3.1 China-Funded Infrastructure Projects in Sri Lanka: Background

Over the past decade, the Chinese presence in Sri Lanka’s economy has been on the rise, mainly manifested through large-scale infrastructure development projects funded by China.Footnote ⁴ For China, establishing critical infrastructure facilities in a country like Sri Lanka, which is strategically located in the Indian Ocean, is crucial for pursuing its ambitious 21st Century Maritime Silk Road. It is one of the main routes for the BRI that cross the Indian Ocean Region. For Sri Lanka, advancing the country’s infrastructure facilities was central to realizing the development agenda led by the then Rajapaksa regime (2005–2015), which repeatedly vowed to make Sri Lanka a dynamic commercial hub in South Asia.Footnote ⁵ This regime relied predominantly on commercial borrowings to finance its infrastructure development agenda, which accelerated after the end of the three-decade-long war in 2009.Footnote ⁶

As will be shown in this case study, several internal and external economic and political factors prevalent in the postwar scenario compelled the Rajapaksa regime to rely increasingly on bilateral sources of financing. Against this backdrop, China became Sri Lanka’s main bilateral sovereign lender, surpassing the country’s traditional lenders such as the Asian Development Bank.Footnote ⁷ The lion’s share of this capital was allocated to develop specific sectors in Sri Lanka’s economy: power and energy, transport and telecommunications, port development, and irrigation. Some of the leading development projects in these sectors commenced even before China officially launched the BRI in 2013. Examples include the Norochcholai Coal Power Plant (2006), the Moragahakandha Development Project (2007), the Hambantota Seaport (2007), the Colombo-Katunayake Expressway (2009), the Mattala International Airport (2010), and the Colombo Lotus Tower Project (2012).

Chinese-funded development projects in Sri Lanka are often labeled as “Chinese investments.”Footnote ⁸ Although it is possible to characterize transitional loans as “investments,”Footnote ⁹ this characterization does not reflect the fact that most of the capital flows are loans. Many projects have been financed by commercial borrowings from Chinese banks, mainly the China Development Bank and the Export-Import Bank of China.Footnote ¹⁰ Only a handful of projects have been financed as direct Chinese investments and the CPC is the only infrastructure development project that can be classified as an FDI. Contrary to loans, FDI does not oblige the host country to repay the capital invested in a project since it is a form of equity finance that ensures foreign capital flows into a given country. Consequently, the Chinese capital invested in the Project cannot be included in the debt that Sri Lanka must repay to China, subject to the ongoing debt restructuring program.

3.2 Chinese Interest in the Project

The Project illustrates the way in which a capitalist approach to foreign investment by a one-party state can play out. Even though the investment is carried out by a company, or a legal entity separate from the Chinese government, it is an enterprise owned by the state and therefore presumably also controlled by the state and subject to its politics. As will be explained, the Chinese investor submitted an unsolicited bid to the Government of Sri Lanka (GOSL) at a time when the government was looking for alternative development partners and approaches. This was due to (1) Sri Lanka being designated as a middle-income country and therefore being unable to obtain loans on concessionary terms, (2) isolation by other powerful states due to allegations of human rights and rule of law violations, and (3) the emergence of an intensified conflation between state, party, and family in governance.

At the time, the Chinese approach to foreign investment converged with the prevailing political and economic dispensation in Sri Lanka. The Chinese economic interests were driven by the political priorities of the Chinese government, resulting in arguably poor investment choices. It is also evident today that, in making such an investment, the Chinese did not have a strategy in place for managing potential risks such as political resistance to projects or domestic legal disputes. However, the Project survived a project suspension and renegotiation and, as will be seen, the Chinese approach in this instance was to be flexible, to negotiate and adapt, rather than to rely on their original contractual rights.

3.3 The History of the Project

The Project itself has its own troubled history and includes at least three narratives. First is the narrative of FDI-led development in a carved-out legal and physical location. Second is the political and economic implications of the BRI project. Third is the narrative that the Chinese were flexible in adapting this project to the infrastructure development approach of the first and second Rajapaksa regimes (2006–2015 and 2019–2022) as well as to the seemingly prodemocratic approach of the good governance (Yahapalanaya) regime between 2015 and 2019.

The idea of reclaiming land off the Colombo coast adjacent to the Colombo Port to expand the Central Business District has a long history. It was initially proposed in 1991 by the then Minister of Industries, Science and Technology, Ranil Wickremesinghe (who is the current president of Sri Lanka).Footnote ¹¹ The main purpose of this endeavor was to release land for real estate development. However, changes in domestic politics resulted in the Project stalling for several years; it regained prominence only in 2001 when Wickremesinghe returned to power as prime minster.Footnote ¹² CESMA International Pte Ltd., a Singapore-based urban planning consulting company, was assigned to develop the “Western Region Megapolis Plan,” which envisioned developing the entire Western province of Sri Lanka as a single megapolis. This development plan was completed in 2004, and a call for expressions of interest from investors to reclaim approximately 145 ha of land from the sea to the south of the proposed Colombo South Port breakwater by 2010 (see later in this section) was issued.Footnote ¹³ However, the Project went unimplemented for the second time due to the political changes in 2004.Footnote ¹⁴

In the meantime, in 2009, the 5.14 km South Port breakwater was constructed as part of the Colombo Port Expansion Project (CPEP), partially funded by the Asian Development Bank. The newly built breakwater made it technically and financially feasible to reclaim land to the south, and thus, in April 2010, the Sri Lanka Ports Authority (SLPA) commissioned an “Initial Technical Feasibility” study to that effect.Footnote ¹⁵ While the SLPA acted as the project proponent in this regard, the reclamation work was supposed to be carried out as a state-funded project. In June 2010, SLPA commissioned an Environmental Impact Assessment (EIA) for the reclamation of 200 ha south of the newly built breakwater.Footnote ¹⁶ The National Environmental Act makes it mandatory to conduct an EIA for all projects with a significant environmental impact,Footnote ¹⁷ and for projects within Sri Lanka’s coastal zone, the Department of Coast Conservation and Coastal Resources Management is the Project Approving Agency (PAA).

Meanwhile, in April 2011, SLPA was approached by a Chinese SOE called China Communication Construction Company Ltd. (CCCC), a Chinese SOE with more than sixty wholly owned subsidiaries working on infrastructure-related constructions, operations, and investments, with an unsolicited proposal (USP) to reclaim the seabed between the southern end of the CPEP and the northern part of the Colombo Galle Face Green.Footnote ¹⁸ In other words, this proposal was initiated by the CCCC itself. The fact that CCCC is a Chinese SOE made this USP distinctive because most unsolicited proposals for developing infrastructure facilities are initiated by private sector entities, not state-affiliated ones. This USP suggested reclaiming a total area of 233 ha as a direct Chinese investment worth US$1.4 billion without any financial commitment from the GOSL.

While this USP was under consideration, in December 2011, the EIA commissioned by the SLPA for land reclamation was approved by the Department of Coast Conservation and Coastal Resources Management.Footnote ¹⁹ According to the 2014 Annual Performance Report of the Ministry of Highways, Ports and Shipping, the USP was reviewed by the Standing Cabinet Appointed Review Committee (SCARC) according to the Guidelines on Government Tender Procedure – Part II (Revised Edition – January 1998) and Public Finance Circular No. 444 (i) dated 16 May 2011.Footnote ²⁰ SCARC was appointed in June 2010, inter alia, to assess unsolicited or standalone development proposals and advise relevant line ministries or government agencies on matters related to such proposals.Footnote ²¹ Accordingly, the line ministers were required to submit unsolicited proposals they received to the SCARC for an initial assessment and recommendation.Footnote ²² They were required to do so when such proposals were deemed competitive and advantageous to national interests.

The 1998 Guidelines are applicable for private sector infrastructure development projects initiated by both solicited and unsolicited proposals. Concerning unsolicited proposals, the Guidelines explicitly require calling for further proposals by advertisement, while providing the original company a chance to improve on their submission as part of the invitation for bids/offers.Footnote ²³ Such bids/offers should be called once the relevant line ministry determines the need for a development project as suggested by the USP. This procedure was not followed in this case,Footnote ²⁴ as, after receiving the SCARC approval for the USP submitted by the CCCC, the Cabinet of Ministers permitted the CCCC to sign a Memorandum of Understanding (MOU) with the SLPA. This MOU was to discuss the key terms of the draft agreement relating to the investment for reclaiming land adjacent to the Colombo Port.

Following the signing of the MOU, CCCC submitted a detailed project proposal to SLPA, while the SCARC recommended to the Cabinet of Ministers that SLPA enter into a Concession Agreement with CCCC to implement the project, subject to approval by the Attorney-General. In January 2014, the Cabinet of Ministers sanctioned the key terms of the Concession Agreement negotiated between the SLPA and CCCC. Nevertheless, as pointed out by the Attorney-General, the SLPA could not be a party to this agreement for two main reasons. Firstly, the SLPA does not have the legal authority to engage in seabed reclamation for commercial projects. Secondly, under Sri Lankan law, only the president of Sri Lanka has the power to reclaim any part of the foreshore or the seabed.Footnote ²⁵ Consequently, a cabinet decision was made permitting the Secretary to the Ministry of Highways, Ports and Shipping to enter into an agreement with the Chinese investor.Footnote ²⁶ Terms of this agreement, referred to as the GOSL Contract Agreement, were akin to those in the original Concession Agreement, which was integrated into the GOSL Agreement as a binding annex. This Agreement was to remain in effect until SLPA was granted the legal authority to be a part of the Concession Agreement.

The GOSL Agreement included a provision to the effect of amending the SLPA Act within one year.Footnote ²⁷ The amendment to the SLPA Act did not take place as planned due to the subsequent political changes and policy adjustments as will be discussed.Footnote ²⁸ However, it is striking that the Project was supposed to affect Sri Lanka’s domestic law, enabling a state entity to be a part of a commercial activity that did not originally come under its legal competence. At the same time, CHEC Port City Colombo, the locally incorporated subsidiary of CCCC (the Project Company), entered into the investment agreement with the Secretary to the Ministry of Highways, Ports and Shipping. This agreement was signed on 16 September 2014 during the Chinese president’s state visit to Sri Lanka and in the presence of both Chinese and Sri Lankan presidents. The reclamation work began on the same day, making one of Sri Lanka’s long-held development proposals a reality. Meanwhile, government borrowings began to increase, and other controversial large-scale infrastructure development projects were underway, including the Hambantota Seaport and the Mattala Airport.Footnote ²⁹

3.4 The 2014 Concession Agreement for the Project

An investment contract is the beginning of the “life” of most foreign investments.Footnote ³⁰ There are different types of investment contracts, and a Concession Agreement is used to finance large-scale projects such as the development of infrastructure facilities. Some scholars describe Concession Agreements as the “heart of any infrastructure investment.”Footnote ³¹ This is firstly because they provide the contractual or legal framework for a project. Secondly, they cover almost all aspects of the project, including the rights and obligations of the parties to the agreement. Thirdly and importantly, it is a manifestation of the bargaining power of the parties to the agreement.

In terms of rights, the 2014 Concession Agreement granted the Project Company an array of entitlements, including land ownership. For context, the Project Company was given the right to hold 108 ha of “Marketable Lands” from the reclaimed landmass.Footnote ³² Accordingly, the investor was entitled to hold 20 ha of “Marketable Lands” on a freehold basis with the remaining 88 ha held by the Project Company or its nominee on a leasehold basis. The Project Company was further entitled to select an engineering procurement construction (EPC) contractor without adhering to public procurement guidelines and procedures.Footnote ³³ Consequently, the Project Company designated another wholly owned subsidiary of the CCCC as the EPC responsible for designing and building the CPC.Footnote ³⁴

The Project Company was given a set of “Development Rights.”Footnote ³⁵ This set of rights included the right to study, investigate, design, engineer, finance, and carry out the first phase of the Project, that is, land reclamation. In addition, they entitled the Project Company to benefit from and generate revenue from all Project Land in which it has a freehold or leasehold interest and from all other activities.Footnote ³⁶ However, “Development Rights” were not absolute since they were subject to restrictions by the SLPA, or any other governmental authority, based on the grounds stipulated in the agreement itself.Footnote ³⁷ These grounds for restriction included (1) the development had to protect public health and the safety or the environment; (2) it had to protect national security; and (3) any breach of the Concession Agreement or any applicable permits by the Project Company would also terminate the Project.

Where the impact of any such restrictions by the GOSL is greater than twenty-four hours for any single event or an aggregate of seventy-two hours in any six-month period, the Concession Agreement designates said impact as a “Compensation Event” under the provision of Clause 33. This clause, inter alia, identifies any action by any third party in a court of law resulting in a “material delay” in carrying out the reclamation work, or preventing or delaying the Project Company in its work, as events that warrant compensation.Footnote ³⁸ The 2014 Concession Agreement moreover barred the GOSL, including the courts of law, from directly or indirectly interfering with the Project Company, its assets located in Sri Lanka dedicated to the Project, its shareholders’ interests in the Project Company, or its interest in the Project Land by way of nationalization, expropriation, confiscation, or compulsory acquisition.Footnote ³⁹

Concerning dispute resolution, the 2014 Concession Agreement provided several methods including amicable settlement, mediation, expert resolution, adjudication, or arbitration.Footnote ⁴⁰ Sri Lankan law was chosen as the governing law of the Agreement.Footnote ⁴¹ Notably, under the Agreement, the SLPA was responsible for conducting environmental studies related to the reclamation work and sand extraction, as well as for obtaining required permits.Footnote ⁴² This responsibility was applicable even during the period leading to the signing of the agreement. As mentioned, the SLPA had successfully completed the EIA up to reclaiming the land, yet it covered an area of only 200 ha, not the 233 ha as specified in the Agreement. Additionally, the SLPA had unsuccessfully commissioned the National Aquatic Resources Research and Development Agency to undertake two Initial Environmental Examination studies to secure permits for sand extraction before signing the Agreement.Footnote ⁴³

3.5 Controversies Surrounding the Project

The rosy picture of the Project began to fade in the months following its commencement. Controversies over the Project revolved around four main concerns. These include the following: first, adverse socioeconomic and environmental impacts of reclaiming the land; second, failure to adhere to Sri Lanka’s environmental laws applicable to a development project with significant environmental impacts; third, procedural flaws associated with awarding contracts; and fourth, possible security-related risks posed by an investment driven by a Chinese SOE.

The Project garnered strong opposition. Opposing civil society groups included affected fisherfolk living along the western coast of Sri Lanka from Moratuwa to Negombo.Footnote ⁴⁴ In their opinion, the Project was an undemocratic, illegal, and catastrophic venture that should be abandoned.Footnote ⁴⁵ While arguing that its socioeconomic and environmental impacts have not been adequately studied, opponents underscored the adverse impact of land reclamation and sand dredging which included damaging fish breeding areas and coral reefs and increasing coastal erosion. However, given the nature of these consequences, correlation, not causation, was established. Nevertheless, the fisherfolk claim that they have suffered from a loss of income and that their livelihoods have been affected.Footnote ⁴⁶

Concerns raised by the affected communities were further reinforced by environmentalists who opposed the Project on the basis that it violated applicable environmental laws in Sri Lanka.Footnote ⁴⁷ First, environmentalists challenged the adequacy of the EIA done by the SLPA in 2011 because it focused predominantly on the impact of land reclamation of 200 ha. It did not address the impact of the sand extraction and quarrying of stones required for the reclamation. Second, they challenged the credibility of the Addendum Report to the 2011 EIA prepared to assess the impact of the proposal to reclaim an additional 33 ha (233 ha in total). In September 2013, the SLPA had submitted this Addendum Report to the PAA without public scrutiny. Public scrutiny is required by Sri Lanka’s environmental law and has been consistently emphasized by the Supreme Court.

Thirdly, environmentalists raised concerns over the fact that reclamation work commenced without obtaining required permits for sand excavation. They pointed out that the Development Activity Permit issued by the PAA, following the submission of the Addendum Report to the 2011 EIA, required the SLPA to obtain approval separately for extraction of sand from the Central Environmental Authority (CEA).Footnote ⁴⁸ Even though the permit for dredging sand should have been sought before the commencement of the Project, it was not obtained before signing the 2014 Concession Agreement as the SLPA had failed to secure the consent for the compensation program for the fisherfolk. This consent was necessary for the CEA to grant the required sand extraction permits.

Some politicians also resisted the Project. Opposing politicians argued that it was necessary to call for bids/offers from other interested parties in the Project.Footnote ⁴⁹ The opacity of awarding the contract was central to the heated political debates over the growing Chinese-funded infrastructure development projects under the Rajapaksa regime. They challenged the decision to give the Chinese investor 20 ha of land on a freehold basis. They further questioned the jurisdiction over this plot of land given its possible threats to national security. Similar security-related concerns were raised by several other regional and global superpowers premised on the concerns that China was using the Project to consolidate its regional presence through numerous additional BRI investments along the 21st Century Maritime Silk Road.Footnote ⁵⁰

3.6 Suspension and the Resumption of the Project

All the controversies surrounding the Project and other Chinese-funded infrastructure development projects in Sri Lanka gradually culminated in a massive public outcry against the allegedly pro-Chinese Rajapaksa regime. Such projects provoked concerns over the impact on the country’s constitutional governance, democratic processes, and the possibility of supporting an authoritarian regime. These concerns were successfully capitalized on by the opposition to discredit the Rajapaksa regime: First, for entangling Sri Lanka in a Chinese “debt trap” by excessive commercial borrowings from China to finance economically unviable infrastructure development projects such as the Hambantota Seaport and Mattala Airport. The myth about the Chinese debt trap has prevailed all the way into the 2022 economic crisis in Sri Lanka.Footnote ⁵¹ However, analysts have pointed out that the debt owed to China is only 20% of Sri Lanka’s external debt stock. The bulk of Sri Lanka’s debt is owed to international sovereign bond holders. Second, for endangering Sri Lanka’s neutral foreign policy for which the country has often been praised. Third, for placing Sri Lanka’s sovereignty and national security at risk due to allowing unprecedented Chinese presence in the country’s economy, notably through strategic industries and critical infrastructure facilities.

Against this background, Chinese-funded infrastructure development projects became politically sensitive.Footnote ⁵² Consequently, reviewing the Project became one of the popular election pledges of the 2015 presidential and parliamentary elections. These elections brought the opposition led by Maithripala Sirisena and Ranil Wickremesinghe into power under the slogan of “good governance.” In complying with its election pledge, the good governance administration appointed an evaluation committee to review the CRC Project soon after the presidential election. Based on this Committee’s conclusion, the Cabinet of Ministers decided to suspend the reclamation work unilaterally. Civil society groups who had been demanding that the Project be canceled welcomed this suspension. They further credited the newly elected good governance administration for fulfilling its election promise at the cost of Sino-Sri Lanka relations which were at their peak at that time.

Nevertheless, it would be a mistake to perceive this suspension as a move toward complete cancellation of the Project. During its suspension, the good governance administration took several steps, in consultation with the Project Company, to ensure its revival after addressing concerns regarding the Project. First, it was decided to commission a Supplementary EIA (2015 SEIA) taking the alterations made to the Project since the completion of 2011 EIA into account. This also addressed the concern that the Addendum Report to the 2011 EIA was not subject to public scrutiny. Accordingly, the 2015 SIEA was intended to cover a total land area of 269 ha (as opposed to the originally contracted total land area of 233 ha) and address the environmental impact of the sand and quarry material extraction.Footnote ⁵³ Second, it was decided to replace the SLPA with the Urban Development Authority (UDA) and thus the Ministry of Urban Development, Water Supply and Drainage became the project proponent for the 2015 SEIA.Footnote ⁵⁴ Although the UDA was assigned to the Ministry of Urban Development, Water Supply and Drainage, it was subsequently brought under the purview of the Ministry of Megapolis and Western Development.

From the Chinese perspective, resuming the Project was essential for safeguarding its economic interest as an investor and China’s policy preference to support the BRI at large. Therefore, commercial diplomacy between Beijing and Colombo played a significant role in ensuring the Project’s revival contrary to Wickremasinghe’s promise to scrap the Project in its entirety.Footnote ⁵⁵ For context, high-level diplomatic engagements took place immediately before the suspension of the Project, including the visit by China’s Assistant Foreign Minister in February 2015 who met with then Sri Lankan prime minister Wickremasinghe. This was followed by then Sri Lankan president Maithripala’s visit to China in March 2015 soon after the suspension of the Project, signifying Sri Lanka’s continued commitment to work with China despite the political changes and policy adjustments that were supposed to be undertaken under the newly elected good governance administration. In the end, after almost one year of suspension, on 9 March 2016 the Cabinet of Ministers permitted the Project Company to recommence the reclamation work.

Understandably, the decision to resume the Project was not welcomed by its opponents. The People’s Movement against the Port City (a self-identified social pressure group) continued to protest, underscoring its adverse socioeconomic and ecological impact, including the impact on the livelihood of the affected fisherfolk community.Footnote ⁵⁶ Environmentalists continued to dispute the credibility of the 2015 SEIA, highlighting the Project’s negative impact on social justice and equity and, therefore, sustainable development.Footnote ⁵⁷ The decision to resume the Project damaged the good governance administration whose domestic reputation and confidence had already been weakened due to perceptions about the tensions within a fragile coalition government.Footnote ⁵⁸ The situation was intensified by the massive public outcry against the leasing of the loss-making Hambantota Seaport to a Chinese enterprise for ninety-nine years. As this port was also to be associated with the establishment of an adjacent industrial zone,Footnote ⁵⁹ the deal gave rise to concerns over potential land grab, particularly in urban and agricultural areas. All these controversies enabled the defeated Rajapaksas, who were seeking reelection, to claim that the good governance administration was selling the country’s strategic national properties to China.Footnote ⁶⁰

3.7 Access to Investment-Related Information: The 2016 Tripartite Agreement

The decision to resume the Project was followed by the signing of a new investment contract that repealed and replaced the much-disputed 2014 Concession Agreement.Footnote ⁶¹ From Sri Lanka’s perspective, it was essential to remove the controversial contractual terms included in the binding investment agreement. From China’s perspective, agreeing to sign a new investment agreement proved its flexibility in adjusting the legal frameworks applicable to BRI investments and showed its willingness to adapt to political changes and policy adjustments in host states. Notably, the Project Company conceded its contractual rights under the 2014 Concession Agreement to receive 20 ha of freehold land.Footnote ⁶² Further, it withdrew claims for compensation arising from the unilateral suspension of the project. There is no publicly known international arbitration brought by the Chinese investor based on the 2014 Concession Agreement or the China-Sri Lanka bilateral investment treaty (BIT) of 1987. (The BIT provides Chinese investors recourse to investor–state arbitration to resolve limited investment disputes such as the amount of compensation payable in an event of expropriation.Footnote ⁶³)

A new Tripartite Agreement was signed on 12 September 2016 (the 2016 Agreement). As mentioned, the SLPA was replaced with the UDA, which was subsequently transferred to the Ministry of Megapolis and Western Development. To date, this agreement has not been made publicly available, giving rise to serious concerns over transparency in investment agreements and the people’s access to investment-related information. The lack of access to investment agreements is not limited to Chinese investments in Sri Lanka; agreements relating to other disputed ventures have also not been made publicly available. In doing so, parties invoke confidentiality clauses and commercial confidence. For example, the agreement between the US-based energy company New Fortress Energy Inc. and the GOSL (September 2021) relating to the former’s investment in Sri Lanka’s energy sector and based on a USP, has not been released to the public.Footnote ⁶⁴

However, civil society activists and environmentalists continued to demand access to the 2016 Agreement through the legal mechanism established by the Right to Information (RTI) Act. The Act aims to promote transparency and accountability of public authorities, guaranteeing the right of access to information as provided for in Article 14A of the Constitution. During such attempts, UDA and other relevant public authorities have refused to release the agreement for several reasons.Footnote ⁶⁵ They invoked the confidentiality clause in the 2016 Agreement and Section 5(1)(d) of the RTI Act, which permits denial of access to information based on several grounds including commercial confidentiality. Moreover, the Project Company has also raised an objection as a third party against the release of the agreement on the basis that it contains confidential and price-sensitive information.

Nevertheless, in the case of Mansoor v Ministry of Urban Development, the Commission decided that the general confidentiality clause in an agreement does not preclude the right to access to the entire agreement. In its Interim Order in 2022, the Commission emphasized the ability to release an agreement “subject to redaction of commercially sensitive information” as provided in the RTI Act. The Commission further decided that the clauses in the 2016 Agreement that are of public interest should be made public. While comparing the 2016 and 2014 Agreements, the Commission determined that many clauses in the former are identical or similar to those included in the latter, which is already in the public domain. In its final Order dated April 2023, the Commission directed the relevant public authorities, including the Ministry of Investment Promotions, to release the 2016 Agreement before 4 May 2023.Footnote ⁶⁶ However, the Project Company has filed an appeal against this Order before the Court of Appeal.Footnote ⁶⁷

3.8 Litigation before Domestic Courts

The Project was challenged before Sri Lanka’s domestic courts in two cases. The first case was the Fundamental Rights Petition filed by the All Ceylon Fisherfolk Trade Union.Footnote ⁶⁸ The petitioners argued that the Project would affect their right to engage in a lawful occupation. The Supreme Court dismissed the petition on the basis that the complaints were vague and lacking in scientific evidence.Footnote ⁶⁹ The second lawsuit was a writ petition filed before the Court of Appeal by a local nongovernmental organization, the Centre for Environmental Justice.Footnote ⁷⁰ It sought a writ of certiorari to quash the 2011 EIA and 2015 SEIA, the 2014 Concession Agreement between the SLPA and the Project Company, and the Development Permit issued by the Director General of the Coast Conservation to the SLPA. It also sought a writ of mandamus to compel the Project Company to conduct a new “comprehensive EIA.”Footnote ⁷¹ This petition was dismissed although the judgment on the writ petition has not yet been issued by the Court. This then resulted in difficulties for the petitioner in appealing against the dismissal. However, an appeal has been filed and the matter is pending before the Supreme Court.Footnote ⁷²

In the fundamental rights matter, the petitioners invoked the Public Trust Doctrine (PTD) recognized by the judiciary in Sri Lanka under the right to equality clause in making a complaint against the violation of their fundamental rights.Footnote ⁷³ As with the writ petition, they complained that the required approvals had not been obtained as per the applicable law and that the SLPA had no authority to enter into an agreement on land reclamation. Proceedings in this matter were discontinued in July 2016 on the basis that the petitioners were “free to come back” to Court if they had “any further concerns” regarding any legal or constitutional violations. The Court noted that the Directive Principles of State Policy required the state to “protect, preserve, and improve the environment for the benefit of the community” and noted “[i]n the same breadth, the Court is concerned about the rapid development of the whole country.”Footnote ⁷⁴ The Court further noted that “[t]he organs of the States are guardians to whom the people have committed the case of preservation of the resources of the people. The Court is mindful in upholding the cause of environment as an independent right of both the present and future generations.”Footnote ⁷⁵

The Court then commented on two developments. First, it commented that the 2015 SEIA had proposed to the government the payment of compensation to “meet the requirement of the Fisher community, their income support and benefits.” It further opined that any concerns that the community may have over the compensation could be taken up with the relevant ministries. Second, the Court noted that if petitioners require any documents “by which approvals were granted,” then they could be obtained through the Attorney-General’s Department from the Secretary of the Ministry.

In both petitions, a key issue was the challenge faced by petitioners in establishing causation between the environmental impact of the proposed project and the actual harm to the environment. In both cases, it appears that the Court was not convinced that the evidentiary burden was satisfied by the petitioners. However, the judicial responses in these two petitions contrast with the approach adopted by the Supreme Court in the Chunnakam case where the Court recognized and enforced the precautionary principle in affirming the duty of the state to protect the environment.Footnote ⁷⁶ Moreover, the Sri Lankan judiciary has in the past declared government transactions that have violated applicable procedures to be null and void. In these cases, the Court invoked the PTD to hold that public power can only be used in trust and for the benefit of the people.Footnote ⁷⁷ In the litigation involving the CPC, however, the petitions have been dismissed and the reasons for the dismissals are not yet available in the public domain.

3.9 Establishing the Colombo Port City SEZ

In January 2019, the first phase of the Project – the reclamation of 269 ha – was complete. Parliament then passed a resolution under the Administrative Districts Act to annex the reclaimed land known as “Port City Colombo” to the Divisional Secretary’s Division of Colombo in the Administrative District of Colombo and to alter the limits of the Administrative District of Colombo to reflect the same. Under the same Act, on 5 August 2019, the Minster of Internal and Home Affairs and Provincial Councils and Local Government published an Extraordinary Gazette No. 2135/13 notifying the inclusion of Colombo Port City Land as a part of the Colombo Administrative District. Meanwhile, on 18 November 2019, the Rajapaksa regime returned to power under the leadership of Gotabaya Rajapaksa. President Gotabaya continued with the Project and, marking the inception of its second stage, Parliament published a bill on 19 March 2019 to establish a special economic zone (SEZ) called “Colombo Port City SEZ” and a body corporate called the “Colombo Port City Economic Commission” (CPCEC) for the purpose of its administration.Footnote ⁷⁸

This bill became the subject of an unprecedented public outcry against the establishment of the CPC SEZ and the CPCEC based on several grounds. First, opponents, mainly civil society groups, argued that these legal and institutional establishments could transform this artificial landmass into a “Chinese colony” that would not be subject to Sri Lanka’s sovereignty.Footnote ⁷⁹ Second, they disputed several provisions of the bill in advancing the idea that CPC will become a satellite Chinese province. They drew attention to the provisions that exempt (or limit) certain Sri Lankan laws from applying to the “Area of Authority” of the CPC SEZ.Footnote ⁸⁰ Thirdly, opponent politicians argued that carving out an SEZ to which the normal regulatory regime of the country will not apply contradicts the signature political slogan of President Gotabaya: “one country, one law.”Footnote ⁸¹ This allegation damaged the credibility of the Rajapaksa regime and President Gotabaya; in his presidential election campaign sternly criticizing the Hambantota Port lease, he had vowed to protect Sri Lanka’s strategic national resources from foreign powers.

At the regional level too, this bill gained much attention among the regional and global superpowers who were already troubled by China’s increased presence in the Indian Ocean Region largely through Chinese-funded infrastructure development projects in Sri Lanka. According to some, the proposed CPC SEZ will be the “Chinese colony in India’s backyard,” enabling China to find its way to the Indian subcontinent amid the intensified geopolitical rivalry in the region.Footnote ⁸² At the domestic level, the bill’s constitutionality was challenged. In its Special Determination, the Supreme Court held that the bill as it was originally proposed undermined the supremacy of Parliament over legislative matters as well as over public finance. For instance, the bill did not provide for parliamentary approval of “Community Rules and Development Control Regulations” issued by the Commission.Footnote ⁸³ Similarly, the bill did not provide for parliamentary approval for decisions of the Commission in granting individual tax exemptions or financial incentives. In certain other instances, the bill proposed authorizing the Cabinet of Ministers to exempt the application of laws specified in Schedule II of the bill to “Business of Strategic Importance.” Those clauses were deemed inconsistent with the Constitution by the Supreme Court in its Special Determination.Footnote ⁸⁴

In designating the Port City as an SEZ, the bill sought to authorize the CPCEC to regulate entry and exit to the territory, but the Court held that these provisions were inconsistent with the Constitution as they amounted to a violation of the freedom of movement.Footnote ⁸⁵ The bill vested broad discretionary powers with the CPCEC. In fact, the bill proposed to mandate that other administrative agencies “concur” with the decisions of the CPCEC. This proposed provision clearly disregarded an entire body of the common law that has long established several principles on the limits to the exercise of administrative discretion. It cannot be under dictation, even by prevailing policies of the government of the day. The Court noted that the proposed clauses would amount to a violation of the right to equality as interpreted by the Sri Lankan judiciary.Footnote ⁸⁶

The Court also noted that “the regulatory structure set out in the Bill lacks clarity and provides for the exercise of arbitrary power by the CPCEC” and is therefore inconsistent with the right to equality. The Attorney-General’s Department responded with proposals for a further set of amendments to the bill. In addition, the Court further determined that the CPCEC “should always obtain the concurrence of the respective Regulatory Authorities” and that those institutions will continue to exercise their powers “unimpeded” in the Port City.Footnote ⁸⁷

In the Special Determination of the Port City Bill, the Supreme Court departed from its previous view on the question of consulting provincial councils.Footnote ⁸⁸ Previously, the Court had held that where a bill relates to a devolved subject and where one of the provincial councils cannot be consulted because it has not been constituted, the bill can only be passed with a special majority. In the Determination on the Port City, however, the Court took the view that the consultation of provincial council is a “procedural step in the legislative process.”Footnote ⁸⁹ The Court argued that where a provincial council has not been constituted, the principle lex non cogit ad impossibilia applies and that it was “not necessary” for the Court to determine whether the bill impacted on devolved subjects.Footnote ⁹⁰ This is a significant inroad into the already weak recognition of devolution in the Sri Lankan Constitution and its implementation.

The bill also required that ordinary courts give priority to legal proceedings arising from the Port City. The Court noted that the objective of establishing the Port City is to create a “conducive environment” for new investments and that the speedy resolutions of disputes is of “critical concern” in this regard. On that basis, the Court determined that this was “a permissible classification.”Footnote ⁹¹ The bill sought to restrict judicial discretion by providing that where a lawyer is unable to be present in the Court, it “shall not be a ground for postponement of commencement or continuation of the trial” or considered as “an exceptional ground” justifying postponement. During the hearing, the Attorney-General’s Department proposed to revise this clause to require that courts prioritize legal proceedings emanating from the Port City and that those cases be heard daily except where, in the opinion of the Court, exceptional circumstances warrant postponement.Footnote ⁹²

In the Port City, disputes have to be referred to arbitration. The Supreme Court did not consider this as a contravention of the Constitution. The Court relied on the fact that any person within the Port City is “put on notice that arbitration is mandatory in given circumstances.” On that basis, the Court concluded that this provision was consistent with the Constitution.Footnote ⁹³

After making the necessary adjustments to ensure that the bill was consistent with the Supreme Court Determination, it was passed by Parliament on 20 May 2021. With the enactment of the Colombo Port City Economic Commission Act (the Port City Act), a distinctive legal regime was established to deal with matters exclusive to the CPC SEZ. This new legal regime coexists with the general legislative framework for facilitating inward foreign investments in Sri Lanka under the Board of Investment of Sri Lanka Law, 1978 (BOI Act). As mentioned in Schedule III to the Port City Act, which should be read with Section 73 of the same Act, the BOI Act does not apply within the “Area of Authority” of the Port City.Footnote ⁹⁴ Understandably, this is because the Port City Act provides an alternative institutional arrangement for facilitating investors who wish to do business in or from the Area of Authority of the Port City.

The Project itself, notably its first phase, was fostered under the BOI Act and provided with incentives under the Strategic Development Projects Act (SDP Act) No. 14 of 2008. This Act aims to grant special concessions to special projects identified as “Strategic Development Projects.”Footnote ⁹⁵ This identification is done by the BOI in consultation with the relevant line ministries. The Port City is exempted from the SDP Act because Part IX of the Port City Act provides its own mechanism to grant incentives and exceptions to ventures designated as “Business of Strategic Importance.” This designation should be done by the CPCEC in consultation with the Sri Lankan president.Footnote ⁹⁶ In addition, the CPCEC is vested with competence to administrate, regulate, and control “all matters connected with businesses and other operations, in and from the Area of Authority of the Colombo Port City” while acting as a Single Window Investment Facilitator.Footnote ⁹⁷

According to the Port City Act, the CPCEC consists of five to seven members appointed by the Sri Lankan president.Footnote ⁹⁸ However, the president is expressly required to ensure that the majority of commission members, including the chairperson, are Sri Lankans. One of the main objectives of the CPCEC is to make the Port City an “attractive investment destination” and a prominent SEZ in the region.Footnote ⁹⁹ The CPC SEZ is expected to facilitate the diversification of Sri Lanka’s service economy, promote foreign investment, and generate new employment opportunities within the zone.Footnote ¹⁰⁰ It is further expected to be an international business and service hub that promotes and facilitates an array of economic activities such as international trade, tourism, offshore banking and financial services, and shipping logistic operations. In order to achieve these objectives, the first set of regulations have recently been gazetted under the Act, specifying the fees payable to an “Authorized Person” to whom the CPCEC has issued or granted registration, licensing, and authorization as required by the Port City Act.Footnote ¹⁰¹ In addition, the CPCEC has issued regulations relating to the incentives and tax exemptions that will be afforded to ventures identified as Business of Strategic Importance as provided in Part IX of the Act.Footnote ¹⁰² Concerning dispute resolution, the CPCEC has appointed the International ADR Center, Sri Lanka as the designated international Commercial Dispute Resolution Centre required to be established under Section 62 of the Act.Footnote ¹⁰³

5.1 For Law School Audiences

1. 1. The Port City Act is a law enacted by a sovereign state. On the one hand, this Act falls under the authority of a written constitution and is part of a domestic legal system. On the other hand, it establishes a statutory body, the CPCEC, which has the power to enter into contracts with foreign investors. In this context, what is the relevance (if any) of the Port City Act and regulations enacted under the Act to the interpretation of any such contracts?

2. 2. What are the significant contractual obligations of the Project on the government and the investor parties? Access the Act and its regulations and consider whether these obligations can be fulfilled within the Port City Act.

3. 3. In Sri Lanka, the common law as interpreted within its Constitution applies to the judicial review of executive and administrative action. Judicial review of these actions is available under the writ and fundamental rights jurisdictions of Sri Lanka’s appellate courts. How should these remedies apply to acts or omissions by executive or administrative actions within and in relation to the Port City?

4. 4. What is your assessment of the approach to judicial review in the litigation related to the Port City discussed in the case study? How will the availability of judicial review compare and contrast with arbitration provided for through the International Arbitration Centre, as set out in the Port City Act for disputes arising in the course of business therein?

5.2 For Policy School Audiences

1. 1. How should the Project be situated in the broader context of BRI as an example of how projects may affect the public law of host states?

2. 2. What lessons can be learned from this case study about the impact of social movements (relating to labor, environment, etc.) on infrastructure development projects driven by FDI?

3. 3. In examining the role played by different actors in this case study, what are the different approaches to development that can be identified? What do these different approaches suggest about the effectiveness of FDI on development?

4. 4. How should policy and governance mechanisms and institutions innovate to deal effectively with the different challenges that are raised through projects such as the Port City?

5.3 For Business School Audiences

1. 1. The Colombo Port City has been established as an SEZ with the purpose of accelerating Sri Lanka’s economic growth. What role is the Port City Economic Commission expected to play in achieving the fundamental objective of establishing the Port SEZ?

2. 2. There are different political and legal narratives about the Project. How do they impact the investors’ confidence in selecting the Port City SEZ as a destination for their investment. The Colombo Port City Act permits the CPCEC to provide selected ventures doing business in and from the Port City SEZ with generous tax incentives and exemptions. The relevant regulations have been already published. What is the role of such incentives and exemptions in promoting the Colombo SEZ as a business hub and how they would impact Sri Lanka’s economy at large? The Port City Act identified alternative dispute resolution, notably commercial arbitration, as the predominant method of resolving disputes. Would such a method contribute to facilitating business to the Colombo SEZ, including fostering and attracting foreign investment?

3.1 Background on Human Rights Obligations and the BRI

When undertaking BRI projects, both Chinese companies and the project’s host country (in this case, Cambodia) are subject to three general categories of human rights standards that govern their conduct: international, transnational, and domestic. At the international level, states have agreed to respect, protect, and fulfill fundamental human rights through a series of treaties drafted by the United Nations (UN).Footnote ⁹ Nonbinding documents such as declarations and guiding principles also influence state and private actions taken by corporations, although they are not legally enforceable.

The transnational level includes binding standards and principles arising from bilateral agreements and regional treaties. BITs are included in this category,Footnote ¹⁰ and they typically govern the specifics of state-to-state investment projects. These agreements can have provisions governing human rights standards, transparency, and dispute resolution procedures, among other regulations. Finally, domestic rules refer to legislation governing the conduct of the state and private organizations. This includes constitutions, legislation regarding business practices and human rights, and any administrative regulations that might be applicable.

At each level, this framework demands substantive protections for human rights and high levels of transparency. However, multiple BRI projects have been under scrutiny in recent years for failing to meet the obligations imposed by human rights laws.Footnote ¹¹ Legal complaints and international resolutions have been levied against Chinese SOEs and private corporations operating in several BRI countries, alleging systematic violations of human rights. Notable examples include withheld wages, unlawful deprivations of liberty, human trafficking, and failing to implement safety measures in hazardous working environments.Footnote ¹² Other harms such as violations to the right of a clean environment have also been reported, although legal cases vindicating this right are rarer.

The case of the Lower Sesan II illustrates the challenges of ensuring transparency and compliance in multilateral projects like those within the BRI. The discussion below articulates the relevant legal standards governing the parties in this case, beginning with international human rights obligations.

3.2 International Human Rights Law

The international human rights instruments relevant to this analysis include the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR). These binding texts will be discussed in the context of Cambodia, as China is not subject to liability for violations of these instruments outside its territory. Under these treaties, it is Cambodia that bears the responsibility to protect and fulfill the rights of its citizens.

Relevant nonbinding texts with broader application include the UN Declaration on the Rights of Indigenous Peoples (UNDRIP), the UN Guiding Principles on Business and Human Rights (UNGPS), and the UN Resolution on the Right to a Clean Environment. China and Cambodia are party to these agreements.

The ICCPR has been signed and ratified by Cambodia, meaning that the state is legally bound to enforce the rights protections in its text.Footnote ¹³ Two rights are most relevant to this discussion. First, Cambodia is obligated to respect and protect the rights of subsistence, which holds that a people or group can freely dispose of their natural wealth and resources without interference by the state.Footnote ¹⁴ Second, minority groups are entitled to “enjoy their own culture, to profess and practise their own religion.”Footnote ¹⁵ In General Comment 23, the Committee of the ICESCR discussed the latter and suggested that this right required the adoption of legal protections for traditional aspects of minority culture, such as hunting or fishing.Footnote ¹⁶

The ICESCR has also been ratified by Cambodia, and requires the state to provide an adequate standard of living, “including adequate food, clothing and housing, and … continuous improvement of living conditions.”Footnote ¹⁷ States are further obligated “to ensure the realization of this right, recognizing to this effect the essential importance of international co-operation based on free consent.”Footnote ¹⁸ General Comment 21 introduces a secondary obligation for states to respect the land rights of Indigenous persons.Footnote ¹⁹

While the UNDRIP and UNGPS are nonbinding, their standards reflect broad international consensus on these matters. The UNDRIP has been signed by all recognized countries that are party to the UN, and the UNGPS has received widespread endorsement, including from China and Cambodia.Footnote ²⁰ The UNDRIP mandates that governments consult with Indigenous peoples to receive their “free and informed consent” prior to making use of their lands.Footnote ²¹ Actions that displace Indigenous peoples from their lands are prohibited under this declaration.Footnote ²²

The UNGPS imposes obligations on states and corporate actors and defines potential avenues for remedies. Its core tenets mandate that the state protect its citizens from human rights abuses committed by third parties (including corporations); that corporations conduct human rights due diligence prior to and during its operations; and that states should enforce their human rights laws, with the cooperation of corporations.Footnote ²³

Unlike the other measures discussed here, the standards upheld by the UNGPS do apply to China and its domestic corporations. It holds states to account for human rights violations committed by its own organizations and imposes basic regulations on corporate conduct.Footnote ²⁴ States moreover have a special responsibility to “take additional steps to protect against human rights abuses by business enterprises that are owned or controlled by the State,” which here implicates SOEs like the Huaneng Group.Footnote ²⁵

Finally, the 2022 UN Resolution on the Right to a Clean, Healthy and Sustainable Environment grants the right to a healthy environment the status of a universally recognized human right.Footnote ²⁶ While it has not yet been included within binding human rights treaties, a separate regime of international environmental law is dedicated to the protection of the environment and the promotion of sustainable societies.

3.3 Regional and Transnational Legal Standards

Transnational legal standards govern the business or diplomatic relationships between two or more state parties. They are contextual and can articulate specific procedures for investment, guidelines for private parties, and methods of recourse in the case of legal disputes. In the case of China and Cambodia, two instruments are relevant to human rights obligations: the 1995 Mekong Agreement and the Association of Southeast Asian Nations (ASEAN) Human Rights Declaration.

The 1995 Mekong Agreement is a regional directive concluded between Cambodia, Laos, Thailand, and Vietnam.Footnote ²⁷ It governs “sustainable development, utilization, conservation and management of the Mekong River Basin water and related resources.”Footnote ²⁸ While the Agreement is nonbinding, it established the independent Mekong River Commission that is tasked with supervising the party states and their compliance with the text.Footnote ²⁹ The main premises of the Agreement that relate to the right to a clean environment include the obligation to conduct a regional consultation prior to commencing major projects that would impact the Mekong, to protect the environment and cease actions that have a negative impact on the Mekong region, and to ensure adequate reparations are administered for violations of the Agreement.Footnote ³⁰

Like the international human rights declarations discussed in Section 3.2, the ASEAN Human Rights Declaration is similarly nonbinding. It requires that states provide an “adequate standard of living,” which includes a number of guarantees; food, housing, clean drinking water, and a “safe, clean and sustainable environment” all fall within this right.Footnote ³¹ While inclusive, ASEAN rights are limited by important caveats. The text recognizes that the realization of rights can be limited by “political, economic, legal, social, cultural, historical and religious” factors, and that rights are subject to domestic laws that govern “national security, public order, public health, public safety, public morality, as well as the general welfare of the peoples in a democratic society.”Footnote ³²

While additional transnational frameworks exist that govern transnational investment projects, they make limited references to the rights of natural persons. The 1996 China-Cambodia BIT,Footnote ³³ the ASEAN Comprehensive Investment Agreement,Footnote ³⁴ and the 2009 ASEAN China Investment AgreementFootnote ³⁵ do not refer to human rights or sustainable development, nor do they suggest that these texts be interpreted in line with applicable domestic or international laws on either subject. Although this is not uncommon, model or draft BITs have increasingly begun to explicitly recognize these obligations in recent years.Footnote ³⁶

3.4 Domestic Legislation and Regulations

Human rights protections found in domestic laws and administrative regulations may have significant bearing on foreign investments and can require strict coordination between the parties to ensure compliance. In the case of Cambodia, the state’s Constitution, the 2001 Land Law, the 1996 Law on Environmental Protection and Natural Resource Management, and the 1999 Sub-Decree on Environmental Impact Assessment Process are relevant.Footnote ³⁷

While Cambodia’s Sub-Decree No. 11 on Build-Operate-Transfer Contracts,Footnote ³⁸ the PRC Administrative Measures for Outbound Investment by State-Owned Enterprises,Footnote ³⁹ and PRC Administrative Measures for Overseas InvestmentFootnote ⁴⁰ are informative, none contain provisions related to human rights.

Cambodia’s Constitution codifies legal protections for the ownership of private property,Footnote ⁴¹ stipulating that “Legal private ownership shall be protected by law. The right to confiscate properties from any person shall be exercised only in the public interest as provided for under the law and shall require fair and just compensation in advance.”Footnote ⁴² Similar to the ASEAN Charter, however, constitutional rights in Cambodia can be subsequently limited by other laws.Footnote ⁴³ The legal rights to property within the Constitution have not been abrogated by other instruments at the time of this writing.

The 2001 Land Law specifically reserves several articles describing the inviolability of the lands of Indigenous peoples. In relevant part:

Two exceptions can apply to these provisions, including the government’s “acting in the public interest” or in states of emergency.Footnote ⁴⁵ Neither exception was defined within the law.

Finally, the 1996 Law on Environmental Protection and Natural Resource Management and the 1999 Sub-Decree on Environmental Impact Assessment Process require corporations to work in tandem with the Ministry of Energy both prior to and during construction to preserve the environment and promote sustainable development. The former requires that EIAs be conducted prior to any project, “private or public,” without exception.Footnote ⁴⁶ The EIA must then be reviewed by the Ministry of Environment and the Royal Government for approval.Footnote ⁴⁷ The 1999 Sub-Decree on EIAs includes the specific procedures for these reports and requires a “Project Owner” to conduct their assessments in consultation with the Cambodian Ministry of Energy.Footnote ⁴⁸

In sum, there are significant human rights obligations governing Cambodia’s and China’s efforts during the construction of the Lower Sesan II. While most restrictions applied directly to Cambodia, Chinese corporations operating in Cambodia were nevertheless obligated to comply with Cambodian laws and the mandatory measures for the protection of human rights. Declarations signed by China also informed the state of best corporate practices that would meet desirable human rights standards. The remainder of this case study assesses whether the above obligations have been met through a review of relevant parties’ conduct. The analysis begins with the preparatory measures taken in advance of construction, moves on to the construction of the Lower Sesan II, and concludes with ongoing human rights implications.

3.5 Preparatory Measures

Under the above instruments, Cambodia and corporations involved in the project were obliged to undertake or enforce the following measures prior to constructing the Lower Sesan II: conducting an EIA to determine potential harms to the Mekong tributary, submitting an EIA to the Ministry of Environment, providing notification to parties of the 1995 Mekong Agreement, and consulting with Indigenous communities that might be impacted by the project.

Regarding the EIA, one of the corporations party to the Lower Sesan II project (Electricity of Vietnam) did commission such a report in 2008. Prepared by Key Consultants Cambodia, the report predicted exceptionally high damage to the Mekong region. By their estimation, approximately 5,000 people would face involuntary resettlement, 66% of local varieties of fish would be significantly impacted through the destruction of their migration roots, and 30,000 ha of forest would need to be flooded.Footnote ⁴⁹ Reports from NGOs and academic publications further speculated that the authors or commissioners of the 2008 EIA reduced its initial predictions to project a less severe outlook.Footnote ⁵⁰

In response to this initial report, CHNG, an SOE, which has the controlling stake in the project, commissioned a second internal EIA that has not been shared with the public or its corporate partners.Footnote ⁵¹ As a result, it is not clear to what extent corporations operating on the Lower Sesan II project worked with Cambodia’s Ministry of Energy to minimize anticipated environmental impacts. While the Ministry of Energy is required to disclose its work related to EIAs upon request under the 1996 Law on Environmental Protection and Natural Resource Management, this information has not been released.

The Mekong River Commission, tasked with gathering information on party compliance with the Mekong Agreement, produced a report on an “informal donor meeting” in 2013 during which the Lower Sesan II was the subject of controversy.Footnote ⁵² It suggested that other members of the Mekong Agreement appealed to Cambodia to provide more information on the project,Footnote ⁵³ which was not provided. While the specifications of a project like the Lower Sesan II would only technically require Cambodia to merely grant notice to other parties, the gravity of the project’s anticipated impacts suggested that it might fall under the Agreement’s prohibition against negative impacts on the region.

Finally, consultations with Indigenous communities prior to the construction of the Lower Sesan II did occur but were regarded as insufficient by the impacted parties and civil society groups.Footnote ⁵⁴ Approximately 200 community representatives from the Sesan, Srepok, and Sekong areas adjacent to the project drafted a Joint Statement in 2008 protesting its construction.Footnote ⁵⁵ They anticipated that the Lower Sesan II would destroy farmland, pollute the water sources and alter its flow, induce the extinction of certain types of fish within the area, and fundamentally disrupt the existing social infrastructure.Footnote ⁵⁶ The government did not provide a response and formally approved the dam’s construction in 2012.Footnote ⁵⁷

A second Joint Statement was then submitted to Chinese Ambassador Bu Jianguo in 2013 by the Sesan, Srepok and Sekong Rivers Protection Network requesting that China withdraw its involvement in the project. Affirming that the local communities were in fact experiencing significant environmental disruptions, the representatives noted that “no stakeholders have taken responsibility for addressing the impacts we face or [are] finding a solution to remedy the problem.”Footnote ⁵⁸ The Chinese government did not respond. A subsequent 2014 letter to Ambassador Bu and other Chinese officials likewise did not receive a response.Footnote ⁵⁹

Finally, in 2018, communities impacted by the Lower Sesan II project filed a Complaint with the World Bank Office of the Compliance Advisor Ombudsman. The Complaint indicated “concerns related to community resettlement, impacts on livelihoods, threats against community members opposing the project, damage to sociocultural significant sites such as ancestral graves and spiritual forests, and impacts on the fish population of the Mekong, Sesan, and Srepok Basins.”Footnote ⁶⁰ The Complaint has passed the initial Eligibility and Assessment stages and is now under investigation for compliance measures undertaken during the dam’s construction.Footnote ⁶¹

3.6 Construction of the Lower Sesan II

Several protected rights were implicated during the construction of the Lower Sesan II. One major event concerned compensation for displaced persons and families. The right to own property is protected by all three levels of human rights instruments, and special rights are reserved for Indigenous persons or communities and their traditional lands. This right is intrinsically linked to the right to culture. In recognition of the historic and cultural significance of these regions, international law and Cambodia’s domestic regulations have created substantive legal barriers to the displacement of Indigenous peoples.Footnote ⁶² In the event that individuals do become displaced from their homes, the state or an agreed party is required to offer adequate compensation in advance.Footnote ⁶³

Although Indigenous communities actively protested the taking of their ancestral lands, few adjustments were made to the project’s initial plan to flood culturally significant areas, such as burial grounds and traditional areas for hunting and fishing.Footnote ⁶⁴ Civil society organizations produced reports that the level of compensation provided to the families by CHNG were insufficient and did not accurately reflect the cultural or economic value of the lands; as many as 180 families refused to accept the amount or leave their homes.Footnote ⁶⁵ A submission to the UN Special Rapporteur on Human Rights in Cambodia suggested that residents within the impacted zones were pressured and intimidated into taking the compensation offered by the corporation.Footnote ⁶⁶

The right to an adequate standard of living, which includes housing, clean water, and the continuous improvement of living standards, was also compromised through limited rehousing efforts. CHNG and other corporations working on the site did not publish their resettlement plan, but Human Rights Watch determined through interviews that a parcel of land was given to affected persons, as well as a choice between a pre-built home or US$6,000.Footnote ⁶⁷ The parcels were located on unfavorable ground for farming and cut off from the river. As further construction compromised the peoples’ access to clean water, most were isolated from basic means of subsistence.Footnote ⁶⁸

Other concerns related to transparency have also been revealed through interviews with various human rights NGOs and other stakeholders. The authors interviewed participants across Cambodia, including those working with the United States Agency for International Development (USAID),Footnote ⁶⁹ the Royal University of Law and Economics,Footnote ⁷⁰ the Documentation Centre of Cambodia,Footnote ⁷¹ the Cambodia Human Rights Committee,Footnote ⁷² an NGO in Phnom Penh (name preserved to maintain anonymity),Footnote ⁷³ and journalists in Chinese-language media.Footnote ⁷⁴ Remarkably, none save one knew of the human rights dimensions of the project, despite their respective expertise in this area. While it is difficult to determine on these bases alone, it may be the case that this topic had been suppressed in the media, which is consistent with the state’s recent crackdown on independent news organizations.Footnote ⁷⁵

Ultimately, 34,000 ha of land were flooded by the dam’s construction.Footnote ⁷⁶ While most of this was forest, 7,000 ha were used for farming.Footnote ⁷⁷ The impact of the dam’s construction on fish in the Mekong is still being realized, but reduced fishing yields and the projected extinction of regional species indicate that the region’s biodiversity is in sharp decline.Footnote ⁷⁸

The impact of the Lower Sesan II’s construction on the livelihoods of displaced communities in Cambodia has been profound – culturally, socially, and economically.Footnote ⁷⁹ Many struggle to maintain their livelihoods on infertile ground far from the river and mourn the loss of sacred areas, including burial grounds and traditional hunting grounds.

3.7 Implications and Outlook

The Lower Sesan II was constructed to gradually improve the lives of Cambodians and may represent a significant step toward the realization of a collective right to a clean environment. The dam is projected to contribute to meeting rising energy demand in the Mekong region and decreasing the use of nonrenewable energy. In reducing Cambodia’s reliance on electricity imports, it also promises to reduce everyday costs and promote accessibility to energy. While civil society organizations suggest that the dam’s output is below what was initially projected,Footnote ⁸⁰ it will reduce the complications that arise from the use of fossil fuels and sets a foundation for a regional shift toward renewable energy sources.

However, the lack of preparatory measures taken in advance of construction severely limited the intended environmental benefits. The most significant impacts referenced within the 2008 initial EIA were largely realized and will reduce the biodiversity of the Mekong exponentially over time.Footnote ⁸¹ Without knowing the full extent of the impact, it is difficult to weigh the harm to the Mekong against the benefits of establishing sources of renewable energy.

Finally, the historical and cultural sites cannot be recovered. Human rights law is predicated on the notion that the enjoyment of one’s rights cannot extend to interference with another’s. Substantive violations of binding international law, the failure to conduct a regional assessment under the transnational framework, and the rejection of domestic standards resulted in the flooding of sacred forests and burial grounds with great relevance to Indigenous people in Cambodia. It is clear that additional measures are needed to enhance human rights compliance in BRI projects.

5.1 For Law School Audiences

1. 1. One of the difficult questions presented by the Lower Sesan II case is how to – and if one indeed should – balance competing human rights interests. Human rights scholars and ethicists agree that some human rights are absolute, including the right to life.Footnote ⁸⁴ The right to life cannot justifiably be leveraged against any other right or value. However, other rights may be subject to a balancing test when pursuing the common interest.Footnote ⁸⁵ For example, privacy rights are frequently suspended in favor of public safety, like when a police officer acquires a warrant to search the home of a suspected criminal. In this case, the history, culture, and livelihoods of several communities were lost to the construction of the Lower Sesan II. Regardless of whether the corporate partners and the state followed ideal construction practices, once approved, the dam was projected to directly impact the cultural rights of nearby Indigenous communities. In contrast, the creation of the Lower Sesan II has generated a new source of clean energy that may contribute to ameliorating the devastating impacts of climate change on a global scale. By reducing regional reliance on fossil fuels, the Lower Sesan II serves an important role in pursuing the human right to a clean environment. What considerations should be considered when balancing rights in this case? Should cultural rights be absolute, like the right to life? Does pursuing the common good of reducing global warming outweigh the specific interests of the impacted communities?

2. 2. The legal scholar Ilias Bantekas argues:

   The persistent problem with investment-related human rights is not so much the indifferent or abusive behavior of foreign investors or their home States. It can generally be attributed to two factors: (1) host states’ poor domestication and monitoring of their human rights obligations, which to some degree is predicated on the provision of investment guarantees that are detrimental to poor host states; and (2) the absence of a clear developmental plan and objectives [including human rights] in the pursuit of foreign direct investment.Footnote ⁸⁶

   What do you think about this summary in relation to the instant case – were the parties’ respective human rights obligations clear enough? And if Cambodia did indeed fail to provide a sufficient development plan in relation to the Lower Sesan II or enforce its rights laws, how much responsibility can be attributed to China’s SOE that led this project, CHNG? Does the fact that Chinese representatives were on notice of these rights violations matter?

3. 3. Relevant Cambodian law, international human rights treaties, and other regulations imposed binding human rights standards on the Cambodian government in this case. However, several other instruments that also bound China and CHNG, including the China-Cambodia BIT and China’s domestic regulations (e.g., the PRC Administrative Measures for Outbound Investment by State-Owned Enterprises, and PRC Administrative Measures for Overseas Investment), do not include provisions related to human rights. Scholars are engaged in discussions of the merits of incorporating human rights obligations into transnational agreements, which is reflected in the growing consensus on incorporating rights goals within model BIT agreements.Footnote ⁸⁷ Others like Bantekas, however, argue that the current model is proving insufficient in addressing major and ongoing corporate violations of human rights, and that domestic investment laws must evolve to meet these challenges. Would the inclusion of human rights standards at the transnational level help to clarify the parties’ rights obligations, or should this be left to the realm of each state’s legislature? Or, conversely, is the existing international human rights law system sufficient?

5.2 For Policy School Audiences

In this case, local Cambodian NGOs shed light on environmental and social harms brought by the Chinese SOE-led infrastructure project. In the context of nondemocratic states, how can SOEs collaborate internationally to support each other to oppose projects that violate international human rights? How can supranational bodies like the UN provide greater support to such active players in the international system who are upholding international human rights norms and standards?

5.3 For Business School Audiences

How can businesses implement best-practice ethical investment principles in large, international joint ventures like the Lower Sesan II? Discuss.

3.1 Oman in the GCC

The Sultanate of Oman, a member of the GCC, is a small country with significant strategic importance in the region and to the world at large (for general details, see Table 3.3.1). It is situated at the intersection of three regions (South Asia, West Asia, and East Africa) and three seas (Arabian Sea, Oman Sea, and Indian Ocean). Consequently, Oman controls the Strait of Hormuz, a vital chokepoint for global oil shipments and other commodities. It is also an important link between the Indian subcontinent and the Horn of Africa, and Oman’s ports provide a convenient stopover for shipping between these two regions. This strategic location makes Oman an important partner for China, as China seeks to expand its economic and political influence in the region.

In contrast to many of its neighbors, Oman is relatively peaceful and stable, with a long history of independent foreign policy, neutrality, and mediation. As a descendant of a powerful maritime empire, it has maintained close ties with both the Arabian and the Persian sides of the Gulf and these relationships have allowed it to play a crucial role in regional diplomacy, serving as a mediator between the GCC and Iran, as well as between the United States and Iran. The country is thus a key player in efforts to maintain stability and promote cooperation in the Gulf region.

Oman has undergone a period of modernization and development over the past five decades under the rule initially of Sultan Qaboos bin Said who transformed the country, diversifying its economic priorities away from oil and exploring new avenues for growth. His successor, Sultan Haitham bin Tariq, the head of state since 2020, has continued this progress by providing a vision document “Oman 2040” focused on five strategic goals: further economic diversification, strong and inclusive private sector growth, sustainable and balanced development, efficient and transparent government institutions, and skilled and competitive Omani human capital.Footnote ³

The future economic policy of Oman places significant importance on free economic zones (FEZs) as an investment instrument to achieve economic diversification and growth, facilitate international trade and exports, help Omani businesses to reach new markets, and create jobs for Omanis. Oman’s strategic location and well-developed ports, including the FEZs around them, contribute significantly to the country’s trade and economic growth. In 2020, Oman’s ports handled a substantial shipping cargo trade volume of US$7,369 million, including 5.2 million TEUs of containers,Footnote ⁴ 18.4 million tons of liquid cargo, and 54 million tons of general cargo. The eight ports of Oman handle an annual average of 5,400 to 6,200 vessels, with Sohar, Salalah, Duqm, and the Port of Sultan Qaboos in Muscat being the most notable. The latter is also currently undergoing a gradual transformation to include a tourist port, enhancing its appeal in the region.

FEZs are special economic zones (SEZs) that offer a variety of incentives to attract foreign investment, including tax breaks, simplified regulations, and easy access to land and labor. However, SEZs and FEZs are not differentiated in Oman at the legislative level, in the Free Zones Law,Footnote ⁵ or in the decree establishing the Public Authority for Special Economic Zones and Free Zones (OPAZ).Footnote ⁶ The OPAZ lists only Duqm as a SEZ together with eight other strategically important entities it oversees including Al Mazunah Free Zone, Salalah Free Zone, and Sohar Free Zone. The terminological differentiation of Duqm’s status may suggest greater plans for the SEZAD.

3.2 China–Oman Relationship

The ancient MSR forged strong cultural and trade ties between Oman and China, laying the foundation for a modern relationship that blossomed during Sultan Qaboos bin Said’s reign. In 1978, the countries established formal diplomatic relations, recognizing the potential for mutually beneficial cooperation. The Sultanate actively participated in promoting cross-regional communication and interdependence. In addition to its strategic location, Oman is the fourth largest crude oil supplier,Footnote ⁷ reducing its dependence on traditional (coal) energy sources. Oman’s neutral foreign policy and shared commitment to the five principles of Chinese Foreign Policy and International Law provide China with a valuable partner in the Gulf region, facilitating dialogue and conflict resolution channels.Footnote ⁸ Oman’s efforts in maintaining maritime security in the Gulf of Oman and the Arabian Sea align with China’s goal of securing safe passage for its commercial vessels.

The trade volume between China and Oman has grown significantly in recent years (see Figure 3.3.1). In 2021, China exported goods worth US$3.13 billion to Oman, while Oman exported goods worth US$23.9 billion to China. In addition, there is a positive trend in cultural exchanges between China and Oman, with a recent increase in Chinese tourists visiting Oman and more Omani students studying in China.

Figure 3.3.1 Oman–PRC trade statistics

Source: Compiled by author. Primarily based on the Chinese Ministry of Commerce data (see 中国商务部非洲西亚司, ‘双边合作简况’ [Ministry of Commerce of the People’s Republic of China, ‘A Brief Overview of Bilateral Cooperation’] (29 November 2023) http://xyf.mofcom.gov.cn/article/tj/) since the Omani Statistical Office calculates trade volumes in the local currency and differentiates between the oil and non-oil merchandise (see National Centre for Statistics and Information, Statistical Bulletin: Foreign Investment, no.16, 2017–21, February 2023).

The China–Oman relationship is likely to continue to grow in the years to come. The Belt and Road Initiative (BRI) provides a framework for further cooperation between the two countries, and both sides are committed to deepening their ties.Footnote ⁹ Much of this framework rests on the multilateral relations with the GCC, which have been developing for decades and achieved significant success with regard to the penultimate round of the China-GCC FTA negotiations,Footnote ¹⁰ the GCC Single Customs Union, as well as the establishment of a number of Sino-Arab platforms for economic cooperation such as the biannual China-Arab States Expo and the China-Arab States Cooperation Forum.Footnote ¹¹ These are the main “umbrella” entities for multiple thematic platforms of South-South cooperation,Footnote ¹² in which Oman has a mandate. In this sense, the creation of the SEZAD has not been just a bilateral effort and strategic partnership between Oman and China but an outcome of significantly wider regional cooperation.Footnote ¹³

3.3 Local Labor and the Investment Environment

The vast majority of the Chinese projects in Duqm are carried out by migrant workers. The total migrant labor force in Oman is estimated to be more than 45% (1.6 million) of the total population in 2023, around 60% of which are migrants from India, Pakistan, and Bangladesh.Footnote ¹⁴ The construction sector is the largest employer of migrant workers, followed by the manufacturing sector and the services sector.

The situation is similar across Oman, which, like its neighbors, has a foreign worker sponsorship scheme, the kafala system.Footnote ¹⁵ Under this system, in order to obtain a working permit in the country, a foreign worker needs a sponsor (a kafeel) who must be a local citizen. This sponsor often ends up controlling the foreign worker’s immigration documents, work permit, mobility, and even accommodation. The ethics and fairness of the working relations between the kafeels and the blue-collar migrant workers in the Gulf states has been subject to international scrutiny for some time.Footnote ¹⁶ In recent years, with the latest set of reforms in 2023,Footnote ¹⁷ the Omani government has implemented a number of progressive changes to the kafala system that has made it easier for workers to change jobs and leave the country without requiring their employer’s permission.

Apart from the labor reforms, the SEZAD investors also faced the challenge of bringing their own workforce from China as there were already many middle-age male migrant workers in the construction sector in Oman as well as alarming levels of youth unemployment.Footnote ¹⁸ It must be noted that along with the high number of migrant laborers, the Omani government is currently reviewing the quotas for the minimum number of local workers in the private sector. The goal is to achieve a gradual and sustainable increase in the so-called Omanization (تعمينال) of the private sector labor force. Although benchmarks vary according to industry, the overall categories include the following goals by 2025: professional and technical occupations, 80%; administration and clerical occupations, 60%; service occupations, 50%; trade and sales occupations, 40%; production and related occupations, 30%. Such sensitivity toward the local labor force might have a negative effect on Oman’s attractiveness for foreign investment, although in the case of the SEZAD, it seems this sensitivity has avoided problems, mostly due to the government’s public diplomacy efforts. However, such labor law restrictions could pose additional barriers in the future for Chinese companies hoping to hire local employees in Duqm. Owing to the remote location of the area (more than 500 km from major urban centers), there are not many Omanis willing to relocate to Duqm.

Similar to its Gulf neighbors, Oman used to have restrictive investment laws that imposed on foreign investors a minimum cap for investment volume of around US$500,000 per investor as well as restricted single corporate shareholder incorporation. In addition, laws required foreign investors to partner with an Omani company and limited the number of shares that could be owned by foreign representatives. Owing to the liberalization of foreign direct investment (FDI) legislation, the Commercial Companies Law (2019) allowed single shareholder incorporation,Footnote ¹⁹ and was followed by the new Foreign Capital Investment Law (2019),Footnote ²⁰ which allowed simplified procedures for setting up wholly foreign-owned companies that permitted 100% share ownership in most types of business.

In addition to the more liberalized foreign investment rules that operate at the national level, the SEZAD offers specific incentives to investors such as no minimum registered capital and full foreign ownership, tax exemptions for thirty years, full repatriation of capital and profit, as well as free import or reexport duties. Even though land use is limited to fifty years, the duration can be renewed. The Sino-Oman Industrial Park is therefore at the heart of an advantageous free zone offering attractive incentives for foreign capital. The park has also received permission to build its own water and power plants, and products processed in the zone are regarded as local products for export. One-stop service centers provide businesses with the services they need, including registration, licensing, visas, and residence permits for expatriates. Such reforms are expected to work in favor of Chinese investors in Duqm, especially as they have pledged to invest in the SEZ to help attract additional FDI from across the globe.

3.4 Major Chinese Investors in Duqm

The Sino-Arab Wanfang Investment Management Ltd. is one of the major investors in the SEZAD. It is a Chinese company that was founded in 2015, has a registered capital of RMB 200 million, and is headquartered in the Ningxia Autonomous Region. It has a focus on investment and management in the Middle East region. Company subsidiaries were established under the leadership and with the support of the Ningxia Hui Autonomous Region (NHAR) Government, a provincial-level jurisdiction within the PRC, and include Ningxia Shunyi Assets Management Ltd., Ningxia Water Investment Group Co. Ltd., Ningxia Construction Investment Group, Ningxia Residence Group Co. Ltd., Yinchuan Yushun Oilfield Services Technologies Co. Ltd., Yinchuan Fangda Electric Engineering Company, and the Ningxia Small and Medium Sized Enterprises (SME) Association.Footnote ²¹

In 2016, the Oman Wanfang LLC was formed as a joint venture company by the Sino-Arab Wanfang Investment Management Company and the SEZAD with the sole aim of developing and operating the Sino-Oman (Duqm) Industrial Park. The cooperation agreement between Oman Wanfang LLC and the SEZAD was signed on 23 May 2016 by Yahya Al-Jabri, chairperson of the SEZAD, and Ali Shah, chairperson of Oman Wanfang LLC.Footnote ²² As part of the comprehensive agreement for land lease development cooperation, Oman Wanfang was granted 1,172 ha of land for the next fifty years for the development of the Industrial Park. This park is divided into three sections: a heavy industrial area of 809 ha, a light industrial complex of 353 ha, and a five-star hotel and tourist area occupying 10 ha.

The total investment for the development of the industrial park is estimated to be US$10.7 billion, which is funded by Chinese companies and financed by Chinese banks. At initiation in 2016, ten projects worth more than US$3 billion had been signed by Oman Wanfang LLC and its investors from China. These included:

• A building materials market.

• A methanol and methanol-to-olefin project.

• A power station.

• A seawater desalination and bromine extraction plant.

• A high-mobility SUV project.

• A solar equipment manufacturing base.

• A plant for the manufacture of oil country tubular goods.

• A plant for the manufacture of nonmetal composite pipes used in oil fields.

• A plant for the manufacture of steel thread frame reinforced polyethylene pipes and their parts.

• A five-star hotel.

In addition to the direct investments made by Chinese companies there was also notable support extended by a multilateral body, the Asian Infrastructure Investment Bank (AIIB).

3.5 AIIB Support

The AIIB, with headquarters in Beijing, has emerged as an alternative development finance institution. Given its focus on the Asian region as well as close ties with the GCC, in September 2023 the Bank established its first overseas office in Oman’s neighbor, the United Arab Emirates.Footnote ²³ Even though the AIIB was established as a Chinese initiative, the PRC currently holds only 27% of its voting shares; the rest are owned by its member countries, with Oman being one of the founding members. Having a wide portfolio, the AIIB has already funded development projects in thirty-six of its member countries, including Oman, which was one of the first high-income countries supported by the AIIB.

The AIIB contributed a US$265 million sovereign-backed long-term loan.Footnote ²⁴ Such an amount might look relatively modest in comparison to the Chinese private capital invested in Duqm. Yet, considering the timing and destination of the AIIB contribution, its loan was essential for securing the Duqm Port Loan and launching the SEZAD. In fact, the loan proved instrumental during the early days when the SEZ focused on the port and refinery and project work involved building port-related infrastructure such as access roads, terminal buildings, and operational zone facilities.Footnote ²⁵ The project was successfully completed by the end of 2023,Footnote ²⁶ and the AIIB assessed the degree of the project readiness positively: “reflected by the high quality of client staff and consultants” the project was implemented with a “high degree of transparency on construction arrangements.”Footnote ²⁷ The stated indicators of the long-term loan are directly linked to the operational capacity and profitability of the Duqm port during a ten-year monitoring period from the date of completion.

It must be noted that the conditions of the contract were based on the construction laws of Oman as the host country,Footnote ²⁸ and that an Environmental Assessment was conducted as required by the Omani authorities. The project also complied with the AIIB environmental and social safeguards, health and safety requirements, and the Construction Environmental Management Plan. The Environment and Social Policy low-risk category was assigned to the project as it was claimed to be implemented on reclaimed land, without land acquisition, resettlement,Footnote ²⁹ or marine works. The SEZAD team received training from international procurement and financial management specialists on tendering, auditing, and best financial practices. All contractor variation orders were subject to approval by the SEZAD’s implementation unit.

Thus, the SEZAD has become a model project supported via different institutional layers, including international ones in the form of the multilateral financial institution AIIB as well as by private sector companies from the PRC. Interestingly, there is another layer of stakeholders that might be overlooked – at the regional level within the PRC – as Chinese companies that have invested in the SEZAD often have clear regional affiliations. In summary, it could be said that the SEZAD is an example of input from multilateral, national (e.g., government negotiations), regional (e.g., companies from Ningxia), and private sector levels.

3.6 Choice of Ningxia: Winning the Hearts and Minds of the Local Population

It may be surprising that the NHAR, one of the poorest inland areas of China, is playing an active role in the construction of the SEZAD given that it is landlocked in the middle of China. Ningxia has, in recent years, garnered a new life as the Chinese national government has branded it as the gateway to the Arab world and the successor to the historic Silk Road toward the Arabian Sea.Footnote ³⁰ Ningxia is relevant not just because of its location but also because of its demographics. It is home to one of the ethnoreligious minorities in China, the Chinese Muslim or Hui people (回族). Their ethnic and linguistic ties to the Muslim world have been a significant factor in enabling investments along the Arabian coast.

The NHAR government has organized the biannual China-Arab States Expo since 2013 in Yinchuan, cosponsored by the Ministry of Commerce and the China Council for the Promotion of International Trade (which serves as a bridge in promoting trade and investment between China and Arab states). The Expo has also been an opportunity to select appropriate partnerships for international industrial capacity development from the Arab countries, showcasing common investment projects along the BRI, including the Sino-Oman Industrial Park.Footnote ³¹

The people-to-people exchanges associated with the Duqm development are not limited to high-level diplomatic exchanges but extend to people working within the SEZ. The core pattern is inbound migration of the host country population to China for cultural and educational exchanges as well as Chinese initiatives to support the development of training and professional development centers locally. It was announced that the Duqm project would help build the city, contributing not only to the development of Oman’s economic diversification but also to local employment including upgrading the professional skills of young Omani workers. This decision could be seen as both benefiting the local economy and enabling Chinese investors to meet the compulsory Omanization requirement while maintaining a skilled workforce in the Industrial Park.

An initiative to send 1,000 Omani students to China on Wanfang scholarships began in 2018 and funds students to train at the Ningxia Polytechnic in Yinchuan. Courses relate to petrochemical engineering, construction materials, computer software, technology, renewable energy, petroleum equipment, and economic management – thus following the economic profile of the Duqm Industrial Park by developing training courses specifically related to SEZAD skills requirements.Footnote ³²

The choice of the NHAR with its historical ties with the Muslim world serves as an apparatus of soft power. Supporting cultural and educational professional training and taking account of the employment perspectives in a predominantly young population could be interpreted as supporting the positive image of China in Oman. Oman Wanfang LLC has further undertaken to build a school for children with special needs and facilitate community greening initiatives, such as planting trees, recycling waste, and using renewable energy sources. Such projects aim to establish a strong and sustainable partnership with the Omani government and people and are examples of very effective public diplomacy that rests on the shared values between two countries, in this case predominately religious values.Footnote ³³

3.7 “One Province One Country” and Overseas Industrial Parks

The fact that all the major Chinese investors are from the NHAR appears to follow the noteworthy “one province one country” (一省一国) model. This is not an officially stated slogan of the Chinese government, yet it has been frequently used in the development context, especially with respect to the pandemic.Footnote ³⁴ However, the slogan, and more importantly, the concept it signifies, had been used in the context of Chinese development before the pandemic, including by one of the investors in the SEZAD.Footnote ³⁵ The matching of sovereign states with Chinese provincial and prefectural administrative units is a significant development in China’s industrial transfer policy, and, in the case of the SEZAD, the NHAR is not just transferring capital and technology to the Middle East but also transferring its own domestic institutions and business expertise to inform the setting up of the Industrial Park.

The timeline for selecting such cooperative ventures can be explored using the SEZAD as an example.

• Selecting cooperative countries for overseas park construction:

  • Ningxia SME Association and Ningxia Expo Bureau organized multiple visits of Chinese private sector representatives to Arab countries.

  • Choice of Oman for the Sino-Arab Industrial Park; visits to potential locations in Muscat, Salala, and Duqm. Select the latter for the construction.

• Strengthening the organization and leadership of industrial park construction:

  • Formation of the Sino-Arab Industrial Park construction coordination and promotion working group.

  • The working group promoted mechanisms involving representatives of the:

    • ▪ Ningxia NDRC (the National Development and Reform Commission) (for formulation of the overall plan for the park);

    • ▪ the Information Commission, the Department of Commerce, the Expo Bureau (for supporting its promotion);

    • ▪ the Department of Finance (to study Omani financial regulation and policies);

    • ▪ the Foreign Affairs Office (working with Omani partners and learning FDI regulations); and

    • ▪ the Ningxia Branch of the National Development Bank of China, the Ningxia Branch of the Bank of China (access to finance for overseas investments).

• Planning of the industrial park:

  • Ningxia DRC commissions the Foreign Economic Cooperation Department of the China International Engineering Consulting Corporation (CIECC) to prepare the master plan of the Sino-Arab Industrial Park in Duqm.

  • The CIECC Master Plan aims to:

    • ▪ guide the infrastructure construction;

    • ▪ attract investments from all over the world;

    • ▪ plan industrial fields;

    • ▪ lay out major projects; and

    • ▪ drive enterprises from Ningxia and regions to go global.Footnote ³⁶

• Determining the areas and priorities for industrial park construction:

  • Cooperation agreement signed between the Ningxia Government and Oman on the industrial park approving the proposed layout of the park as well as the industries to promote given the resource allocation in the region, access to markets, and advantages of the Chinese manufacturing industry, promoting China’s international production capacity cooperation.Footnote ³⁷

• Selecting enterprises:

  • Only at this stage does Ningxia invite and select those private companies that are going to be primary investors in the industrial park as well as enterprises from other Chinese provinces that invest in individual projects.

• Formulating work programs for the construction of industrial parks:

  • This stage includes initiating the construction projects in accordance with the master plan.

Such a process for international capacity development, and in particular the role of subnational or province-level actors, is a significant departure from the traditional approach to foreign investment, which has often been characterized by a top-down approach from international institutions. It is a novel approach, specific to China, and the interplay between the provincial entities and enterprises that took place in case of the SEZAD could be generalized to planning and policy approaches used for the other thirty-nine Chinese Overseas Industrial Parks (COIPs),Footnote ³⁸ as the majority of them have strong provincial affiliations. By pairing its domestic administrative units with foreign countries, China is taking a more proactive approach to its foreign investment strategy, moving away from Western-led international institutions such as the World Bank and the International Monetary Fund (IMF) and adapting its approach to align more with multilateral development banks such as the AIIB. This gives China more control over the process of industrial transfer and allows it to tailor the process to the specific needs of the target country. Linking state investment funds and state offshore industrial associations with local government administrative units ensures that the capital and technology transferred to, in this case, the Middle East is used in a way that is beneficial to both China and the host country.

In terms of the normative or regulatory framework for this type of foreign investment and international development, there is no specific law that supports Chinese provincial enterprises seeking international cooperation and investments in a similar manner to the law that supports foreign firms investing in China’s provinces.Footnote ³⁹ The main guiding legal text is the “Guiding Opinions of the State Council on Promoting International Cooperation in Production Capacity and Equipment Manufacturing,”Footnote ⁴⁰ which includes four principles:

• Expanding the scope and scale of cooperation and promoting the export of high-quality production capacity and equipment.

• Improving the policy support system and creating a favorable environment for cooperation.

• Strengthening the coordination and cooperation mechanism and enhancing the overall effectiveness of cooperation.

• Promoting green development and fulfilling social responsibilities.

Those four principles can be illustrated using the SEZAD case since it is an example of the use of Chinese equipment and international production capacity in an internationalized investment environment and the attempt to promote new patterns of an open economy with optimizing export flows, while also promoting green development.

3.8 The Security Dimension

In addition to its strategic location, Duqm has a number of other qualities that make it a notable location for trade and investment. First, the port has a deepwater harbor that can accommodate large ships, and China is particularly interested in Oman’s expanding road networks and railway system.Footnote ⁴¹ These developments will connect the new Sohar Port and Free Zone to the existing Omani and GCC transportation corridors that extend into the UAE and Saudi Arabia. This will give Oman a competitive advantage over other established logistical and transportation hubs in the region.

Second, the SEZAD is characterized by a diverse portfolio of primary industries within the industrial zone, whether they concern petrochemicals, natural gas processing, oil refining, building materials, chemicals, or the halal food industry. Even those industrial plants that are not Chinese-owned might still serve Chinese economic security interests; it is very important to trace the movement of intermediary goods as well as determining the markets for the final products. Looking at the China–Oman trade statistics, since most Omani petrochemicals and crude oil are exported to the PRC, plants such as oil refineries should still be considered strategically important for China even though Chinese investors might not have any stake in the actual plant. It is likely that once the industrial park is fully operational, it might serve as an international platform for meeting China’s growing demand for the energy products from the Gulf. Thus, the multimodal connectivity that makes the SEZAD work must be considered as significant within the overall industrial manufacturing enterprise.

Third and perhaps most prominently, Duqm’s strategic location also has implications for regional security. The port is situated relatively near important geopolitical hotspots, such as Yemen, where Oman is mediating the ongoing conflict between the Saudi-backed coalition and Houthis, as well as the Horn of Africa. This has drawn attention to its potential military and security significance. The development of the port could have implications for the balance of power in the region, and it could also potentially be used as a base for military operations.

In 2017, just a year after signing the Agreement between Oman Wanfang and the SEZAD, Duqm became a focus for military cooperation between Oman and its allies. The UK Ministry of Defence, Oman’s major economic and security partner, announced the expansion of the UK Joint Logistics Support Base at Duqm by investing an additional US$31 million.Footnote ⁴² In 2018, this was followed by an annex to an existing maritime security memorandum of understanding (MOU) signed between India and Oman,Footnote ⁴³ granting special access for the Indian Navy to Duqm port as well as to a dry dock and maintenance facilities. Also in 2018, the United States, which has the highest military naval presence in the Gulf,Footnote ⁴⁴ signed a Framework Agreement with Oman expanding US access to facilities and ports in Salalah and Duq.Footnote ⁴⁵ The agreement gave the US Navy berthing rights at Duqm for logistical and maintenance purposes. The maritime security cooperation between Oman and its Western allies goes beyond just granting access and includes joint naval training and anti-piracy cooperation.

Oman also maintains military cooperation activities with the People’s Liberation Army Navy (PLAN), including joint training and coastline security cooperation.Footnote ⁴⁶ The military value of the Duqm port to PLAN, however, should be considered as very low. Even if we assume “dual-use” of the port,Footnote ⁴⁷ it would still be of limited value to PLAN given that it already has a military presence much closer to the Bab-la-Mandab strait (between Yemen on the Arabian Peninsula and Djibouti and Eritrea in the Horn of Africa). PLAN has negligible (if any) operational control over the SEZAD port as it is neither owned nor operated by Chinese companies (in contrast to other ports, e.g., Gwadar or Dar as Salam).

Such a wide range of military partnerships and the utilization of Duqm for military purposes puts Oman in a situation similar to Djibouti, which has a comparable, if more permanent, coexistence of different military powers (although not because of its independent neutrality policy but driven by financial motivation). The resemblance of the SEZAD to Djibouti’s Doraleh Port lies not as much in the “dual-use” aspect but in the development pattern, specifically the import of the Shekou model (蛇口综合开发模式) in Djibouti.Footnote ⁴⁸ Shekou, similar to Duqm, a small fishing village in Shenzhen in China’s Guangdong province, was transformed into a modern center using the port–zone–city model to develop the port infrastructure, an industrial park, and the adjacent urban zones.

3.9 The Shekou Model

The SEZAD covers a multifaceted and integrated coastal urban-industrial space that is divided into eight separate and interconnected zones grouped into three main areas: port, industrial park, and city. This model envisages the initial development of the port with the subsequent gradual development of the industrial district and finally the residential area.Footnote ⁴⁹ For the SEZAD (Figure 3.3.2):

Figure 3.3.2 Implemented and planned zones at the SEZAD

The main similarity between the Shekou model and the SEZAD is the emphasis on foreign capital and the measures taken to attract it. Duqm stands out as an example of a more internationalized COIP, compared to other COIPs that are mainly oriented toward serving Chinese companies. Even though a large proportion of the project has been funded by Chinese private and development cooperation funds, European and Middle Eastern enterprises are supporting a number of infrastructure projects. For example, the port component is managed via a 50:50 joint venture between the Omani government and the Antwerp Port Group of Belgium (thus the special guests at its inauguration), the dry dock was built by Daewoo Shipbuilding Engineering Company of South Korea and is managed by the Oman Dry Dock Company, and the Omani Investment Authority is the sole manager of the fishing port. Similar patterns prevail beyond the maritime zone, such as a diverse range of stakeholders, which suggests that the development of the SEZAD should not be considered merely as a Chinese project.

5.1 For Law School Audiences

1. 1. Given that the SEZAD is located in one of the most internationalized of the SEZs that Chinese companies are working in, what does the level of internationalization mean for dispute resolution? Many of the SEZAD contracts use local law, but would foreign investors have sufficient trust in local law for the purpose of resolving their disputes? If not, what are the alternatives? In discussing this question, consider China’s push to build Alternative Dispute Resolution both within and outside of China.Footnote ⁵⁰

2. 2. This case mentions different layers of funding for the development of the SEZ, ranging from provincial to multilateral levels. How do Chinese local administrative structures as well as multilateral strategies influence China’s trade and development policy with the Middle East?

3. 3. The case also highlights that the projects had been implemented using the local law and complying with local industry standards. Is this also the case with other Chinese outbound investment projects you are aware of?

5.2 For Policy School Audiences

1. 1. How does regional security shape the construction of the SEZAD? Did the planners of the SEZAD take such concerns into consideration, including what it means to have the industrial park near the highly militarized zone for (a) China, (b) the Omani government, and (c) the wider Gulf region? What are the risks and opportunities for the parties involved given that the Chinese have commercial activities in a port that is used by NATO? What are the possible implications of Chinese trade and development on Oman’s security interests?

2. 2. It has been a decade since Xi Jinping proposed the grand goal of the Chinese foreign and development policy, the BRI.Footnote ⁵¹ How does this case study shed light on the soft power aspects of such initiatives such as the BRI and the relatively newer Global Development Initiative and Global Civilization Initiative?Footnote ⁵² What is the role and value of people-to-people exchanges, common religious/historical backgrounds, and education and training in this process?

3. 3. What light may the SEZAD project shed on China’s possible policy choices in the MENA region? China has also played a decisive role in the normalization of the Saudi–Iran relations, which traditionally had been the domain of Omani foreign policy. It has also shown a strong stand on the recently revived conflict in Gaza. Given its interests, what is the possible policy line China could maintain in the regional conflicts of the Middle East? Given that Gulf–China relations have been elevated to the level of comprehensive strategic partnerships, and recognizing that the former relies extensively on US security and geopolitical assistance, what might the hard power projections look like in the greater Indian Ocean region in the case of potential escalation of the relationships between the great powers?

5.3 For Business School Audiences

1. 1. When the SEZAD was first announced, it consisted of just the port and the refinery. It takes confidence by investors to invest at such an early stage of development. Nowadays, geopolitical risks play a crucial role in investment considerations, especially when it comes to the two superpowers, the United States and China, with ongoing technological rivalry and trade wars. What could be the geopolitical considerations for Western companies investing in the SEZAD as well as risks from the perspective of the Chinese companies when developing such an internationalized industrial park? To what extent would the Chinese-backed projects and commitments to the SEZAD have encouraged investment from the West and the Gulf region?

2. 2. Duqm has been a major Chinese investment, yet the size of the FDI from China has fallen considerably (from billions to several hundred million US dollars) during the later stages of development. Currently, the focus for the SEZAD has shifted from heavily industrialized production and transportation of minerals toward more green energy and digital initiatives, supported mainly by British, European, and Korean investors. For example, the most sizable investments in the SEZAD in 2023 did not revolve around the Sino-Oman Industrial Park but rather focused on Hydrom,Footnote ⁵³ which is coordinating national interest in green hydrogen and aiming to build the world’s largest production plant of renewable hydrogen by 2030. What would such a shift mean for China’s interests, including, potentially, its hydrocarbon trade? How would the medium-term investment horizon change for those Chinese companies that have been concentrating on the oil and gas production in the SEZAD?