Exclusive: Sri Lanka's cabinet 'clears port deal' with China firm after concerns addressed

By Shihar Aneez

COLOMBO (Reuters) - Sri Lanka's cabinet cleared a revised agreement for its Chinese-built southern port of Hambantota on Tuesday, the government said, after terms of the first pact sparked widespread public anger in the island nation.

The port, close to the world's busiest shipping lanes, has been mired in controversy ever since state-run China Merchants Port Holdings , which built it for $1.5 billion, signed an agreement taking an 80 percent stake.

Under the new deal, which Reuters has examined, the Sri Lankan government has sought to limit China's role to running commercial operations at the port while it has oversight of broader security.

Chinese control of Hambantota, which is part of its modern-day "Silk Route" across Asia and beyond, as well as a plan to acquire 15,000 acres (23 sq miles) to develop an industrial zone next door, had raised fears that it could also be used for Chinese naval vessels.

Sri Lankans demonstrated in the streets at the time, fearing loss of their land, while politicians said such large-scale transfer of land to the Chinese impinged on the country's sovereignty.

Details of the new agreement have not yet been made public. But according to parts of the document seen by Reuters, two companies are being set up to split the operations of the port and allay concerns, in India mainly but also in Japan and the United States, that it won't be used for military purposes.

China Merchants Port Holdings will take an 85 percent stake in Hambantota International Port Group that will run the port and its terminals, with the rest held by Sri Lanka Ports Authority. The company's capital will be $794 million.

A second firm, Hambantota International Port Group Services Co, with capital of $606 million, will be set up to oversee security operations, with the Sri Lankans holding a 50.7 percent stake and the Chinese 49.3 percent, according to the document.

Ports Minister Mahinda Samarasinghe said that several foreign missions had sought clarification from Colombo about whether the Chinese navy would be using Hambantota port as it steps up its presence in the Indian Ocean.

"We told China that we can't allow the port for military use and that 100 percent responsibility of security matters should be with the Sri Lankan government."

China has been building ports in Pakistan, Sri Lanka and Bangladesh and smaller island nations in what military officials call a "String of Pearls" in the Indian Ocean, or a network of friendly ports where its warships can refuel.

REDUCING STAKE

China Merchants Port Holdings also agreed to reduce its stake in the Sri Lankan joint venture running the commercial operations of the port to 65 percent after 10 years, the document says.

"The cabinet approved the deal and now it needs parliament approval. We will send it for approval this week," cabinet spokesman Dayasiri Jayasekera said.

He didn't provide details. A Chinese embassy spokesman said it had no comment to make on the deal. A source close to the Chinese Embassy in Colombo said both sides had reached a compromise and that Sri Lanka's concerns had been addressed.

"They emphasised that they wanted to maintain balanced relations with other countries. But the deal is still beneficial for China in terms of revenue," the source said.

The latest agreement relates to the port while the pact for the industrial zone will be handled separately, Sri Lankan officials said.

The revised deal comes weeks after President Maithripala Sirisena reshuffled his cabinet, naming Samarasinghe to the ports ministry after his predecessor had strongly opposed a majority equity stake for the Chinese firm and raised a red flag over possible military use.

Two Sri Lankan sources familiar with the deal said the Sri Lankan Ports Authority would have the right to inspect ships entering Hambantota.

"Sri Lanka will have control over port activities including security, which various parties have raised concerns over earlier," one source told Reuters. "The agreement clearly says no military ships will be allowed in the port."

New Delhi in 2014 was alarmed when a Chinese submarine docked in Colombo, where another Chinese firm is building a $1.4 billion port city on reclaimed land.

India has long considered Sri Lanka, just off its southern coast, as within its sphere of influence and sought to push back against China's expanding maritime presence. In May, Sri Lanka turned down a Chinese request to dock a submarine.

(Writing by Sanjeev Miglani; Editing by Nick Macfie)