Govt. corruption & mega deals


Allegations of widespread government corruption can be heard from the public stage at every election. Many allegations of government corruption have been made in the ongoing presidential election campaign and it may be pertinent to delve into some of the issues raised. At the ceremony held to launch his book ‘Alapalu Arthikaya’ Champika Ranawaka made the allegation that the cost of the first phase of the Norochchcolai power plant was estimated at 300 million USD for 300 megawatts in 2005. But that this figure was bumped up to 455 million USD in 2006 on various pretexts including the claim that a jetty had to be built. He appeared to be implying that the cost of the power plant had been artificially bumped up with somebody pocketing many tens of millions.  When we made inquiries about this, Mr M.M.C.Ferdinando the present Secretary to the Power and Energy Ministry made it clear that the initial estimate prepared on 9 June 2005 for Phase I of the Norochcholai plant was 398 million USD (and not 300 million) for 300 megawatts. He explained that the MOU signed by the General Manager of the CEB and the contractor on 30 August 2005 made reference to the 9 June 2005 proposal and that 398 million $ for 300 MW was the initial price agreed on.

Later in 2005 the technical scope of the project was changed and the final estimate of 471  million USD was submitted in January 2006. All that had taken place before Ferdinando had been appointed Secretary to the Ministry. In February 2006 S.B.Divaratne, MMC Ferdinando and Lakshman Watawala constituted the cabinet appointed tender board for the project and the contractor gave a revised price of 468 million USD. At the behest of the tender board, this was further reduced to $455 million. So it appears that the cost of Phase I of the Norochcholai power plant was not bumped up from 300 million to 455 million as Champika alleged but had increased from 398 million USD to 455 million USD due to changes in the technical scope of the project. As Ferdinando says, around this time Dr P.B.Jayasundara had signed an agreement with Exim Bank of China for a credit facility of 300 million USD at 2% interest rate. But this was not money earmarked for Norochcholai and could have been utilized for any purpose – it was just a loan and the agreement had not mentioned Norochcholai anywhere. Be that as it may, the initial estimate of Phase I of the Norochcholai power plant was 398 million and not 300 million as Champika said. As the Secretary to the Ministry, Ferdinando said he has all the relevant documentation in his possession.  

Disguised foreign debt

At this same event (his book launch) Champika went on to charge that in 2013 alone, the People’s Bank had borrowed 209 million USD, the Bank of Ceylon $180 million and the National Savings Bank $135 million and said that all this money is also being funneled into government projects. Champika’s point was that when the banks borrow from overseas and lend to government, that does not appear in the books as the government’s foreign debt. In response to this allegation, Central Bank Governor Ajith Nivard Cabraal said that these sums appear in the banks books as foreign debt. If the government borrows that money in rupees from the bank, it appears as domestic borrowings of the government.  He dismissed the view that debt can be ‘hidden’. Cabraal also pointed out that in any case, the government is the biggest borrower from the banks and that when the banks buys treasury bills and bonds, they are in effect lending to the government.  He also pointed out that if the banks lend money to private parties they may be able to get 10-12% in interest but when they buy government treasury bills the interest rate may be as low 6% but the banks prefer to lend to the government because the risk is minimal and the transaction costs are low.

Southern Highway

The Southern Expressway has come in for much discussion at this election. At the Kandy rally of the common opposition, Champika Ranawaka said that the southern expressway cost 2.5 million USD per kilometre when it began but ended up costing $7.5 million per km by the time it was completed. Though he did not say so expressly, what the ordinary man on the street would understand from this is that someone has pocketed the colossal sum of $5 million per km from the Southern Expressway. While corruption in infrastructure projects is undeniable, does that extend to inflating the actual costs? What really was the cost of the Southern Expressway and why did the estimate change from $2.5 million at the beginning to $7.5 million by the time it was completed? The details provided to us by the Secretary to the Ministry of Highways, Mr R.W.R.Pemasiri are as follows:

Work on the Southern Expressway began in 2003 and ended only in 2011. During this nine year period the price of cement increased by 157%, steel by 268%, tar by 502%, wages by 166%, diesel by 344%, sand by 682%, earth by 104%, metal by 125% and Hume pipes by 256%.  This road was to be built in four phases. Work on the stretch from Kurundugahahetekma to Godagama in Matara started in 2003, and the estimated cost at that time was USD 1.5 million per km. This first 60 km stretch was to be a two lane highway. The Kottawa-Dodangoda stretch (35 km) was started in 2005 at an estimated cost of $2.7 million per km and it was to be a four lane highway. The Dodangoda-Kurundugahahetekma stretch (32 km) was started in 2006 at an estimated cost of USD 2.4 million per km. This stretch of the road was also supposed to be a two lane highway. It was only in 2007 that the decision was taken to make the entire Southern Expressway a four lane highway.

The final stretch of 30 km from Pinnaduwa Galle to Matara Godagama was begun in 2009 at an estimated cost of USD 5.4 million per km. Even though this part was included in the first phase of the project, a total of 90 km of the entire expressway road had to be redone to turn it into a four lane highway. All overpasses, underpasses, culverts, bridges had to be altered accordingly.  More land had to be filled.  Land had to be acquired from their owners all along the route at market prices and the amount of compensation paid is also included in the final cost. Added to all this was the rise in the cost of building materials over the nine year duration of the project, as mentioned earlier. The construction of the Southern Expressway involved the construction of 27 overpasses, 73 underpasses, 15 interchanges, 19 bridges, 485 culverts for rain water management and a further 27 kilometres of access roads.  

The Kurundugahahetkma-Pinnaduwa stretch was funded by the Asian Development Bank with a 23-year loan at 1.5% interest. The Kottawa-Dodangoda stretch was financed by the Japan International Cooperation Agency (JICA) with a 30 year loan at 2.2% interest. The Dodangoda-Kurundugahahetkma stretch was also financed by JICA with a 20 year loan at 1.4% interest. The Pinnaduwa-Matara Godagama stretch was financed by the Exim Bank of China with a 15 year loan at 2.75% interest. Thus we see that the expressway was built on loans at concessionary rates of interest. The lending institutions concerned also have their own internal processes to verify the actual cost of the projects they were financing. When finally completed in 2011, the Southern Expressway cost 6.7 million USD per km.


Colombo-Katunayaka Highway

The Colombo-Katunayaka highway has the dubious distinction of being the highway built with the shortest duration loan with the highest interest rate. The Exim Bank of China provided funding for this project at 6.3% interest. The loans taken for all the other highway projects cost much less than half of that. Be that as it may, the Colombo-Katunayaka highway is 25.6 km and was started in 2008 at an estimated cost of USD 352 million. That works out to $13.7 million per km. According to the Highways Ministry, the difference in cost between the Katunayaka Expressway and the Southern Expressway is due to the difference in the terrain, the former being built across the Muthurajawela marsh. Moreover 2 km of the road consists of six lanes (the rest is four lanes) and the four lane portion is wider than the Southern expressway. The highway features a 1.4 km stretch built on concrete columns, 42 bridges, five interchanges, 110 culverts, 1.3 km of access roads, and unlike the Southern Expressway, has lighting installed throughout the length of the road.

Outer Circular Highway

The outer circular highway was designed to be completed in three phases and when complete would extend from Kottawa to Kaduwela and from there onwards to Kadawatha ending in Kerawalapitiya. Phase I of this highway is from Kottawa to Kaduwela and was begun in 2009. This four lane, 11 km stretch is funded by JICA at an estimated cost of 219 million USD. Of this 3.3 km is built on concrete columns above the wetlands. The rest of the road is on filled land. This segment has two interchanges. The stretch built on concrete columns cost USD 24 million per km and the segment built on filled land USD 14 million per km. JICA has provided financing for this segment with a 20 year loan at 1.5% interest.

Phase II from Kaduwela to Kadawatha is also being funded by JICA at a cost of $392 million. The tender was awarded in 2011. Of this 9.32 km segment, 4.9 km is on concrete columns. There is provision for six lanes on a three km stretch of this road. The 4.9 km bridge alone accounts for the better part of the total cost of the road. The JICA loan is for 30 years and the rate of interest on the loan is just 0.2%, the lowest interest rate on funding for any highway project.  

Phase III from Kadawatha to Kerawalapitiya is financed by the Exim Bank of China on a 24 year loan at 2% interest. Work began in 2013 and the estimated cost is 513 million USD. Of the 8.9 km road, 5.9 is on concrete columns. The elevated part has four lanes and the filled earth part of the road six lanes. More piling has been required for this phase than the earlier two phases. In the Outer Circular Road project, Phase II cost more than Phase I and Phase III cost more than Phase II. One notices that the Japan International Cooperation Agency which financed a part of the Southern expressway is also financing parts of the Outer Circular Highway. If someone had been inflating the cost of the Southern Highway from 2.5 million USD to 7.5 million USD and pocketing 5 million per km, it is unlikely that an institution like JICA would have got involved with the Outer Circular Highway as well. The purpose of JICA is to win friends overseas by helping developing countries. That purpose will not be met if they just pour their funds into the pockets of corrupt government politicians and officials.  We note that the cost of the Outer Circular Highway is much higher than the cost of the Southern expressway, but JICA does not seem to be fazed by the difference in cost.

Godagama- Hambantota Highway

The 96 km stretch from Godagama to Hambantota is by far the most expensive of the highways built. Estimated to cost 1.86 billion USD, it is financed by the Exim Bank of China on a 20 year loan at 2% interest. The highway features 30 bridges, 25 overpasses, 50 underpasses, 268 main culverts and 10 interchanges. A stretch of 5.4 km is elevated on columns over the Nilwala wetlands and another 750 meter segment has been built on columns over the Dandeniya forest reserve. There is also a 400 meter bridge over the Walawe ganga to minimize the filling in of land. This road also features 870 meters of overpasses for elephants and other animals to cross the highway. This segment of the highway is 20% wider than the rest of the Southern expressway. The cost includes an electric fence to keep wild animals out of the highway and compensation paid to landowners along the route. It also includes bus and railway stations in Hambantota, CCTV cameras for the highway, emergency phone booths and automatic ticket vending machines etc.

It has to be noted that none of these projects have been built on commercial loans where the lender would not care what the money is spent on, or how it is spent. A commercial lender would only be concerned about the creditworthiness of the borrower.  The highways have been built on long term loans provided by friendly nations on concessionary terms as goodwill measures. Since money does not grow on trees in any nation, countries like Japan and China would naturally want to see that their money is spent wisely in the countries they wish to help or their aim of building goodwill between the nations will not be met. Even a country as rich as China has only a limited amount of money to help friends in Asia, Africa and Latin America and they have to make sure the maximum impact is achieved with what they have lent. So it seems unlikely that they will allow anybody to inflate the cost of infrastructure projects so as to pocket the difference.

Banks lending for

road projects

At his book launch mentioned earlier Champika also spoke of state banks giving commercial loans to the government to build roads in a situation where the roads do not bring in any revenue. He explained that these are dud loans that will never be repaid. The way the state banks offset the losses from these non-performing loans is by lending to the Ceylon Petroleum Corporation. The interest payments made by the CPC to the banks provides a large chunk of the bank’s profits and in that manner the banks are kept afloat and are able to absorb the losses made when money is siphoned off to build roads. He also said that those who actually pay for the roads are those who consume petrol and diesel and contribute to the revenues of the CPC.

(Some may not see anything wrong in people consuming petrol and diesel paying for the roads being built because they are the very people who use those roads! Even if the government was using the profits of the CPC to finance those roads there is nothing wrong in that either as it with government revenue that all roads are built anyway.) Governor Cabraal said in response to the allegation that the CPC was being used to keep the state banks afloat by saying that the CPC account is the best account in the country with a turnover of over five billion USD a year and that any bank would want to have an account that has over two billion rupees passing through it every day. He said that if the state banks turn down such an account then the private banks will line up to canvass for it!  

Cabraal also explained that the state banks are not losing anything by lending to the government to build roads.  The banks lend to the Road Development Authority with a guarantee given by the Treasury so that provides them with security. While banks do look at project viability and return on investment as well, an equally important consideration would be the creditworthiness of the borrower. When SL goes to the international market to raise debt for the country through a sovereign bond issue, an individual list of projects is not presented. The buyers of the bonds are not interested in what we will be spending it on. They want to see our creditworthiness. Likewise, if a local bank is going to give money to the RDA and the loan is guaranteed by the Treasury, the bank is happy. By borrowing directly from the banks the RDA is also made more responsible, because the loan appears on their balance sheet. In any case says Cabraal, the government is by far the biggest borrower from all banks in every country.  

Disguising the debts

of the CPC

At his book launch Champika also made the allegation that the debt of the CPC was also being disguised by parceling off parts of its debt to smaller entities like the Lanka Coal Company. But this was dismissed by Central Bank Deputy Governor Dr Weerasinghe who said that Lanka Coal Company is only managing the transaction and that the CEB is paying the debt and it appears in the CEB balance sheet. Lanka Coal Company imports the coal and the CEB pays for it. If Lanka Coal was to handle the debt, it would need to have a purchase agreement with the CEB so that Lanka Coal would also make a profit and pay off the debt with that profit. But such an arrangement would increase the cost of the CEB. As of now Lanka Coal Company has just a small staff doing the procurement.

A further allegation was made by Champika Ranawaka to the effect that the National Savings Bank had given one billion USD to the Kotelawala Defence University and that all these debts (which he assumes would never be paid back to the banks) would have to be offset by the profits the banks make by lending to institutions like the CPC and the CEB. Champika said that the huge interest payments made by the CEB to the banks is another factor that enables the banks to stay afloat and absorb the massive losses they are suffering due to government borrowings to carry out infrastructure work. He said that the electricity consumer was being made to pay for the government’s projects and characterized this as a "hena gahana aparadaya". We managed to verify from the National Savings Bank that they had indeed lent 200 million USD to the KDU (and not USD one billion as Champika said). Lending 200 million USD to KDU can hardly be called a non-performing loan. The fee-levying courses at the KDU are already showing signs of attracting a lot of students. Indeed there is fierce competition already to get into the limited intake. 

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