The Sri Lankan government has offered China Merchants Ports Holdings a debt-for-equity swap that involves a controlling 80% stake of the Hambantota port under a 99 year lease, local Sri Lankan press report.

The port facility at Hambantota was built with help from Chinese constructors and Chinese debt, but has struggled to gain custom. It is located on the southern coastline, around 240-kilometre from Colombo.

China Merchants would assume US$1.12 billion of the government debt owned to China under the terms of the deal. The port area would then be further developed as a joint venture between Sri Lanka and China Merchants. It is adjacent to a planned 15,000 acre China led industrial zone, which will give China what is viewed by some analysts as a strategic enclave in the Indian Ocean.

China Merchants Port Holdings Company will make a US$5 million payment as a security deposit upon signing the agreement, which the government expects to do on January 7. The company will pay 10% of the US$1.12 billion within one month, and the remaining 90 percent within six months of signing the transaction documents.

The deal proposed by the Ministry of Development Strategies and International Trade, and Ministry of Special Assignments based on a decision by the Cabinet Committee on Economic Management has been approved in principle by the Cabinet of Ministers.