena and Mr. Ranil Wickramasinghe unequivocally stated during the last election campaign that the project would be an environmental disaster and would be cancelled if a new government were elected. Neither of them would claim to be experts on the environment. Their statements, if responsibly made, would have had to be based on reliable studies done by others. The government now claims that an Environment Impact Assessment (EIA) that the University of Moratuwa prepared has declared that the CPCP would not have a negative impact on marine life. The government, in keeping with its principal of transparency in governance, should release this report without any delay for public scrutiny.

The Sunday Times of July 04, 2010 citing the then CEO of Lanka Hydraulic Institute (LHI) Ltd., Malith Mendis reported that “although an in-depth study has not been carried out by the LHI or any other institute, there is unlikely to be a major impact on the environment such as beach and land erosion.” However, the Sunday Times in the same report also noted that Mr. Mendis does “not rule out the (sic) long term impact on marine resources.” It has been reported that the Palm City in Dubai that was built on land reclaimed from the sea has altered the sea wave pattern causing damage to natural beachfronts of the country. There have been unconfirmed reports denied by the Dubai authorities that the city is sinking at the rate of 5 millimeters (0.20 in) per year.

All these add up to two facts. First, the impact of the project on the environment is uncertain and probably requires further study. Second, the Sri Lanka government does not want to displease the Chinese.

There is a third issue, the economics of the project that needs close attention before this project is approved. The projected total cost is $15 billion. Usually in projects of this magnitude there are cost overruns.

The detailed project proposal, if such a thing exists, has never been made available to the public. The Rajapaksa administration controlled the release of information. The public has a right to know the full details of this project. The new government must release to the public whatever project report that exists.

It was never made clear if the $15 billion is only the cost of reclaiming the land or whether it includes the cost of construction of utilities and buildings as well. Newspaper reports have mentioned four different figures, 450 acres, 500 acres, 568 acres and 575 acres as the extent of land to be reclaimed from the sea. The difference between the lowest and highest is as much as 125 acres (28%). Only one figure can be correct. If the $15 billion is only for reclaiming of land, the cost per acre would be $26 million if 575 acres were reclaimed and $33 million if only 450 reclaimed. Recent advertisements for bare land in prime locations in Colombo 2, 4 and 7 show a price of around $55,000 per perch or $7m to $8m per acre. Reclaiming land from the sea at about four times the current cost of natural land makes no economic sense and should be abandoned without any further debate. If we assume that the $15 billion includes the construction of the new city, reclaiming land from the sea should cost no more than about $8.0m per acre that will add up to $4.0 billion for 500 acres. Even if land could be reclaimed from the sea at a price comparable to the current price of land in Colombo there are a large number of other reasons that make the case for proceeding with the CPCP very weak.

First, Finance Minister Ravi Karunanayaka’s adjusted budget presented to parliament on January 29th allocated Rs 520 billion ($4.0 billion) for capital expenditure. This is only one-fourth of the investment in the CPCP. In 2013 Sri Lanka’s total investment, private and public sectors combined, was only $19.6 billion. The CPCP alone is expected to cost about 75% of that amount. These numbers show the magnitude of the investment proposed to reclaim a few hundred acres of land from the sea.

Second, there are countries that suffer from severe land storage that reclaim land from the sea. Holland is one. More recently Dubai completed its Palm Island project that added 35 miles to its then existing natural coastline of 44 miles. Dubai needed Palm Island to develop a luxury tourist resort because it is due to run out of oil by 2016. But Sri Lanka has plenty of other alternatives to develop its economy. It is also useful to remember that Dubai’s per capita GDP is over $60,000 per year. Sri Lanka’s current per capita GDP is around $4,000. This income is not adequate to support the kind of facilities the CPCP expects to build.

Third, it is entirely possible that there could be an additional cost to maintain the reclaimed land. For example, in Dubai’s Palm City the artificial beach gets eroded but there is no natural replacement of the sand. The beachfront has to be maintained at an additional cost that was not originally anticipated.

Fourth, high-end tourism is a very fickle industry. It is particular sensitive to poltical instability in host countries and economic recessions in the home countries of tourists. Sri Lanka should not risk such a large amount of resources on a project that has a high risk when more stable alternatives are available for investment.

Fifth, adding 500 acres of new land to the Colombo beachfront in Fort area will bring down the price of existing land in the area. This will be good for buyers and new investors but bad for current landowners.

Sixth, the project will boost the demand for rock, metal, sand and other building material increasing the cost of construction, especially in the Colombo District.

Seventh, if the CPCP is to proceed, the Sirisena/Wickramasinghe administration has to resolve some other inconsistencies in its declared policy. According to newspaper reports the Rajapaksa version of the plan included a Formula 1 racetrack, yacht marina and a mini golf course plus luxury hotels, and skyscraper commercial and residential buildings. In short it would be a super luxury holiday resort combined with some commercial activity. Such a resort usually includes casinos that attract high rollers. But the government has decided to ban any new casinos.

Eighth, Sirisena and Wickramasinghe have criticized Rajapaksa for not distributing the fruits of economic growth more equitably. If they keep their promise the new government would not want to see a super rich class grow that may have the money to afford the housing, shopping, dining and recreational facilities that the CPCP project would produce. If Sri Lankan society moves towards a more equitable distribution of wealth and income, the project would be viable only if rich foreigners invest and use it as a facility for whatever purposes that they want. If that happens Sri Lanka will have a small foreign enclave attached to its capital city of Colombo.

There is one significant economic upside to the project. It will create a large number of construction jobs for a few years. It will also produce a significant number of service sector jobs after construction is completed if the new facilities are fully utilized. That is a big if. However, there are alternative avenues of investment available to Sri Lanka to create comparable jobs.

The Rajapaksa administration announced that there was an investor, who has not been publicly identified, ready to invest $2.5 billion in the project and get in return some portion of the reclaimed land on a long-term (99 years has been mentioned) lease together with tax holidays. Other foreign investors were also to be offered similar terms. China Harbor Engineering Company whose parent company is China Communication Construction Company (CCCC) Ltd. is the designated contractor. The World Bank has CCCC and its affiliates on its prohibited list (2009-17) for procurement guideline violations (see here).

From a diplomatic perspective it may be embarrassing for Sri Lanka to get into a public spat with China on this project. But Sri Lanka can ill-afford a second Mattala. The Mattala Airport investment totaled $209m. CPCP is over seventy times larger than that. In the case of CPCP if a mistake has been made in negotiating a bad deal, it needs to be rectified. That’s what “long-standing friends” are for!

Mega urban development projects have become a part and parcel of 21st century urbanization and globalization. There is no reason for Sri Lanka to opt out of this trend. However, the CPCP is not the kind of project that would yield the highest possible economic and social benefits to the country. It is likely to exist in splendid isolation from mainstream society. The new government could do much better to create a more people-friendly mega urban development project with the assistance of the Chinese.

There are examples from Asia that we could use as a model. For example, Singapore has invested about $20 billion over the last 35 years in a science park that it established in 1980. Malaysia has built a multimedia super corridor spending $2.9 billion that is a mix of R&D, education, telemedicine etc. Hong Kong has invested $1.7 billion on a cyber port that is devoted to the development of digital and other technologies. Something similar, perhaps a Knowledge Park that combines tertiary education, ICT and R&D, could be established in Sri Lanka investing around $2.0 to $3.0 billion spread over a period of several years. Such a project will especially benefit the younger generation and provide the skills required to develop the country. I would prefer to see such a facility in Kandy (full disclosure – I am from Kandy and totally partial toward Kandy) that would not only be a refreshing change from Sri Lanka’s Colombo-centric development but also be as far away as possible from the sea so that marine life is allowed to live in peace.

http://groundviews.org/2015/02/09/economics-of-the-colombo-port-city-project/

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