China Eximbank provides $65 million buyer’s credit loan for Hambantota Bunkering Project

Project narrative

On August 6, 2009, the Export-Import Bank of China and the Government of Sri Lanka signed a $65,094,508 buyer’s credit loan (BCL) agreement (No. BLA0902) for the Hambantota Bunkering Project. The BCL carried the following terms: a 15 year maturity, a 3 year grace period, an interest rate of 6.5%, a default (penalty) interest rate of 1%, a 0.3% commitment fee, a 0.3% management fee, and a 6% Sinosure insurance premium (exposure fee) that was payable within 30 days of the loan signature date. It also specifies that 'in case of arrears on interest payments, the borrower is expected to pay interest on those arrears at an annualized rate equivalent to the interest rate on the respective loan. In case of arrears on interest and principal, then the borrower is expected to pay interest on those arrears at an annualized rate equivalent to the interest rate on the respective loan plus one percent.' The Government of Sri Lanka on-lent the proceeds of the BCL to Sri Lanka Ports Authority (SLPA), the state-owned operator of major commercial ports in Sri Lanka. SLPA (as the end-user) was expected to use the proceeds of the BCL to finance 85% of the cost of a $76.6 million commercial contract that its signed with China Huanqiu Contracting & Engineering Corporation (HQCEC) on June 13, 2008. China Eximbank disbursed an unknown amount in 2009, an unknown amount in 2010, $28.2 million in 2011, $3,339,025.80 in 2012, $1,099,631.65 in 2013, and $4,802,153.95 in 2014. The borrower made repayments worth $5,917,683 in 2015, $5,917,683 in 2018, $5,917,682 in 2019, $5,917,683 in 2020 and $5,917,683 in 2021. The loan's amount outstanding was $62,355,400 (Rs 8,142,792,149) as of December 31, 2014, $59,560,793.91 (Rs. 8,098,892,118) as of December 31, 2015, $44,382,619 as of December 31, 2017, $38,464,936 as of December 31, 2018, $32,547,254 as of December 31, 2019, $26,629,571 as of December 31, 2020, $20,711,888 as of December 31, 2021, and $17,753,048 as of June 30, 2022. The project involved the construction of a bunkering facility at Hambantota Port. The bunkering facility and tank farm are located 1.2 km from the Hambantota waterfront, and are connected to the oil terminal through a pipeline. The facility has 14 tanks (total storage of 80,000 m3). Eight of these storage tanks carry bunker oil for ships and six of the storage tank tanks carry aviation fuel and liquefied petroleum gas (LPG). This project was part of a broader effort by SLPA and the Government of Sri Lanka to position Hambantota port as a refueling and service point for cargo ships, which pass a few kilometers away off the southern tip of the country on one of the world’s busiest east-west shipping lanes. The contract for the Hambantota Bunkering Project was awarded to the China Huanqiu Contracting and Engineering Corporation. Construction was started in October 2009 and its mechanical works were completed on October 10, 2011. Bunkering operations began after a project completion ceremony on June 22, 2014, and they are run by the SPLA. However, these operations were late suspended due to a loss of $19.9 million as a result of irregularities. 17,818 metric tons of marine gas oil were purchased by the Government of Sri Lanka for oil bunkering at the tank farm yard, but SLPA was only able to sell 3,235 metric tons due to the poor quality of oil. The Hambantota Bunkering Project has also encountered debt repayment problems. On April 12, 2022, the Government of Sri Lanka announced a ‘pre-emptive’ sovereign debt default, noting that it would suspend debt repayments to all external creditors other than multilateral institutions. Its decision to suspend external debt service reportedly affected all China Eximbank loans with amounts outstanding at the time of the announcement.