A long, slender breakwater arcs out into the Indian Ocean from near the desolate construction site along the waterfront near Colombo port. The silent excavators dotting the heap of boulders at the site overlook the calm waters. Protected by the breakwater, the tranquility of this swathe of the ocean contrasts the storm raging over the project marked for it.

Now stalled by a government decree, the Colombo Port City project is being reviewed afresh. Promoted by Chinese state-owned and Hong Kong-listed China Communications Construction Co (CCCC), it has become a bone of contention between China and Sri Lanka, threatening to derail Beijing's most successful diplomatic outreach in the region.

For Sri Lanka's new rulers, who have ordered the review after coming to power by trouncing Mahinda Rajapaksa in January's presidential elections, Colombo Port City represents everything that was wrong with the last regime - corruption, cronyism, lack of transparency and utter disregard for democratic institutions and procedures.

For China, it is a shocking turn of events in a country where it has invested enormous financial and political capital. For its companies, it is also a major bend in the learning curve in negotiating the cross-currents of local politics, business and geopolitics on foreign shores as they increasingly venture abroad.

With CCCC now digging in its heels with full-page advertisements defending its position, and the new government appearing torn between its election promise of scrapping the project and the legal, financial and diplomatic implications of actually doing so, the waters can only get muddier. With no easy resolution in sight, it's either going to be a messy and costly divorce or a very long and equally expensive reconciliation process.

From ports and highways to airports and power plants, Chinese funds and companies have been on an infrastructure building spree in this country of 20 million people that sits in the middle of the east-west trading route and along all major oil routes between China and the Middle East.

In September, Xi Jinping , the first Chinese president to visit Sri Lanka in 28 years, inaugurated this US$1.4 billion project to reclaim land the size of Monaco for a luxury real estate development. It was to be the jewel in the crown of the billions of dollars of Chinese investments in a nation that Beijing sees as a vital component of its Maritime Silk Route plan linking China with Europe via the Indian Ocean, the Red Sea and the Mediterranean.

Colombo Port City was envisaged as a parallel business district in the Sri Lankan capital, providing an alternative to congested and unplanned central Colombo. Complete with hotels, shopping malls, a water sports area, golf course, luxury apartment blocks and office buildings, marinas and even a Formula One track, it was to launch Colombo as the new hub of business and tourism in South Asia.

But since its inception, the project has been mired in politics. Like almost all other mega Chinese infrastructure projects, it came to be identified as yet another white elephant designed by the Rajapaksa administration to line its pockets. Environmentalists have also been up in arms against it, saying it would severely harm the country's entire southwestern coastline.

Unlike most projects by Chinese companies, Colombo Port City is not bankrolled by Chinese loans. It is financed entirely by equity from CCCC or funds raised through it, with no commitment from the Sri Lankan government. Under the deal for the project, CCCC would reclaim 233 hectares of land. Of this, it would keep 108 hectares, including 20 hectares on an outright basis and the rest on a 99-year lease. Sri Lanka would own the rights to the other 125 hectares.

The project's critics have argued that giving away a piece of strategic land close to major international shipping routes to a Chinese state-owned company would pose security threats to Sri Lanka and its neighbours. That argument has gained traction since two Chinese submarines docked in Colombo last year.

This week it came to light that Sri Lanka's Civil Aviation Authority has warned the government that the airspace over the Chinese-held area would be exclusively controlled by China, provoking an uncharacteristically sharp rebuttal from the Chinese embassy.

The controversy over Port City is hence not so much about wasteful public expenditure as it is about sovereign rights, environmental concerns and alleged corruption in clearing the project in contravention of established procedures.

In an interview with the South China Morning Post this month, Rajapaksa refuted all these charges, saying "it's a very viable project and all relevant studies were done".

But in a separate interview, Finance Minister Ravi Karunanayake reiterated there was no record of the mandatory environmental impact and feasibility studies needed for such a project, nor was there any document showing the government had cleared it.

"There was no clearance … you cannot just jump into the Indian Ocean and start filling it up," the minister told the Post. "That's why we have asked them [CCCC] to show us any document that they may have been issued illegally."

His colleagues have, however, appeared less sure. From the pre-poll promise of scrapping it, the project swung to a cabinet green light after the results, to a review process, and eventually a suspension. The serial flip-flops could well be a reflection of the doubts within the government on the legal case for cancelling the project outright.

"Permits are issued by the government, so those should be in the government archives even if a new set of people are in charge. Why does the investor have to come up with the permits that the government issued?" one of the lawyers advising CCCC on the matter told the Post on condition of anonymity.

In most public-private partnership ventures, the key to negotiations is allocation of resources. Typically, the financial risks are borne by the project developer or investor and the political and regulatory risks by the relevant government entity.

According to Jiang Houliang, managing director of the CHEC Port City Colombo, a subsidiary of CCCC contracted to undertake all land reclamation and infrastructure works for the project, Port City went through the cabinet's requisite review process before the government signed the agreement with CCCC.

"According to Schedule 2 of the concession agreement, the obligation to obtain all key applicable permits for the reclamation work lies with the government of Sri Lanka," he said.

If the documents show the government was indeed the guarantor of the concessions made to the project, it may be liable for hefty compensation if the project is canned.

"The government has every right to terminate a contract if it doesn't fit its priorities, but if the contract is legally valid, it would have to compensate the investor. The government can't terminate the contract based on its own breach, it can only do so if the breach took place on the part of the investor," said another lawyer working on the case who also did not want to be identified.

CCCC has been pointedly telling the local media that it is losing US$380,000 a day because of the suspension, clearly building up ground for compensation to put pressure on the government.

CHEC sources say the company gave the government all necessary documents long before a two-week deadline.

"We submitted all permits and approvals to the secretary of port, shipping and aviation on March 9, after receiving the suspension letter on March 6. We haven't received any feedback from the government," said a CHEC executive who did not want to be named.

Factors other than legal intricacies are adding to the uncertainty. "The government is probably using the Port City project as a bargaining chip with Chinese interlocutors to renegotiate other deals with unfavourable loan terms or to renegotiate the land reclamation terms of this project," said Nilanthi Samaranayake of US-based research organisation CNA Corp.

One major complaint against Chinese infrastructure projects is the massive Chinese loans that financed these ventures, borrowed at exorbitant interest rates, with crushing impact on Sri Lanka's public debt.

Asked if the government is trying to renegotiate the loans, the finance minister said: "That's what we are asking China: 'Please help us'."

But even if China agrees to renegotiate other deals in return for getting Port City restarted, it is not clear how the new coalition in power will sell the U-turn to its voters, who were promised a cancellation.

As Samaranayake says, a part of Colombo's defiance is also aimed at domestic consumption, "to show voters that the government is charting a new path and values accountability and transparency". If Port City was a monument to Rajapaksa's corruption, as his opponents claimed, how do they now justify building it?

Figuring all that out might take longer than ascertaining the legalities of the agreement. There is a reason why the government has not set a time frame for the review process.

To make matters worse, a parliamentary election could be due in months - part of the promises made by new president Maithripala Sirisena. Not the time when politicians like to be seen going back on long-held views.

Those excavators will just have to get used to gazing at lifeless water.

By Debasish Roy Chowdhury (South China Morning Post)