1. Mr Sarath Fonseka and one of his media spokespersons have claimed that the "corruption" of the Government is unprecedented, and is costing the country in economic terms as much as, or even more, than terrorism. By eliminating such "corruption", they have pledged to find the money to fulfill all of Mr Fonseka’s grand and expansive promises. They have also indicated that "corruption" has denied the people a total sum of Rs. 810 billion, and have also attempted to lay the blame for such "corruption" on President Mahinda Rajapaksa.

The main basis for these allegations appears to be an ad-hoc 2007 study report on the "Impact of Corruption on Poverty and Economic Growth", commissioned by the United States Agency for International Development and prepared by an organization described as ARD, Inc. for the USAID-Association for Rural Development (ARD) Anti-corruption program consultative committee at which the Sri Lanka Economic Association (SLEA) too, had been represented. Accordingly, it is of vital importance to study such report carefully and assess Mr Fonseka’s claims, particularly because his economic team has suggested that the funds for all the massive salary increases, lavish disbursements to various pressure groups, and the many extra generous welfare schemes are to be found by eliminating this Rs 810 billion "corruption", and then directing such funds to fulfill Mr Fonseka’s promises.

2. The "Preface" of the above mentioned report states thus :

The Sri Lanka Economic Association (SLEA) has been represented in the USAID-ARD Anti-corruption Program (APC) Consultative Committee by its President, Professor A D V de S Indraratna. On a recommendation made by this Committee, SLEA was invited to undertake this study on "the Impact of Corruption on Poverty and Economic Growth." SLEA has been able to complete this study in five months, by the end of April 2007, on schedule.

In addition to the literature and documentation survey, this study included a field survey of villages and a series of interviews of more than a dozen people who have been knowledgeable on the subject, or have worked in corruption-ridden departments or ministries in the central government or provincial or local government, or the private sector.

In view of the time constraints, the field survey had to be confined to a stratified sample of only four villages comprising 110 households, and the interviews to 13 persons. As mentioned in the Epilogue at the end of this report, therefore, the findings based on them would be subject to some limitation.

The "Acknowledgements" of the Report states thus:

There are several parties that were instrumental in bringing this report …… our investigators, who did an excellent job under trying conditions. Had it not been for their devotion and commitment, it would not have been possible to complete the field survey in a week."

3. In this regard, the following points are worthy of note:

(a) The study was commissioned by USAID – Anti-Corruption Program Consultative Committee. The purpose of commissioning such a report by an aid agency of a foreign nation is a matter that may need to be viewed with some careful consideration, particularly in view of certain pronouncements that have been made by the US Government in certain other matters relating to the Sri Lankan state.

(b) The entire study was completed in just 5 months, and the field survey in just one week! This seems to be an amazingly short period of time to undertake such a serious study.

(c) The findings were based on a field survey of 4 villages. This is incredible when considering that Sri Lanka is a country which has over 35,425 villages [Statistical Pocket Book – 2008 – Dept of Census & Statistics].

(d) The findings were based on "interviews of more than a dozen people who have been knowledgeable on the subject….". In fact, the interviews were with just 13 persons, only who are the following:

Here too, it seems strange that such a few number of persons have been interviewed and and that too people who have not even been named.

(e) The report states that the findings "would be subject to some limitation". In this regard, considering the paucity of research material, and the facts and evidence that has been considered in arriving at the findings, it seems a massive understatement to refer to some "limitation"! Accordingly, any person who refers to or relies on such report, must note these limitations and consequently be extremely wary about relying too much on its conclusions, as otherwise, it could lead to seriously flawed responses.

4. In the body of the report, the authors refer to many matters and projects which were undertaken prior to 2005, as well as to several matters highlighted by the Committee on Public Enterprises (COPE), which again, relate to periods prior to 2005. While it may be highly debatable as to whether some of the matters referred to, could properly fall within the definition of "corruption", what is of even greater consternation is the fact that the authors of the report, after a study done by a few part-time researchers for a period of 5 months, proceed to make an incredible sweeping statement that "the research team has hazarded an estimate as given in Annex 6 of the Report". Strangely, the report does not contain an Annex 6, but it is likely that what the authors have referred to "Appendix F" – Approximate Estimate of Annual Loss due to Corruption as a Percentage of GDP of the report which carries the following table:

It is of course very appropriate that the authors have used the term "hazardous" to describe the above estimates, because the inferences drawn are clearly hazardous since these findings are also not, in any way, based upon on an extensive empirical or sound research.

It is also abundantly clear that the research team has merely relied on some statements of a few unnamed persons, supposed to be "knowledgeable", who themselves may have based their responses on some rough estimate (which are also not substantiated). What is unfortunate however is that notwithstanding all these shortcomings, the authors have proceeded to deliver a statement of massive importance and national significance.

5. For purposes of record, the sum total of these "hazardous" estimates of the "amount lost" is claimed to be Rs. 246.2 billion. The four main components of that table and an analysis thereon is discussed below:

(a) The perceived revenue loss is being described as "corruption" and is said to be 3% of GDP, based on the authors’ assumption that 20% of GDP should have been collected as taxes and that, only 17% was collected! There is however, no rationale or discussion as to how and why such an arbitrary "loss" of 3% has been assumed, and as to whether there is any study done as to how such an amount was calculated.

(b) The table suggests that, out of the capital expenditure of the Central Government of Rs. 225 billion and of the Provincial Councils of Rs. 14 billion, another arbitrary 20% amounting to Rs 47.8 billion, is assumed to be lost due to "corruption". As to how this percentage of 20% had been arrived at, is not justified in the report, other than perhaps with an indirect attribution of such corruption percentage to the comments made by one or more of the 13 "knowledgeable" persons!

(c) An amount of Rs.100 billion is added to the "amount lost" on the grounds that it is the "loss" that has been set out by COPE as corruption.

This proposition has many serious weaknesses in that:

(i) The amount of losses given by the COPE does not reflect misuse of funds in 2007. These largely refer to misuse of funds before 2006.

(ii) Some of these losses include irrecoverable claims, which have taken place decades ago, with compounded interest on such claims. For example, the larger amounts that are involved in this Rs.100 billion is that:

(i) the CEB has become a debtor to the tune of Rs. 15 billion to banks;

(ii) the Central Bank has "paid" Rs. 7 billion to the depositors of the failed finance companies;

(iii) two state banks have non-performing loans of Rs. 12 billion; and

(iv) Various state corporations have made losses.

Whilst all these matters relate to prior 2005 events, these are also not confined to a single year, but spread over many years and sometimes as much as a decade.

(iii) Some of the claims, for example, income tax liabilities are not based on actual tax returns filed by taxpayers but are merely based on assessments made by authorities.

(iv) When estimating such losses, the authors have assumed that similar transactions at the same magnitude will continue to occur every year, although the government has taken the necessary measures over the past 4 years to close such gaps and also taken many measures to improve transparency and accountability.

In the circumstances, it is certainly "hazardous" to set out a figure of Rs. 100 billion as "corruption" for the year 2006, and express it as a percentage of GDP for each year, thereafter.

(d) In respect of Defence expenditure too, an arbitrary corruption percentage of 20% has been arrived at, possibly by basing such percentage to a comment of an unnamed retired Air Force official. This presumption too, is, to say the least, a highly "hazardous" assessment!

6. Based on the above hazardous assessments, the authors have quite casually arrived at an estimated GDP loss on account of corruption as being 9% of GDP, and then elaborated further to state that "had such sum been invested, our economy would have grown by at least a further 2 percentage points, or else it could have been used to wipe out the almost entire budget deficit". It is incredible that a hurriedly prepared report without references, without an adequate research, and without a proper basis and discussion relating to its findings, could have reached such a far-reaching conclusion. In that conection, in order to be generous to the authors, perhaps the only possibility for such an occurrence would be to surmise that such report was prepared only to flag the issue of corruption in general terms, and not so much to offer a well researched analysis on the subject or for the report to be relied upon to make major policy pronouncements or reforms which impact the entire nation.

Sad to say, the unfortunate result of this episode is that Mr Fonseka has now used this report with its "hazardous" guesses and massive imperfections, to base his entire election manifesto. In such manifesto, by simply relying on the sweeping statement of "9% of GDP" being "the loss due to corruption", Mr Fonseka has boldly asserted that "from 2006 – 2009, corruption has denied the people a total sum of Rs. 810 billion".

Such an assertion displays an unbelievable degree of unprofessionalism on the part of Mr Fonseka’s economic planners who have not even thought it fit to read though the report carefully and absorb its contents.

7. If, as Mr Fonseka asserts, Rs 810 billion is the amount of the losses that have occurred due to "corruption" during 2006 – 2009 period, then on average, the losses due to corruption would have to be around Rs. 202.5 billion per annum, during this period. If so, the billion-rupee question to be asked is as to whether this could have happened within the government finances?

When the structure of the government expenditure is analyzed, it would be noted that no one could "steal" from interest payments, pensions or salary payments. It then follows that for the corruption as claimed to have taken place, it should have been in relation to capital expenditure. The total capital expenditure of the Government during the period amounted is set out below:

Considering the above figures, for Mr Fonseka’s assertion to have any validity, as much as 78% of capital expenditure should have been stolen, lost or misappropriated due to this "corruption".

In such event, the next billion rupee question arises as to how all the massive developments including power projects such as Kerawalapitiya Combined Cycle Plant, Upper Kotmale Hydropower Plant, Norochcholai Coal Power Projects, Road Projects such as Southern Expressway, Bridges at Manampitiya, Katugastotoa, Matara, Mannar, Arugambe, Kinnia and Irakkandi, New Port Projects such as Colombo South Port, Oluvil and Hambantota, Irrigation projects such as Moragahakanda, Kalu Ganga, Weragala and large number of water supply projects, Village roads, massive village development work, etc. etc., could have been carried out at a capital cost of Rs. 231 billion only!

Obviously therefore, it is clear that this figure of Rs.810 billion of "corruption" churned out by Mr Fonseka’s economic planners and media team is a total myth, deliberately concocted and maliciously disseminated, and the allegation of a Rs. 810 billion " is entirely baseless. On that premise, Mr Fonseka would naturally be disappointed that an imaginary elimination of such non-existent "corruption" would not provide him with the cash needed to execute all his grandiose promises, and the only recourse he could possibly fall back upon, is to "print" money recklessly, and ruin our presently healthy economy. Perhaps, he is preparing for that eventually now, since he has recently warned that it is now time to rid our country of all economists!