CB Governor:

Corruption charges baseless

by Shirajiv SIRIMANE

NDF Presidential Candidate Sarath Fonseka and the combined Opposition have accused the Government of waste and corruption to the tune of Rs. 430 billion, saying that these funds could instead be used for public welfare.

Central Bank Governor Ajith Nivard Cabraal

They have mentioned the CPC, Mihin Air, SriLankan Airlines, Kerawalapitiya, Uma Oya, Weerawila Airport project, MiG deal, VAT scam flyovers and the Hambantota Safari park as examples of institutions and projects where acts of corruption have allegedly taken place. In a recent interview, Central Bank Governor Ajith Nivard Cabraal explained the actual costs associated with these projects and exposed the baseless charges of the Opposition.

Here are excerpts from the interview:

Q: The Opposition has charged that over the past few years, there has been a loss to the country amounting to Rs. 430 billion. Fourteen allegedly corrupt deals of the Government including the hedging deal of the Ceylon Petroleum Corporation (CPC), Mihin Air, the Kerawalapitiya Power Plant and the VAT scam, are said to have caused this massive loss. Let's start with the hedging deal which is said to have caused the biggest loss, amounting to more than half of the grand total of Rs. 430 billion.

Does the loss from the hedging deal of the Ceylon Petroleum Corporation amount to Rs. 230 billion?

A: I have studied these allegations of massive corruption and waste because this is an important issue from the point of view of the stability of our economy. Over the last two or three years, there have been many attempts to destabilise our economy. These attempts were made in various ways, by dissuading investors from investing, by constantly highlighting a threat of trade concessions being withdrawn, by making threats of non-repayment of sovereign borrowings, etc. I see the present attempt also as another such attempt. That is why I have made a special study of the subject.

With regard to the hedging deal, I do not know how anybody has come up with the figure of Rs. 230 billion. The total amount that the five banks have claimed from the Ceylon Petroleum Corporation amounts to US$ 418 million. This amounts to about Rs. 47 billion. So, the figure of Rs. 230 billion is a complete fabrication from any angle. At the same time, even though US$ 413 million has been claimed by the banks, there is absolutely no reason for the CPC to honour such claims.

In the case of hedging transactions, there are certain norms to ensure that such transactions are structured in a proper, orderly manner. In many countries it has been found that certain hedging deals have not been structured properly. For example, in China, Korea and India, there have been instances of mis-selling and there was no liability at all established in relation to claims that were made by various banks.

In Sri Lanka too, the Central Bank looked into the transactions entered into by the CPC and the banks, and after a detailed investigation, we have made a very clear determination that these transactions have not been structured properly, and that these transactions are tainted, and accordingly should not be given effect to.

So, 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 Rs. 230 billion or even Rs 47 billion. Further, I also know that 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: Let's 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, even though we know it's wrong. Sometimes, this is done for various reasons. The other option is to defend ourselves through legal proceedings.

The very fact that payment, in this instance, has been resisted shows that there is no corruption involved and the CPC is confident of its position. The cost of arbitration is certainly not going to be 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. Nevertheless, I am somewhat concerned that this figure of Rs. 230 billion is being floated about by certain quarters who are raising this issue, because someone at some stage may be thinking of making such payments 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 these failed finance companies paying executives a good cut if their deposits are returned to them?

A: I wouldn't like to speculate on that, but in this instance, you will appreciate that someone 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.

However, 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 Rs. 230 billion is being floated around, which could be done possibly with a view of such persons making allegations considering making such a payment at some later date.

SriLankan Airlines

Q: To move on to the next issue, SriLankan Airlines is said to have suffered a loss of Rs. 10 billion. How did this happen?

A: The global airline industry went through one of the toughest periods in its history, in 2008. If any airline had made money, it would be an exceptional case. All airlines including Japan Airlines, Cathay Pacific, Singapore Airlines and British Airways, 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 last week. There were less travellers, 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. Oil prices were high in the first part of the year, and there were less passengers in the second part of the year. So, both these factors had a heavy impact on all airlines.

No corruption in CPC hedging deal

In addition to these global issues, SriLankan Airlines had to face more challenges. In the latter part of the year, there were less people travelling to Sri Lanka because the conflict had escalated. Also, the decline in the number of tourist arrivals due to travel advisories being issued by certain countries also affected the airline. All these matters led to the airline suffering losses. However, when the global situation eases, the profitability of SriLankan Airlines should improve. We are already seeing signs of improvement.

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

A: The budget allocation for Mihin Air has been about Rs. 3,300 million, which is a very modest capital for an airline. We have to understand that Mihin Air is a new 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 SriLankan Airlines. It takes four or five years before you start breaking even. Even a grocery business takes a couple of years to make a profit. In the case of Mihin Air too, there will be a reasonable gestation period before it turns profitable.

On top of all this, the global downturn in the airline industry affected the new airline. At the same time, Mihin Air has had a certain service element too, where it has been the less affluent Sri Lankans who used this budget airline and went on pilgrimages to Bodh Gaya and Mecca, as well as for Sri Lankan migrant workers to travel to the Middle East at a cheaper cost.

Budget airlines make money on volume, but it takes some time to build up the volume. Because an airline does not make money in the first year, it should not be deemed a failed enterprise, or as a corrupt organisation. Over the past few months, however, it should be pointed out that there has been a reasonable turnaround of the financial performance of Mihin Air due to business picking up and that has led to losses decreasing substantially. Needless to say, if these conditions continue, Mihin Air will turn around soon.

Feasibility study

Q: Did the feasibility study for the Weerawila airport cost Rs 500 million?

A: That is completely untrue. According to the information we have, Airport and Aviation Services has spent just Rs. nine million (not Rs. 500 million) for the initial work relating to the Weerawila airport. This included the environmental impact assessment (EIA). In any major project, an environmental impact assessment has to be done.

Once the EIA was completed, and the location was found to be not suitable, the project was shifted to Mattala. There is nothing untoward in this. A location has to be studied to determine whether it is suitable for such a project. Anyway, from what I gather, some of these approvals had been granted when Mangala Samaraweera was the Minister of Aviation.

Q: MIG deal?

A: There is absolutely no truth in this matter too. The Defence Secretary has already filed action against the newspaper which stated that there was corruption in these deals, and the matter is now in Court. If there was corruption as stated, why should the Secretary of Defence take the newspaper to Court?

Q: There is an allegation that during the period that President Mahinda Rajapaksa functioned as the Minister of Finance, there was a VAT fraud amounting to Rs. 35 billion.

A: According to the audit report, this fraud happened during the period between November 2002 and December 2004. So this certainly is before Mahinda Rajapaksa became the President and Finance Minister. In fact, this fraud was unearthed after President Rajapaksa became the Minister of Finance and now there are court cases pending on this matter. Action has been filed against those involved. In any case, the amount involved is not Rs. 35 billion but Rs. 3.5 billion. I don't understand how these figures are just plucked out of the sky.

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 wildlife reserve, but for a theme park which will feature animals like lions and zebras which are not found in the wild here. This is a different concept, a sort of cross between a zoo and a wildlife sanctuary. This concept is seen in other countries too. Attractions of this nature are needed if Sri Lanka is to be promoted effectively as a major tourist destination. Investments of this nature are quite common in countries which are targeting large numbers of tourists, with a variety of attractions, and it is good that Sri Lanka too is on this track.

Q: Was the cost of the Kerawalapitiya power plant inflated to US $ 400 million when the actual cost was US $ 200 million?

A: Certainly not. 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 complete project is now estimated to be only about US$ 295 million, for the power plant of 300 megawatts. That works out to roughly about a million US dollars per megawatt. That is satisfactory as it is the current industry norm of about one 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: Once again, no. 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, in a matter of a few days. 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 predetermined formula which includes the price of furnace oil. Therefore, no one can set a specific price which would stand 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/Rs 16 per unit, when Phase 2 of the Kerawalapitiya power plant is in operation. Hence, this contention is invalid.

I must also mention that the Kerawalapitiya power plant is owned by West Coast Power Ltd of which 56 per cent is held by the Government, 10 percent by LECO, 24 percent by EPF and 4 percent by Lakdanavi Co. So, you can see that almost the entire plant is owned by Government or State institutions.

Q: There are allegations regarding the Uma Oya project. Did the estimated cost of this project increase from US $ 265 million to US $ 539 million?

A: The structure of a project can change from time to time based on the project components. There may be add-ons by the time a project is finalised, and it may even have certain components that are dropped by that time. The original project had an irrigation as well as power generation component and the estimate of the project amounted to US $ 265 million based on input prices in 1999.

The Uma Oya project at that time was meant to produce 50 megawatts of hydropower and irrigate around 5,000 acres of paddy land. Later, the project scope was expanded and the hydropower generation capacity was increased to 120 megawatts and the irrigation scope to 12,500 acres of paddy. As a result of these add-ons, the project cost was re-estimated at US $ 545 million in 2009.

It is generally estimated that the capital cost to produce one megawatt of hydroelectricity is about US $ 3 million. In fact, for the Upper Kotmale project which aims to produce 150 megawatts, the project cost is US$ 460 million.

When all these factors are taken into account, the increase in the project cost of Uma Oya is reasonable and there is ample justification for the increased.

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. For example, India will not finance a project for which construction will be carried out by a company from Australia, or vice-versa. Similarly, when Iran provides the money, they will want their corporations to handle the construction.

Even in the past, under the Mahaweli development and other schemes, the contracts had been given to contractors from the country which provided finances for the project.

Accordingly, the general practice under bilateral loan agreements is that construction contracts are awarded to a Contractor of the lending country, has been followed here too. However, having identified the contractor, the Government has taken measures to ensure the project is cost-effective. In fact, the Government has been able to negotiate and 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 have to be borne by the contractor and no additional payments need to be met by the Government.

A9 road

Q: Was the reconstruction of the Anuradhapura-Jaffna A9 road handed over to a Chinese firm at the rate of Rs. 125 million per kilometre? Has this Chinese company subcontracted the same work to two Sri Lankan companies at the rate of Rs. 60 million per kilometre? The same allegation is made regarding the reconstruction of the Point Pedro - Kankesanturai Road, the Mannar - Pooneryn Road, and the Nandikulam- Mannar Road.

A: The Road Development Authority had made a proposal for the rehabilitation of the A9 road and later the project was handed over to the Ministry of Reconstruction and Rehabilitation. This is an urgent project and it was essential that it is undertaken as soon as possible. So, the Exim Bank of China, which came forward to offer the funding, has been given the opportunity to do so.

SriLankan Airlines is already showing signs of improvement

The contractor has agreed to finalise 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, for contingencies, 25 percent have been allocated. The rates at which the contractor subcontracts to other subcontractors is not relevant since it is the original contractor who is finally responsible for the quality and the delivery of the work. This is normal. 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. But, they were finally responsible for the project.

In the case of the A9 road, it must also be noted that the materials for construction of projects, skilled labour were not easily available as this area is now open after 30 years of hostilities. Further, infrastructure like electricity, water and facilities for engineers are not easily available for the use of the A9 project, and 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 due to the availability of construction material, terrain, etc.

Q: There is another allegation concerning the purchase of 35 SZPMC cranes for the Colombo port. The original cost of each crane is supposed to be US$ 600,000. Has the price been inflated to US$ 1.2 million each?

A: That is quite different to the figures I have. Thirty transfer cranes with a capacity of 50 tonnes each was purchased by the Ports Authority at US$ 1,507,000 each. Twenty five years ago, in 1985, they had got 35 tonne transfer cranes at US$ 1,570,000 each. So, a quarter of a century later, they have bought transfer cranes at US$ 63,000 less, and that too with an increased capacity of 15 tonnes.

Q: Was the price at any stage US$ 600,000 per crane?

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

Flyovers

Q: Then we come to the four flyovers. The costs that are said to have been incurred are as Rs. 2000 million for the Kelaniya flyover, Rs. 1200 million for the Nugegoda flyover, Rs. 900 million for Dehiwala, Rs. 1000 million for Orugodawatte - all this is said to be when the international price for such a flyover was Rs. 400 million.

A: It is very silly to say that a flyover will cost the same everywhere. The number of lanes, the terrain, the barricades, the surface, and many other factors could be different. The actual costs incurred in these projects are also different to what has been stated by you. The Kelaniya flyover cost Rs. 1700 million, Nugegoda Rs. 800 million, Dehiwala Rs. 960 million and Orugodawatte Rs. 650 million. It must also be noted that those 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.

Q: There is said to have been a US$ 16 million 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 organisations were connected to the LGN. The contract value of the project was US$ 14.5 million. The value of the computer equipment (computers, monitors and keyboards) was US$ 2.3 million. The balance US$ 12.2 million was for licensing software, network equipment, servers, LGN hub, setting up of data centre equipment and the cost of broadband 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. 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: Rs. 430 billion is said to be the cost of all this alleged corruption and waste. The hope held out on the political platforms was that by recovering this amount, wages could be increased, pensions could be increased, Golden Key depositors be repaid, and various other things done with this money.

A: Such calculations amount to a scam. This is non-existent money. For example, the figure of Rs. 230 billion that you mentioned in relation to the hedging deal does not exist.

No such amount has been paid or is due to be paid or has even been claimed by any party, so it cannot be 'recovered' for wage increases or any other payment or liability. This type of logic can only be described as fanciful daydreaming, or incredible foolishness or downright dishonesty.