• Economic researchers point out flaws in the 2010-11 special framework for project financing

BY Sumudu Chamara   When it comes to looking into the calls for a system change in the country, it is crucial to understand that the kind of corruption that is being protested against is not simply people breaking the law or finding loopholes to evade the law, but that in Sri Lanka, the rules themselves have been designed and doctored to allow decision makers to work against public interest and to violate public trust in ways that are considered lawful.  Therefore, the form of corruption that the country is discussing is a systematic entrenchment of the practices that are against the public interest in the country. This was emphasised by Verité Research Executive Director Dr. Nishan de Mel during an online forum titled “The Lure of Chinese Loans” where the implementation and flaws of the special framework introduced for the financing of infrastructure projects, especially with regard to procurement processes, have resulted in adverse impacts on the country.     Special framework: Birth, evolution, and flaws   During the discussion, Verité Research’s Research Director Subhashini Abeysinghe shed light on how the special framework came into existence and operated during the past few years.  Explaining the context in which a special framework was introduced, Abeysinghe pointed out that Sri Lanka prioritised large-scale infrastructure investments following the end of the war, while the country’s access to and obtaining of traditional concessional loans declined with the country being upgraded to a middle-income country from a low-income country, thus increasing the share of non-concessional or commercial loans. Noting how the country’s need for financial assistance led to the country seeking such assistance from China, she explained that in this context, the country had to come up with a framework to accommodate unsolicited proposals for public-funded projects. During the discussion, it was further explained that at that time, Sri Lanka had frameworks for procurement processes for both public sector infrastructure (issued in 2006) and private sector infrastructure (issued in 1998), which however did not meet the requirements in the above-mentioned context.  “There were two main bottlenecks that the Government faced. The first one was in the procurement guidelines of 2006 that governed public procurement, where there was no reference to unsolicited proposals and there was no procedure outlined as to how to manage unsolicited proposals in relation to public sector projects. The second bottleneck was that there were deviations allowed from the normal procurement process outlined in the procurement guidelines, and the Government, the relevant Ministry or agency had to demonstrate the existence of an extraordinary circumstance to do so. The guidelines ought to outline the areas that would be conditions that would meet these extraordinary circumstances-related requirements.” She added that due to this situation, the Government realised that there was a need for a special framework and that in addition to that, during the 2005-2009 period, the Government had actually entertained unsolicited proposals for public-funded projects despite the lack of explicit provisions in the existing regulatory framework. Abeysinghe explained the origin of the framework: “This framework was established between 2010 and 2011, and it came into existence by the Cabinet of Ministers’ appointing a Standing Cabinet-Appointed Review Committee (SCARC) to review unsolicited proposals and also to guide Ministries, the Cabinet and departments in terms of how to proceed with these unsolicited proposals.  “Subsequently, the Finance Ministry issued a circular advising all Ministries and Government agencies to table unsolicited proposals before the SCARC for their evaluation and recommendations, even though earlier, it directly sent these recommendations to proceed with unsolicited proposals to the Cabinet. It took about a year to actually come up with proper guidelines and amendments to the guidelines which spell out the process that agencies and the SCARC should follow in evaluating unsolicited proposals.  “What is very interesting was that the Government actually did not amend public procurement guidelines. What it did was that they brought this as an amendment to the private sector infrastructure guidelines because they made references to unsolicited proposals and the amendment that was issued was actually an amendment to the private sector infrastructure guidelines. But, ironically, they brought this amendment under the purview of public sector projects.” She explained that the Government brought in a second amendment, which pointed out the need to do away with the additional requirement of extraordinary circumstances to deviate from the normal procurement guidelines. This amendment introduced six reasons based on which the SCARC could proceed with an unsolicited proposal, namely, the proposals are of “strategic importance” and benefit the country, fall “well within the planned development programmes of the Government”, lead to the “transfer of superior knowledge/knowhow”, lead to a “significant inflow and savings of foreign exchange”, justifiable to deviate from the competitive bidding procedure, and financing is “acceptable and attractive and there is evident firm commitments on the part of the financers”. Conditions that were presented for Ministry-level review included the proposals’ attractiveness in terms of the funding compared to alternative funding arrangements, proposals falling within the public investment plan of the Ministry or Department and the Government’s overall policy, and commanding a reputation and knowhow that is otherwise scarcely available in the field related to the project. Cabinet approval was based on these. However, there was no requirement for the Ministry to meet all these conditions, and the SCARC’s approval could be given based on even one out of the six reasons, according to Abeysinghe, who further pointed out a number of flaws in the framework.   Impacts of using the special framework: A case study   It was noted during the discussion that a number of projects had been implemented with the use of the special framework, including large-scale projects such as the Gampaha, Attanagalla, and Minuwangoda Integrated Water Supply Scheme which can be considered a case study that shows how the special framework was used in reality and how the framework’s flaws have had an adverse impact on the country.  The scheme is one of the Chinese projects with unsolicited procurements that were approved by the SCARC under the special framework. It was implemented at a cost of $ 229.5 million, and the implementing agency was the National Water Supply and Drainage Board (NWSDB). While the primary contractor was the China Machinery Engineering Corporation (CMEC), 85% of the funding came from the China Development Bank (CDB) and 15% came from the Bank of Ceylon. The agreement for the project was signed in 2013, the project commenced in 2017, and the progress by the end of 2021 was at 76%.  Verité Research’s Senior Analyst Mathisha Arangala explained the flaws in the planning and execution of the project: “The project was approved by the SCARC without the funding commitment and before the terms and conditions of the loan were finalised. The guidelines of the special framework clearly state that there should be evidence of a firm commitment of finances to fund a project and that the terms and conditions of the project should be attractive when considering other alternatives. The SCARC approved the project, and the contract agreement was signed in 2016, three years before the loan agreement was signed. This meant that funding was not confirmed at the time when the SCARC made its decision.   “The SCARC essentially approved the project based on the mere assurance by the Water Supply Ministry and the CMEC that they would preferably obtain a concessional loan from the China Exim Bank. This means that at the time, the China Exim Bank also had not confirmed that they would provide the loan. The loan agreement was finally signed with the CDB. This means that the loan which was signed with the CDB was at a much more expensive rate and that the Government also failed to ensure that funding for the project was attractive.  “Another key condition of the special framework is that the contractor selected for the project should command a reputation and know-how in the field related to the project. This is also a condition which can be ignored if needed. When we take a closer look at the CMEC, this is not the case. There was a clear lack of experience with the CMEC in carrying out water-related projects at the time the decision was made to go ahead with the CMEC, and this was highlighted during the evaluation process by the Assessment Committee and the Strategic Expertise Management Agency (SEMA).” Another issue Arangala noted is the fact that, according to the procurement guidelines of 2006, project preparedness activities for a public project should be done before calling for tenders and the awarding of the contract. He stressed that in the said project, that was not the case. As per the information revealed during the discussion, the feasibility report had been completed the same month that the contract was signed, the environmental impact assessment (EIA) had been completed three years after the contract was awarded, and the approval of the Central Environmental Authority (CEA) had been completed three years after the contract was awarded and four months after the signing of the loan agreement.  “This suggests that if the feasibility report deems the project unfeasible, or the EIA was rejected by the CEA, it would be complicated to renege on this project, as the Government had already made the commitment to the contractors and to the funders,” he emphasised.  Another key concern was the fact that the contract was awarded for a price that was 33.4% higher than the Total Cost Estimate (TCE). The initial TCE, which included a 25% profit margin, was $ 172 million, but the contract was awarded for $ 229.5 million. When this issue was brought up by the SCARC, Arangala said, the NWSDB had given several reasons as justifications for this increase, including the allocation of $ 25 million to account for inflation resulting from the delay in implementing the project, and an allocation of up to $ 13 million for unforeseen developments as the project was contracted as a fixed lump sum contract.  “What is most interesting is the fact that an allocation was made for a 10% appreciation of the yuan against the US dollar. This is concerning because the fact that the Government even considered the possible appreciation of the yuan in its evaluation of the contract prices means that it would only be a factor if the project was awarded to a Chinese contractor and that there is a constraint for goods and services for the project to be sourced purely from China.  “However, none of these conditions was met. Not all goods and services were procured from China (64% million worth of the contract was subcontracted to the NWSDB), and the Government did not sign the loan agreement with the China Exim Bank but signed it with the CDB which does not have this constraint. In this context, what we can see is that the SCARC had actually made up its mind to go ahead with the loan agreement with China and did not consider any of the alternatives.  “It is notable that the yuan actually depreciated by 9.7% against the US dollar. This is a serious miscalculation, and this is also a good example of how cost escalations occur when there is no competitive bidding.”  He further raised concerns that although the special framework was established with the intention to expedite priority projects such as this scheme, the completion of the project was delayed by over seven years. He pointed out that although the initial date of completion was 2015, as of 2022, it is still incomplete. Expressing concerns that although investigations were ordered to be launched in this regard in 2016, he noted that they did not result in any tangible results and that the project continued based on various justifications, some of which he said are irrational.