U.S. counters China’s Belt and Road with $553m investment in Sri Lanka

The project is billed as providing critical infrastructure for the South Asian nation with the potential to “transform Colombo into a world-class logistics hub at the intersection of major shipping routes and emerging markets,” according to the U.S. International Development Finance Corp.

The DFC’s commitment of $553 million in private loans for the West Container Terminal will “expand its shipping capacity, creating greater prosperity for Sri Lanka — without adding to sovereign debt — while at the same strengthening the position of our allies across the region,” said DFC Chief Executive Officer Scott Nathan.

The U.S.-backed financing comes at a time when Sri Lanka is struggling to recover from a dire financial and economic crisis.

The Port of Colombo has been operating near its capacity since 2021, and the new terminal will cater to growing economies in the Bay of Bengal, the DFC said. Local partners will include Sri Lanka’s John Keells Holdings and India’s Adani Ports & Special Economic Zones Limited, which owns a 51% share in the West Container Terminal.

Nathan said DFC provides a direct loan to the consortium involved in developing the terminal and with that investment, Sri Lanka will be the “2nd biggest exposure” for his institution in the whole India Pacific region. India is the biggest.

“It’s high priority for the United States to be active in the Indo-Pacific region” said Nathan, adding this region is the engine economic growth of the world and has a huge potential to make impact for development.

“We are very active in other countries through out the Indo Pacific region. Sri Lanka will be very important partner of our portfolios in the region,” Nathan told reporters in Colombo, after visiting the site of the new terminal.

The DFC was established five years ago in response to Beijing’s massive global infrastructure building campaign, known as the Belt and Road Initiative. Through it, Beijing has invested tens of billions of dollars each year to build roads, railways, ports and airports, typically in developing nations, to foster trade and goodwill toward China.

Some of those projects have raised controversy, among them Sri Lanka’s Hambantota Port, on its southeastern coast. Sri Lanka borrowed heavily from China to build the port and other infrastructure including an airport and a city being built on reclaimed land. The projects have failed to earn enough revenue to pay for the loans, and in 2017, Sri Lanka leased the seaport in Hambantota to China.

Sri Lanka’s multibillion-dollar debts to Beijing have hindered efforts to resolve its financial woes and have often been cited as evidence by critics of the BRI who claim China engages in debt-trap diplomacy.

The Chinese government rejects such accusations. The debt trap argument was “fabricated to disrupt and undermine China’s cooperation with developing countries,” Chinese Foreign Ministry spokesperson Wang Wenbin said during a routine briefing Tuesday.

Both neighboring India and China are jostling for influence in Sri Lanka and both have already invested in expanding facilities at the Colombo port. India worries over a growing Chinese presence in the island, which is on one of the world’s busiest shipping routes and in a region that India considers part of its strategic backyard.

Colombo port also has a terminal run by China Merchants Port Holdings. Another Chinese project — a luxury oceanside development spanning over 269 hectares of reclaimed land called Port City, is being built by CHEC Port City Colombo Co., a unit of China Communications Construction Company. It has invested $1.4 billion to build an integrated resort and casino and conference center zone, a marina, apartments, a business district and green space.

That project has raised concerns in Sri Lanka and India that the development could become a virtual Chinese outpost or colony.

In development financing, the U.S. faces tough competition from Beijing, which has recalibrated its BRI initiative to be greener, safer and more sustainable, according to AidData, a research lab at William & Mary, a public university in Virginia.

However, Nathan said the DFC was “only interested in making financially sustainable financial transactions.”

“We are not interested in giving money to projects that are not going to work. Of course, sometimes, mistakes happen. But rarely.”

“Sustainability and local appropriateness are very important elements for what we do,” Nathan said, expressing optimism on their latest investment in Sri Lanka.

“It’s really an investment in dynamics of the global economy, shipping and transhipment,” he said, adding that studies on the project “have demonstrated that dynamics with high confidence.”

In a recent report, AidData said the U.S. is catching up with China in terms of development finance after being overtaken by Beijing in terms of total official financial flows to the developing world in 2007.

China’s lead has grown since then but the gap has narrowed recently as China scaled back its lending while the U.S. sharply raised loans through the newly launched DFC.

The U.S. now provides about $60 billion of development finance each year to low- and middle-income countries. Yet, at $80 billion a year in aid and credit commitment, China remains the single largest official source of international development finance, AidData says.

For the past two decades, China has dominated global infrastructure finance with faster and bigger projects. Now it has rebooted with more stringent environmental, social and governance safeguards, said Bradley Parks, executive director of AidData.

He said, “this finding is a big deal because China’s competitors in the global infrastructure market offer safety but not speed.”

“Beijing, on the other hand, is squaring the circle between safety and speed. It is several steps ahead of its competitors in the global infrastructure market. It is laser-focused on giving leaders in the developing world exactly what they want: rapid delivery of big-ticket infrastructure projects without unreasonably high levels of risk,” he said. “Whether the U.S. will be able to do the same is a big question mark.”