Last week, China Merchants Port Holdings (CMPH) pulled out of an agreement to build a $392 million South Asia Commercial and Logistics (SACL) hub at the Colombo port. The Sri Lanka Ports Authority (SLPA) agreed to pay $21.9 million to settle investments. This should not have come as a surprise given that the project was rife with delays from the start.

When the project was announced in April 2023, it was expected to be completed by the end of 2025. The SLPA and private sector firm Access Engineering were the other parties to the agreement and each holds a 15 percent stake in the project. The logistics hub was to be an eight-story, 5-million-square-foot facility with a storage capacity of 530,000 cubic meters (CBM). The SACL project was expected to provide direct employment to at least 1,800 people and create 10,500 other indirect jobs.

China has been a major financier and builder of Sri Lanka’s infrastructure. Chinese loans helped finance infrastructure projects, while Chinese companies made substantial investments in port operations. China Merchants developed the $500 million Colombo International Container Terminals facility, in which it holds an 85 percent stake, and secured a 99-year concession to operate Hambantota Port through a $1.12 billion agreement in 2017. Separately, China Harbor Engineering undertook the Colombo Port City development on reclaimed land adjoining the capital’s harbor. The proposed logistics hub would have expanded China Merchants’ existing maritime business into a larger warehousing and distribution operation, further linking Chinese investment to Sri Lanka’s ambitions to become a regional logistics center.

There were allegations against the SACL project from the beginning, including claims that the Ranil Wickremesinghe administration signed the agreement without following tender processes. The unions insisted that Sri Lanka would lose 2.8 billion Sri Lankan rupees annually (around $8.4 million) and that the agreement prevented the SLPA from granting other port logistics or warehousing operators royalty terms below those payable by this project, raising questions about the SLPA’s freedom to attract competing investment.

In March 2024, almost a year after the agreement was signed, it was revealed that the project had not yet commenced due to delays in approval for concessions. Almost another year later, the SLPA said the project was scheduled to commence in 2025 after the attorney general’s approval for the proposed concession agreement.

SLPA Chairman Admiral (Retd) Sirimevan Ranasinghe told the media that the delays in the project were due to difficulties in reaching an agreement on the concessions applicable to the project. When the agreement was signed, it was expected to enjoy concessions as a Strategic Development Project (SDP). However, this facility was withdrawn due to the objections of the International Monetary Fund (IMF), which had long insisted that Sri Lanka suspend SDP concessions. Ranasinghe also said that the logistics center project would take around 42 to 45 months to be completed, which would have pushed the project’s completion to around 2029, four years after the original completion deadline of 2025.

In October this year, leader of the house Bimal Rathnayake told parliament that the deal was called off because the two sides could not see eye to eye on the agreement. He said the agreement allocated 10 acres between the East and West Container Terminals at the Colombo port. The agreement’s clauses were highly problematic, and despite several rounds of discussions, the two sides could not reach an agreement, Rathnayake said.

This falling out between CMPH and the SLPA raises a number of issues. The Colombo Port could have benefitted greatly from a logistics center. Had it been completed as scheduled in late 2025, it could have allowed Sri Lanka to earn more from cargo passing through.

The World Bank’s latest reports show both the strength of Colombo’s position and the danger of allowing it to weaken. The Connecting to Compete 2025 report said Sri Lanka is among the developing economies whose emergence as shipping hubs have given them unusually strong international connectivity. Yet the Container Port Performance Index 2025 placed Colombo 95th for vessel turnaround, behind Jawaharlal Nehru Port and Mundra, both in India, at 22nd and 30th places, respectively. Colombo’s performance scores also deteriorated sharply in 2024 and 2025.

The World Bank reports showed that while Sri Lanka has valuable shipping connections, it faces growing pressure to provide better service. The reports recommended that Colombo must earn more from the cargo those connections bring. Much of Colombo’s transshipment work involves transferring unopened containers between ships. A logistics center would have allowed operators to unpack selected shipments and prepare their contents for onward distribution.

There could also have been operational benefits. The Container Port Performance Index 2025 report said that inadequate storage and slow movement of cargo fill terminal yards, disrupt handling, and lengthen ships’ stays. A well-integrated logistics center could help by providing suitable space for cargo processing and storage, supported by efficient transfers and customs procedures.

In response to CMPH’s pullout, the SLPA has decided to call for tenders to develop a new logistics hub at Colombo port, under a public-private partnership (PPP) model. Colombo port is a busy place, and some believe that it will not be difficult to attract new investors to build the logistics center.

However, given international developments, geopolitical rivalries, and the expertise needed to develop a logistics center, finding a replacement investor will be difficult and time-consuming. The conflicts in West Asia have disrupted shipping routes, raised transport costs, and made future cargo flows harder to predict. Then, there are alternative ports for Colombo that are modernizing rapidly.

The falling out with CMPH, which already operates a major Colombo terminal and has obvious commercial interests in making the proposed center work, would be another obstacle in attracting a new investor. A replacement investor will want to know why that venture failed and whether the same difficulties could affect its own investment.

And if indeed the deal didn’t go through because the initial agreement of April 2023 did not follow due process and ignored IMF dictates about SDPs, prospective investors will wonder whether an agreement signed with the Sri Lankan government is a dependable basis for committing significant funds for long-term projects. Sri Lanka’s IMF program was approved on March 20, 2023, a month before the logistics hub agreements were signed on April 21. Negotiations with the IMF had begun much earlier, with a staff-level agreement reached on September 1, 2022. In December 2023, Sri Lanka committed to stop approving new SDP projects.  

The Wickremesinghe administration was responsible for negotiating both the IMF program and the logistics investment. It can’t say that the IMF demands were unforeseen, as the government knew the fiscal commitments it had accepted from the IMF and the concessions the developer wanted.

CMPH is expected to recover approximately $20.83 million under the settlement, before winding-up costs. But it also spent time pursuing a project that never became operational. Returning most of the capital does not compensate for the forgone opportunities. So, a prospective investor may require a higher expected return, stronger compensation provisions, or more approvals completed before committing money.

A business that commits hundreds of millions of dollars to a long-term investment project like the SACL looks for stability and clarity. No investor would like to spend months agreeing on terms of a project, invest substantial time and resources, and then be compelled to leave because opportunity costs are great, especially at a time when the world is in flux. In recent years, successive Sri Lankan governments have shown international partners that they were unreliable. One of the National People’s Power (NPP) government’s main challenges is to change that perception. However, there has not been much to write home about in the past two years.