A Chinese state-owned defence company has been awarded a contract to construct a university department on Colombo, days after a major hotel deal was cancelled by the Sri Lankan government.

The deal to construct a hotel on the illustrious Galle Face Green with the Chinese defence contractor China Aviation Technology Import-Export Corporation (CATIC), was worth $500 million and was hailed as one of the island’s single biggest foreign investments.

See our earlier post: ‘Sri Lanka’s defence ministry and tourism investment’ (June 2011)

The Sri Lankan Government, anxious to placate the Chinese investors, were reportedly looking for alternate land and have now offered the university project worth $89.6 million.

The contract was cancelled after the Sri Lankan government came under intense scrutiny from opposition parties over the sale, who claimed the deal was not done transparently.

They also questioned why the “best property in Sri Lanka” was being sold to an arms company that owns only a few hotels in China and not a well reputed international chain, reportedly with not a single cent of tax being charged. CATIC does however, export military aeroplanes to Sri Lanka.

The announcement comes as Sri Lanka faces increased pressure from China for loan repayments, leading to Sri Lanka trying to swap some of its debt for equity with Chinese firms, starting with the Norochcholai power plant in the North-West.

CATIC had reportedly already paid $54.4 million for four acres of the land, before the deal fell through.

The Chinese company were allegedly “furious” at the cancellation and were even reported to have been looking to sue the Sri Lankan authorities.

The issue was exacerbated by Sri Lanka having already penned an almost identical hotel deal with another Chinese company Shangri-La Asia Ltd, to build a shopping complex and apartments in a deal also worth $500 million. Shangri-La had already paid $125 million to buy a plot of land on Galle Face Green adjacent to that allocated to CATIC.

While the government deny that the university project has nothing to do with the hotel deal, UNP legislator Harsha de Silva said,

"This is a typical economic hitman story. When we can't do things, China is asking for flesh.

I think either the government doesn't see this or some people are benefiting from these kind of deals."

Sri Lanka relies heavily on China for foreign investment, demonstrated by yet another Chinese company having signed a deal on Friday, awarding it a $176 million contract to build a dam and irrigation complex in the Trincomalee district.

See our earlier post: 'Trends in China - Sri Lanka ties' (Aug 2011)