Business News/ News / World/  China-backed Colombo project fails to get tax break from Sirisena govt

Colombo: China’s $1.4 billion plan to build a city on reclaimed land near Colombo port faces its first tangible setback since new Sri Lankan president Maithripala Sirisena took power last month.

Lawmakers failed to approve a 25-year tax holiday proposed by the previous administration for the Colombo Port City before a deadline on Tuesday, said Eran Wickramaratne, deputy investment promotion minister. The process must now be restarted if the project is to continue, he said.

“Within three months you have to get it approved in parliament," Wickramaratne said in an interview on Wednesday. “Three months ended yesterday. They have to talk again."

Sirisena’s government started an investigation into the project as it looks to increase transparency and rebalance ties away from China. The president this week visited India on his first overseas trip since he surprisingly ended Mahinda Rajapaksa’s decade-long rule in 8 January elections.

China had become Sri Lanka’s largest investor, top government lender and second-biggest trading partner under Rajapaksa, and the Port City is Sri Lanka’s biggest foreign-funded investment.

Although the project will be delayed, it’s unlikely to be killed altogether, according to Bimanee Meepagala, an analyst at NDB Wealth Management Ltd in Colombo.

“Sri Lanka can’t undermine the magnitude of the project and the sensitivity of the relationship with China," she said.

Sirisena plans to travel to China in March, about a month before he’s due to call parliamentary polls. His first budget last month included populist measures such as a one-off windfall tax on company profits, and a failure to secure investment could hurt his chances of winning more seats.

Chinese President Xi Jinping in September inaugurated construction of the Port City, which is being built by a unit of state-controlled China Communications Construction Co. on an area slightly larger than Monaco. Plans include offices, hotels, and shopping centers on 233 hectares (576 acres) of reclaimed land, which the company had said will attract about $13 billion of foreign investment.

Sri Lanka was to own rights to 125 hectares, 20 hectares was to be held by China Communications, and the remaining leased to CHEC Colombo Port City Ltd for 99 years. Rajapaksa proposed a 25-year tax holiday with main contractor China Harbour Engineering Co. offered an eight-year tax break. Inputs were also to be exempted from import duties and value-added tax.

The project wasn’t transparent and agreements had been signed by Rajapaksa’s government without cabinet approval, Prime Minister Ranil Wickremesinghe said in parliament on Wednesday. A probe is on and a final decision will be taken on the project based on the findings, he said.

Chiranthi Balapatabendi, public relations manager at CHEC Port City said officials authorized to comment weren’t available due to the Chinese new year holidays.

Sirisena had pledged to reduce Sri Lanka’s dependence on China during his election campaign. He accused Rajapaksa of amassing wealth for Rajapaksa’s family while leaning more on China to finance large projects as the US and its allies expressed concern over alleged human rights abuses during a 26-year civil war that ended in 2009.

During his 15-18 February India visit, Sirisena signed a deal to receive training for his country’s civilian nuclear program. Officials under Rajapaksa had rankled India by suggesting that Pakistan—whose reactors have mostly been built by Chinese companies—may help Sri Lanka build nuclear power plants.

China welcomes the “constant growth" of relations between Sri Lanka and India, Sri Lanka’s government said on its website this week, citing Chinese foreign ministry spokeswoman Hua Chunying. “If the three pairs of relations can promote each other through sound interactions, it will benefit regional peace, stability and development," Hua said. Bloomberg

Asantha Sirimanne contributed to this story.

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Updated: 19 Feb 2015, 07:17 PM IST
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