Monday, January 18, 2010

The Rs. 430 billion fraud

The loss to the country due to corruption over the past few years has been estimated a Rs.t 430 billion . Fourteen corrupt deals of the government including the CPC hedging deal, Mihinair, the Kerawalapitiya power plant, the VAT scam among others, are said to have caused this massive loss. Since this is a matter of the utmost public interest, we decided to request clarifications regarding the fourteen tainted mega deals of the government from a responsible state official. In this interview, we go through all 14 deals with central bank governor Ajith Nivard Cabraal.

KERAWALAPITIYA



Q. Was the cost of the KERAWALAPITIYA POWER PLANT inflated to 400 million dollars when the actual cost was $ 200 million?

A. The cost of the Kerawalapitiya Power Plant was originally estimated in 2002 as US$ 390 million. However, due to careful planning and execution, the cost of the project is now estimated to be only about US$ 295 million for the power plant of 300 megawatts when fully completed. That works out to roughly about a million US Dollars per megawatt. That is close to the current industry norm of about 1 million dollars per megawatt for petroleum based thermal power plants.


Q. Was the capacity of the plant reduced to 200 megawatts from 300 megawatts?

A. The Kerawalapitiya plant is a combined power cycle plant. The first 200 megawatts is generated with furnace oil. The exhaust from the first phase is to be converted into steam to generate another 100 megawatts. The first phase is already in operation and the second phase will be operational soon. The cost of setting up this plant will thus be distributed over the entire 300 megawatts.



Q. The agreed price for electricity per unit from the Kerawalapitiya plant is said to be Rs 18. But is power now being purchased at Rs 40, incurring a loss of Rs 22 per unit?

A. The pricing of electricity is done on a pre-determined formula which includes the price of furnace oil as well. Therefore, no one can set out a specific amount forever, since the price of furnace oil changes regularly. At current fuel oil prices, the unit cost, although higher when only the first phase of the plant is operational, will decline to around Rs. 14 to 16 per unit, when the Phase 2 of the Kerawalapitiya power plant is in operation. The Kerawalapitiya power plant is owned by West Coast Power Ltd in which 56% is held by the Government, 10% by LECO, 24% by EPF and 4% by Lakdanavavi Co.



UMA OYA



Q. Then there is an allegation concerning the UMA OYA project. Did the estimated cost of this project increase from 265 million US dollars to 539 million?

A. The structure of a project can change from time to time. The original estimate of the Uma Oya project amounted to 265 million US dollars based on input prices in 1999. At that time, this project was meant to produce 50 megawatts of hydropower and irrigate around 5,000 acres of paddy land. Later, the project scope was expanded to 120 megawatts and 12,500 acres of paddy land. As a result of such add-ons, the project cost has been re-estimated at US dollars 545 million in 2009 prices. It is generally estimated that the capital cost to produce one megawatt of hydroelectricity is about 3 million U.S. dollars. For the Upper Kotmale project which aims to produce 150 megawatts, the project cost is 460 million U.S. dollars.


Q. Was the contract for the Uma Oya project awarded to an Iranian company without calling for tenders?

A. The financing for the Uma Oya project comes from the Export Development Bank of Iran. Usually, the agreement in such cases is that the contract has to be handed over to a company from the country providing the financing. The general practice under bi-lateral loan agreements, has been followed here too. Having identified the contractor, the Government has taken the necessary measures to ensure the project is cost effective. They have been able to enter into the contract at a lower price than the estimated value. At the same time, any unexpected costs and adverse movement in prices will also have to be borne by the contractor and no additional payments need to be met by the Government.


Q. There is another allegation concerning the purchase of thirty five SZPMC CRANES for the Colombo port. The original cost of each crane is supposed to be 600,000 U.S. Dollars. Has the price been inflated to 1.2 million Dollars each?

A. That is quite different to the figures I have. Thirty transfer cranes with a capacity of 50 tonnes each were purchased by the Ports Authority at 1.507,000 dollars each. Twenty five years ago, in 1985, they had got 35 tonne transfer cranes at 1,570,000 dollars each. So a quarter of a century later, they have bought transfer cranes at 63,000 dollars less, and that too with an increased capacity of 15 tonnes.



Q. Was the price at any stage, 600,000 dollars per crane?

A. If the cost of a crane was $ 1.57 million in 1985, it couldn’t have been 600,000 in 2009.



Q. Then we come to the question of the four FLYOVERS. The costs that are said to have been incurred is Rupees 2,000 million for the Kelaniya flyover, 1,200 million for the Nugegoda flyover, 900 million for Dehiwala, 1,000 million for the Orugodawatte – all this is said to be in a situation where the international price for such a flyover would be Rs 400 million each.

A. Every flyover will not cost the same amount everywhere. The number of lanes, the terrain, the barricades, the surface, and so many other features can be different. The actual costs are also different to what was stated by you. The Kelaniya flyover cost 1,700 million rupees, Nugegoda 800 million, Dehiwala 960 million, Orugodawatte 650 million. It must also be noted that these are flyovers with steel structures. Certainly, building a concrete flyover will cost less than a steel structure. However, steel was opted for, because the roads cannot be kept closed for too long and the construction has to be completed in two or three months. A concrete structure takes a longer period of time to construct.



VAT SCAM



Q. There is said to have been a 16 million dollar contract to supply COMPUTERS to divisional secretariats. The computers supplied are said to be locally assembled machines with no brand name and most are said to be out of order and unusable now.

A. This question relates to the Lanka Government Network (LGN) project which was funded by the Korean Government. Under this project, 325 Government organizations were connected to the LGN. The contract value of the project was US dollars 14.5 million. The value of the computer equipment (computers, monitors, keyboards etc.) out of the above was 2.3 million US dollars. The balance 12.2 million US dollars was for licensing software, network equipment, servers, LGN hub, setting up of data centre equipment and the cost of broad band connectivity for three years for 325 locations, where 3,235 computers have been installed.

The computers are of a Korean brand and here too, only Korean manufactured computers have been allowed under the aid conditions. Hence, they are not locally assembled machines as reported. Also, as of now, 3,223 computers are in proper working condition. I am also told that 12 computers are presently under repair and are being fixed under a three year warranty and maintenance which is also included in the contract.


Q. If we go on to the next issue, there is the allegation that during the period that President Rajapaksa functioned as the Minister of Finance, there was a Value Added Tax fraud amounting to 35 billion rupees – THE VAT SCAM

A. The amount involved is not 35 billion Rupees but 3.5 billion Rupees. According to the audit report, this fraud occurred during the period November 2002 to December 2004. That was before Mr Mahinda Rajapakse became the President and Finance Minister. In fact, this fraud was unearthed after President Rajapaksa became the Minister of Finance and now action has been filed against those involved.


Q. THE HEDGING DEAL of the Ceylon Petroleum Corporation is said to have caused the biggest loss, amounting to more than half of the grand total of 430 billion Rupees. Does the hedging deal loss amount to 230 billion Rupees?

A. The total amount that the five banks have claimed from the Ceylon Petroleum Corporation amounts to 418 million U.S. Dollars. This works out to about 47 billion Rupees. In hedging transactions, there are certain guidelines and norms to ensure that such transactions are structured in a proper, orderly manner. In many countries including China, India and Korea, it has been found that certain hedging deals have not been structured properly and therefore, the banks had no legal claim. In Sri Lanka too, the Central Bank investigated the transactions entered into by the CPC and the banks, and we have determined that these transactions have not been structured properly, and that they are tainted, and should therefore not be given effect to.

From the point of view of the country, there is no money due to be paid by the CPC. But, that is not to say that the banks cannot make claims. If an accident occurs, claims can be made from the insurance company, but the insurance company may find that something is not right, in which case, they are not obliged to make the payment. In this instance, the Central Bank has determined that the transactions are tainted, and the CPC is not obliged to pay. So nothing has been paid as alleged. Neither will any such payment be made. Certainly not 230 billion rupees or even 47 billion. The Attorney General is defending the CPC in arbitration proceedings abroad, and he is confident that the country will not have to pay any money at all.



Q. Lets talk about the cost of arbitration and even the remote possibility that we may have to pay up.

A. If we have been wrongfully claimed against, we have two choices. One is to pay up. The other option is to defend ourselves in legal proceedings. The cost of arbitration is certainly not going to cost billions, and it is likely that it may be a few millions because it involves foreign counsel as well. But, it is certainly better than just paying whatever the banks claim. I am somewhat concerned that this figure of 230 billion is being floated about, because someone at some stage may be thinking of making payments of that kind which is totally out of line with the amount claimed.



Q. Are you saying that if some future government decides to pay up, there could be some hanky panky in the payment process, like these allegations of depositors in failed deposit accepting enterprises paying executives a cut if their deposits are returned to them?

A. I wouldn’t like to speculate on that, but in this instance, you will see that some one will resist paying, only if that person is honest and incorrupt, which means, that there is no occasion for anyone to receive any kickbacks for paying up. If someone was in a hurry to make these payments, allegations could be made. In this case, since no money has been paid, there cannot be allegations of kickbacks. But, let me reiterate that I am concerned that an arbitrary amount of 230 billion is being floated around, which could be done possibly with a view of such persons making those payments at some later date.



Q. SRI LANKAN AIRLINES is said to have suffered a loss of Rs. 10 billion in 2008/9. How did this happen?

A. The global airline industry went through one of the toughest periods in its history in 2008/9. If any airline had made money, it would be an exceptional case. All airlines, Japan Airlines, Cathay Pacific, Singapore Airlines, British Airways, all made losses. In fact Japan Airlines is now on the brink of failure, with its share price dropping from 356 Yen a few months ago, to just 8 Yen on Thursday. There were less travelers, so flights had to be cut back. Flights had lower loads. There were massive increases in fuel charges. The entire expenditure on fuel could not be recovered from customers. There was the high price of oil in the first part of the year, and less passengers in the second part of the year. These factors impacted heavily on all airlines.

In addition to all the global issues, Sri Lankan airlines had to face more challenges. In the latter part of the year there were less people coming in because the conflict escalated. Also, there was a decline in tourist arrivals due to travel advisories issued by certain countries. All these matters put together, made the airline suffer the loss. However, when the global situation eases, the profitability of Sri Lankan Airlines should improve. Already, we are seeing some signs of improvement.



MIHINAIR



Q. The budget airline, MIHINAIR has been the subject of much discussion. Has Mihninair caused a loss of Rs 4 billion to the country?

A. The budget allocation for Mihinair comes to a total of about 3,300 million rupees, since its inception to date, which is a very modest capital for an airline. The airline and shipping industries are long gestation businesses. The moment you get into business, you aren’t going to make money. It was the same with Sri Lankan airlines too. It takes four or five years before you start breaking even. On top of all that, the global down-turn in the international airline industry also affected the new airline. At the same time, Mihinair has had a certain service element too, where it has been the less affluent Sri Lankans who had an opportunity to make use of this budget airline and travel on pilgrimage to Buddhagaya and Mecca, as well as for Sri Lankan migrant workers to travel to the Middle East.

Budget airlines make money on volume, but it takes some time to build up the volume. Over the past few months however, there has been a reasonable turn around of the financial performance of Mihinair due to business picking up and that has led to losses decreasing substantially. If conditions continue in the same vein, Mihinair will turn the corner soon.



Q. Did the feasibility study for the WEERAVILA AIRPORT cost Rs 500 million?

A. The Airport and Aviation Services has spent just 9 million Rupees (not 500 million) for the initial work relating to the Weerawila airport. This includes the environmental impact assessment as well. Once the EIA was completed, and the location was found to be unsuitable, the project was shifted to Mattala. There is nothing unusual in this. A location has to be studied to determine whether it is suitable for such a project.


Q. It is alleged that a sum of Rs 400 million was overpaid in the purchase of four MIG combat aircraft – The MIG DEAL.

A. The Secretary Defence has filed action against a newspaper which has alleged that there was corruption in this deal, and the matter is in Court.


Q. There is also the allegation that Rs 1.6 billion is being spent on setting up a SAFARI PARK in Hambantota when the Yala wildlife sanctuary is close by.

A. From what I have learnt, this capital expenditure is not for a wild life reserve but for a theme park which will feature animals like lions and zebras which are not found in the wild here. There are theme parks like this in several other countries too. Investments of this nature are quite common in many countries trying to develop tourism.



A9 ROAD



Q. Was the reconstruction of the Anuradhapura-Jaffna A9 ROAD handed over to a Chinese firm at the rate of 125 million rupees per kilometer, and has this Chinese company sub-contracted the same work to two Sri Lankan companies at the rate of 60 million rupees per kilometer? The same allegation relates to the reconstruction of the Point Pedro - Kankesanturei Road, the Mannar - Pooneryn Road, and the Nandikulam- Mannar Road.

A. The Road Development Authority had prepared a proposal for the rehabilitation of the A9 road and later the project was handed over to the Ministry for Reconstruction and Rehabilitation. The Exim Bank of China came forward to offer the funding. The contractor for the project has agreed to finalize this 153 km project at a cost of Rs. 15, 300 million. Therefore, the expected cost per km is around Rs. 100 million and not Rs. 125 million. However, 25% has been allocated for contingencies. The rates at which the contractor sub-contracts to other sub-contractors is not relevant since it is the original contractor who is finally responsible for the quality and the delivery of the work. For example, in the Mahaweli project, Balfour Beatty was the main contractor for the Victoria dam, and they in turn, employed various other parties as subcontractors.

In the case of the A9 road, it must also be noted that resources such as skilled labour were not easily available in this area after 30 years of hostilities. Further, infrastructure like electricity, water, facilities for engineers etc. have to be supplied by the contractor at a high cost. Such costs naturally have to be borne by the project. The cost incurred on the Kandy – Mahiyangana Road was Rs. 117.65 million per km and it was Rs. 98.49 million per km for the Nuwara Eliya – Badulla project. However, costs differ from one area to another based on the availability of construction material, terrain, etc.


Q. A sum of 430 billion Rupees is said to be the cost of all this corruption and waste that has taken place. The hope held out is that by recovering this amount, wages could be increased, pensions could be increased, Golden Key depositors repaid, and various other things done with this money.

A. Such calculations amount to a scam. For example, the figure of 230 billion rupees that you mentioned in relation to the hedging deal, does not exist anywhere. No such amount of 230 billion has been paid or is due to be paid or has even been claimed by any party. So it cannot be ‘recovered’ to pay wage increases or any other expenditure.


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