China Merchant Port Holdings Company Ltd (CMPort) which has clinched majority shares of the Hambantota Port joint venture company will sell a quarter of them within the first ten years to a Sri Lankan party at a “fair value” determined by an independent valuer, the final draft of the concession agreement between the company and [...]

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Hambantota deal: Major changes in final draft

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China Merchant Port Holdings Company Ltd (CMPort) which has clinched majority shares of the Hambantota Port joint venture company will sell a quarter of them within the first ten years to a Sri Lankan party at a “fair value” determined by an independent valuer, the final draft of the concession agreement between the company and Sri Lanka Ports Authority (SLPA) states.

At the start, CMPort will hold 80 percent of shares while SLPA will have 20 percent. A divestiture would effectively bring down CMPort’s shareholding in the joint venture company to 60 percent. An independent valuer will be mutually agreed upon and appointed by the Sri Lanka Government and CMPort while the valuation will be based on an internationally acceptable valuation methodology.

However, in the event a Sri Lankan party expresses interest in buying the divesting shareholding within the first five months of the agreement being signed, the sale will be based on the transaction value stipulated in the agreement. This means the interested party will have to pay a fee calculated on the US$ 1.4 billion that the joint venture company will be capitalised with.

The agreement also states that, in the event there is no Sri Lankan party interested in such acquisition within the 10 years, CMPort and its affiliate would be entitled to divest its shareholding in the company “to any other party with the first right of refusal given to the other shareholders”.

It specifies that, in the event the public-private partnership (PPP) operator needs further funds, then, such additional funds “shall be contributed by the respective shareholders in proportions corresponding to their shareholding…at the time of the required investment”. (The PPP operator will be majority owned, controlled and managed by CMPort).

Crucially, the agreement does not say what would happen if the SLPA does not have the money to invest. But an earlier version of the document had read that, in the event the PPP Operator needs any funds, the shareholding of 80-20 percent may be changed or diluted based on the further capital contribution by the shareholders.

This meant that the SLPA’s shareholding in the joint venture — already small at 20 percent — could reduce still more if it could not find the required funds. And it also meant that CMPort’s share would increase if it deposited the requisite money.

It is also noteworthy that the parties will agree to the divestiture of shares being based on an independent valuation when the proposed allocation of an 80 percent shareholding to CMPort is not based on a similar valuation. The company will take over all assets and services of Hambantota Port with none of the liabilities. The SLPA is even obligated to restore the US$40 million tank farm — forcing it to incur an additional cost — before handing it over free of oil to CMPort.

The final draft of the concession agreement is just 96 pages long and pertains to the public-private partnership being forged for the running and development of Hambantota Port. The PPP operator would be entitled to collect the total revenue generated from all services including, but not limited to, navigation charges, landing and delivery charges, port dues, etc. There is no mention of royalties payable to the SLPA.

The agreement clearly states that, from the date of the agreement till the performance of port services reaching 50 percent capacity utilisation, or during the first fifteen years, “there shall be no container port/terminal development directly in competition with the Port Services and activities carried out at the Port, within one hundred (100) Km perimeter from the periphery of the Port Property”. This is called the “Exclusive Limit”.

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