YAHAPALANA AND THE ECONOMY Part 8
Posted on April 2nd, 2018

KAMALIKA PIERIS

This essay describes five contracts entered into by Yahapalana that have been contested by stakeholders. Ceylon   Oxygen Limited has challenged in Supreme Court, the award of a multimillion rupee tender to Gas World, in November 2016, for the supply of medical gases to 40 government hospitals. Ceylon Oxygen says there had been bias and also ‘procedural impropriety’.

Ceylon Oxygen complained that  that the terms and conditions given in the tender document were ambiguous and vague and that this was deliberately done  by the Ministry Procurement Committee (MPC) and Technical Evaluation Committee (TEC), to help award the tender as they wished. The tender, they say, had been designed to favor Gas World.

Ceylon Oxygen complained that the tender document and  evaluation of bids was not in accordance with the Government Guidelines for Procurement of Pharmaceuticals and Medical Devices of  2006, specially pre-qualification, post qualification criteria, long term contracts to multi-source products, inspections and general technical specifications.

Two Consultant Anesthetists of the National Hospital, who sat on TEC, had not been in favor of Gas World. They had doubts about Gas World’s ability to meet island-wide medical gas requirements, when they looked at the production, storage capacity, distribution fleet (three bowsers of Gas World as opposed to 20 bowsers of Ceylon Oxygen ) and manpower, together with non-availability of a back-up plant critical in times of unanticipated events leading to a breakdown.. The anesthetists are the best persons to comment on the matter. They are end users of medical gases in day to day practice in operating theatres and critical care environments” said Ceylon Oxygen.

The TEC’s decision to award the tender was arrived at without consulting these two anesthetists. However, MPC and TEC had obtained letters from the National Medicine   Regulatory Authority (NMRA) and Director, Kurunegala hospital saying that Gas World was satisfactory.

Ceylon Oxygen   said that it has been a supplier of medical gases to the Health Ministry for over 80 years with an unblemished safety and quality assurance records. Just prior to the tender under discussion, a tender was called for the supply of medical gases to the Colombo South Kalubowila Teaching Hospital. After a detailed evaluation, the TEC recommended Ceylon Oxygen instead of Gas World though their price was less, because of the guaranteed quality of the products and unquestionable safety mechanisms followed by Ceylon Oxygen, said Ceylon Oxygen.

TEC/MPC had not considered the unparalleled quality standards of Ceylon Oxygen. It has disregarded the Liquid Oxygen tanks/pipelines already installed and maintained at the cost and expense of Ceylon Oxygen at nine hospitals forming part of the tender. The entire tender document was silent on this all important aspect to ensure continued supplies to these hospitals, complained Ceylon Oxygen. It has also ignored the outstanding payments due to Ceylon Oxygen for medical gases supplied previously to government hospitals, included in the said tender, which as that date amounted to over Rs. 832 million.

Ceylon Oxygen said it locally manufactures all its medical gases, whereas Gas World, only manufactures some. Gas World was also not equipped with a comprehensive laboratory to carry out periodic testing of cylinders and medical gas analysis even though they claimed so. the questionable quality and safety mechanism of Gas World is already the subject matter of action in the Colombo Magistrate’s Court, after two divers lost their lives allegedly on account of the oxygen tanks supplied by Gas World. MPC has not considered the drastic consequences that may arise due to inferior quality products and poor safety standards when they award tenders in this manner said Ceylon Oxygen.

Then comes a contract about granular urea. The Government is set to make a loss of US$2.7mn (Rs412mn) in importing, outside of tender procedure, a massive consignment of granular urea at the same price as the more expensive prilled urea,  complained a group of  local fertilizer importers. They want this award stopped.

The outside importers have offered to supply a cargo of granular urea at USD 280 per metric tonne (cost and freight), as opposed to the price the Ministry of Agriculture is now getting it at which is USD 316.20 per metric tonne.

The last purchase of 36,000mt of granular urea was done in August 2015, and a part of this is still unused, over 2 years from the date of purchase. Ceylon Fertiliser Company and Colombo Commercial Fertilisers Ltd, two associated companies of the Agriculture Ministry , have  said that they do not need granular urea as it cannot be sold. Prilled urea is preferred. It is made up of smaller particles and is softer.

Public sector purchases of fertilizer were previously on open tender, publicized through newspapers or via request to all pre-qualified registered suppliers. The evaluation was done by a Cabinet Approved Tender Board. And the tenders adhered to Cabinet Approved Tender Conditions which specified that such offers should be on Letter of Credit (L/C) terms.

In October 2017, however, the Ministry of Agriculture attempted to bypass transparent tender procedure and L/C procurement terms by submitting a Cabinet paper for the direct procurement of 100,000mt of prilled urea for the Yala season. This was more than double the quantity of the previous purchases for Yala. Furthermore, the product was to be purchased from an unknown supplier, not registered with the Ministry of Agriculture, with no previous history of supply. The purchase was to be done on DA [documents against acceptance] terms, totally outside of the L/C terms as per tender procedure.”

The Ministry maintained that the purchase was necessary via special Cabinet approval as there was an emergency requirement for urea. The fertilizer industry blocked the deal by protesting to President Sirisena. They pointed out that there was a Cabinet approved tender procedure for emergency purchases and that an open tender should be called.

A tender was then called in November 2017 for 72,000mt of prilled urea. But it specified that offers should be on DA terms, contrary to usual practice L/C terms typically attract lower prices. There were five bids but only one was on DA terms from a non-prequalified, unregistered, first-time supplier. The other four were on L/C terms from pre-qualified, registered suppliers.

The offer on DA terms, by JAT Holdings, was the highest while the others were much lower. The L/C offers were rejected and the contract granted to JAT to supply the cargo by December 15, 2017. But the tender was then cancelled because JAT could not meet the required specifications. The Ministry did not charge JAT for not being able to complete the supply.

On December 7 2017 the Ministry of Agriculture called yet another tender to purchase 36,000mt of prilled urea in bags for Ceylon Fertiliser Co Ltd and Colombo Commercial Fertilisers Ltd on L/C or DA terms. Once again, the tender was cancelled without, any explanation to the tenderers”.

The Ministry of Agriculture then awarded a contract for double this quantity (that is, 72,000mt) to the fourth-ranking bidder of the last tender, Agri Commodities for a consignment of granular urea at the same price as the more expensive prilled urea. The order, therefore, changed from prilled to granular and was given to the fourth-ranking bidder, Agri Commodities, with no price reduction for switching to the cheaper urea

Furthermore, the price of prilled urea offered by the fourth-ranking bidder was US$316.20pmt while the lowest prilled urea offer at tender closing on December 7 was US$289.29 – a difference of US$26.91.  In the world market, granular urea is US$20.00 cheaper than prilled urea, complained the importers.

Agriculture Minister Duminda Dissanayake, however, dismissed any allegations of irregularities in urea procurement. He said there was no problem with changing from prilled to granular urea as the latter was as slow release application. He also said the tender of December 7 was cancelled because the consignments would only have been delivered at the

end of January 2018 – too late for farmers.  That’s why we took a special Cabinet decision to procure the fertiliser through a company,” he said. We will get the consignment on December 27.

”The Minister confirmed that the company was supplying the granular urea at the same price as the prilled urea. Asked why prilled was changed to granular, he said, Only granular is available. If we go for prilled, we have to wait till the end of January. We can get granular faster.”The JAT Holdings contract was cancelled owing to a specifications problem, he continued. When the specs are wrong, we could not have brought that urea to Sri Lanka. This whole problem is because Pakistan stopped exporting urea,” he said, blaming delayed urea imports on a policy decision by Pakistan rather than the lopsided recent tenders.

Senok Trade Combines Limited has filed a fundamental rights petition in the Supreme Court against the Cabinet, the Minister of Power and Renewable Energy and several public entities over the alleged non -granting of a tender to the company, amounting to Rs. 3 billion, in violation of the established tender procedure, for the purpose of installing 50 power generation sets in the country.

Despite our company being the most suitable and qualified bidder out of 18 bidders recommended by the Technical Evaluation Committee (TEC) of the Ceylon Electricity Board (CEB), it was granted to an Indian company called Sterling and Wilson Private Limited, by the Standing Cabinet Appointed Procurement Committee (SCAPC), overruling CEB’s TEC committee recommendations, said Senok.

This tender was a package tender where the successful bidder has to commission and install containerized transformer sets, fuel tanks and emission sets. ‘Applications of two companies, including those of Sterling and Wilson, were rejected due to non compliance with tender rules. However, the SCAPC overruled the decision without any justification and arbitrarily requested the TEC to re-evaluate the two bidders who had been rejected by the TEC for non compliance and being incomplete bids.

SCAPC thereafter overruled TEC recommendations and awarded the tender to Sterling and Wilson in July 2017, continued Senok. We have made an appeal to the Procurement Appeal Board (PAB) at the Presidential Secretariat, protesting against the move, calling it an unfair and unjust award, ignoring proper tender procedure, said Senok in January 2018. However,

Deputy General Manager, CEB, told the media that the Cabinet took the decision and that he cannot comment on the matter because a court case is pending in the Supreme Court.

The Government will open for procurement under the Swiss Challenge method a South Korean proposal for a free-of-charge floating Liquefied Natural Gas (LNG) terminal tied to an annual order of 1 mn metric tonnes of LNG for two decades at international market prices reported the media in January 2018.

The floating storage regasification unit (FSRU) will be provided free-of-charge. The LNG pipeline will be funded by the Sri Lanka Government and, if necessary, SK E&S will provide technology for pipeline engineering, construction, and operation. The LNG price is to be at competitive level,

The terms of the contract will be Take or Pay”. The buyer either takes the product from the supplier or pays the supplier a penalty. The SK E&S proposal says, If Buyer fails to take any scheduled cargo, Buyer shall pay Seller an amount equal to the Contract Price multiplied by the quantity which Buyer failed to take”.

The Korean proposal has suggested the starting date for the LNG sale and purchase agreement (SPA) as the second half of 2020, ending on March 31, 2040. The Sri Lanka Ports Authority has, in principle, approved the site of the LNG receiving terminal to be the western breakwater.

The bid from the Korean Government-backed SK E&S Company was first submitted by President Maitripala Sirisena, according to a letter sent by Power and Energy Ministry Secretary to the Chairman and General Manager of the Ceylon Electricity Board (CEB).

A joint memorandum was then put forward by Power and Energy Minister Ranjith Siyambalapitiya and Special Assignments Minister Sarath Amunugama to request Cabinet approval for the CEB to call the tender based on the Korean proposal under a Swiss Challenge” concept. Cabinet of Ministers gave approval for the CEB to call tenders for the purchase of LNG for existing power plants and upcoming 300MW power plant based on a Swiss Challenge concept using the Korean proposal.

However, there are at least three other   separate unsolicited bids for LNG terminals under consideration, said the experts.  Japan and India have submitted two separate proposals. There is also the proposed Sri Lanka, India, and Japan government-to-government joint venture initiative for a floating storage re-gasification unit (FSRU) with LNG supply. A 400 mw LNG power plant and terminal in Hambantota is also coming up with Chinese participation in Hambantota.

Cabinet has called for the Korean proposal to be subjected to a Swiss Challenge. This is a system by which a party makes an unsolicited proposal to the Government. It is then opened out for third parties to make better offers for the same project. The original party then has the right to counter-match those offers. A Swiss Challenge usually grants an advantage to the original proposer.

Swiss Challenge is one of the least-used methods of procurement in the world, said Saliya Wickramasuriya, former Director General of Petroleum Resources. Credible international bidders are usually reluctant to respond to a Swiss Challenge because it comes on the back of an unsolicited proposal. They don’t know if the proposal has been informally solicited, and is simply being ‘laundered’ via a Swiss Challenge process.”

Swiss Challenge is not a smart procurement method. It is typically only used to shift State assets in which few have expressed interest. It is hardly ever used to select partners for strategic projects. ” If the structure of the Swiss Challenge is bad, it carries little incentive for serious players to make the effort to compete. It is not a competitive process, although it may appear to be, The Government should go to the market with a proper Request for Proposals (RFP) document not a Swiss Challenge,” Wickramasuriya said.

This is the most expensive tender ever to be floated in Sri Lanka, say experts. Therefore, say industry and procurement experts, any tender for a terminal and for LNG, especially in such vast quantities, must be in keeping with the principles of open international competitive bidding to ensure Sri Lanka gets the best prices and widest participation of global players. In view of the high level of interest Sri Lanka’s natural gas market has generated, it would be far better to compile a proper tender document, with specific timelines, prices and volumes, and offer it to the entire market place.

Energy experts have urged the Government to introduce a legal and regulatory framework and choose open, transparent bidding for Sri Lanka’s first ever Liquefied Natural Gas (LNG) tender. The long-term gas supply to Sri Lanka is a quantifiable, strategic national project.   At present there is no RFP document. There is also no legal framework or regulator. The subject of downstream gas has not been assigned to any authority. And no competitive bids have called encompassing liquidated damages for non-performance, said experts.

Sri Lanka must also factor into its plans the very real prospect” of producing its own gas in the future, pointed out Wickramasuriya.  The possibility has existed since October 2011. The Treasury has set up a subsidiary called Sri Lanka Gas Terminal Company (SLGTC) with a view to entering into a joint venture (JV) with India and Japan to build an LNG terminal.

The SLGTC will have the Sri Lankan shareholding in the joint venture, sources from the Ministry of Development Strategies and International Trade said. India’s Petronet nominated

by the Indian Government, will hold a 47.5 percent stake while the Japanese consortium of Mitsubishi and Sojitz Corp will have 37.5 percent and SLGTC will control 15 percent.

Sri Lanka’s new bio-metric E-passport project has been embroiled in a legal mesh as a result of the attempt made by the authorities to award the contract to De La Rue Lanka Currency and Security Print Ltd (De La Rue Lanka Ltd) through a non-transparent and unsolicited, single-source procurement process.

In July, 2017, the Secretary, Ministry of Public Administration sent a letter to  Secretary, Ministry of Internal Affairs saying that the Government Printer  was willing to supply e-Passport to the Department of Immigration and Emigraiton (DIE) at a cost of Rs.650 million.

A feasibility study conducted by the Government Printer to set up the facility for e-Passports was included with the letter, to show that the Government Printer was capable of producing the e-Passports required by DIE. Government Printer was a 100 per cent state-owned entity and was the main body for security printing for the Government.

Secretary, Ministry of Internal Affairs wrote back to Secretary, Ministry of Public Administration saying that Cabinet had taken a decision to call proposals for the E- Passport under the Swiss Challenge method. Government Printer   could also submit a proposal for this Swiss Challenge.

In the meantime, Information Communication Technology Agency (ICTA) together with the Ministry of Telecommunication and Digital Infrastructure (MTDI) had proposed to the Cabinet Committee on Economic Management (CCEM) in early 2017 that they undertake the task of implementing an E-passport system for Sri Lanka.  E-passport came under Ministry of Internal Affairs (MIE) not MTDI But this was ignored by ICTA and MTDI, observed critics.

A Cabinet Memorandum dated May 25, 2017 was submitted by the Prime Minister seeking Cabinet approval to proceed with ICTA’s proposal to implement an E-passport with De La Rue. President Sirisena however, wanted a joint cabinet memorandum on the matter by  MTDI and MIA. The authorities were ordered not to engage in single source bidding but to call multiple bids or to call bids under the ‘Swiss Challenge’ process. The Cabinet of Ministers met on June 13, 2017 and deferred the E-passport project.

Despite the Cabinet decision and the President’s directives, Muhunthan Canagey, Managing Director ICTA presented a Board Paper on June 27, 2017 to obtain ICTA  board approval to enter into a MOU between the ICTA and De La Rue Lanka Ltd to conduct a requirement study and to propose an E-passport solution for the DIE. (Sunday Times 31.1.18 )

MTDI then forwarded a draft cabinet memorandum to the Ministry of Internal Affairs requesting its consent for this purpose. MIA rejected  it. MTDI  then submitted a fresh Cabinet

Memorandum under the signatures of Ministers S.B. Navinna , Minister for DIE and Harin Fernando, Minister of Telecommunication and Digital Infrastructure and it was approved by the Cabinet on August 17, 2017

Disregarding the objections made by Minister S.B. Nawinna, Minister Harin Fernando  thereafter moved a Cabinet Paper in November, 2017 seeking Cabinet approval to award the contract to De La Rue Lanka under direct contracting method without following the Swiss Challenge process or any competitive bidding process., for which Cabinet approval had been granted previously. Minister Harin Fernando stated that De La Rue Lanka has committed to invest over Rs.1.2 billion being the capital investment required to migrate the country from the current machine readable passport (MRP) system to a new e-Passport system. (Sunday Times 4.3.18)

EPIC Lanka (Pvt) Ltd then   filed a fundamental rights case in the Supreme Court objecting to the award,  requesting an open, competitive tender,  in terms of the applicable Government Procurement Guidelines. Epic Lanka is challenging the decision of the Cabinet of Ministers to award  the project to De La Rue Lanka.

Epic Lanka,  also submitted an unsolicited proposal, which stated that the cost to migrate the country from the current MRP Passport to an ICAO standard e-Passport would be only Rs. 185 Million. Epic would absorb the migration  cost if the contract is awarded to them, thus the Government will not have to make any capital investment for the migration.

Epic Lanka,  said that it was  a Sri Lankan company which has been serving the Department of Immigration and Emigration (DIE) for the past 15 years in the supply of passports and maintenance of the passport printing system.  It has 257 Sri Lankan IT engineers among its staff members and has so far supplied approximately 8 million passports since 2003. It is the ‘only’ company in Sri Lanka qualified to bid for international tenders for passports and secure ID cards.

Epic  has also asked  court to issue an interim order suspending the operation of the project and preventing the authorities from entering into any kind of Memorandum of Understanding, contract, agreement, or such similar arrangement with De La Rue Lanka Ltd to issue E-passports until the final hearing and conclusion of this application.

De La Rue  then submitted a report titled Sri Lanka Passport Survey” dated 26th January 2018, In this report De La Rue Lanka modified its initial offer  which was end-to-end system connecting 05 local immigration offices and 56 overseas missions.  Now, it   said that it would  only provide a ‘centralised’ e-Passport Personalisation System with the capacity to personalise ‘one day process’ passports, and this will be installed at the DIE head-office   This will will integrate with the existing infrastructure of DIE.

This in  turn showed that the existing IT Infrastructure at DIE was  sufficient to issue e-Passports. Department of Immigration and Emigration (DIE) said that the cost to upgrade the existing infrastructure at the DIE to issue e-Passports would be less than Rs.50 million. De La Rue also proposed to implement another similar personalisation system at the De La Rue Lanka facility at Biyagama to personalise and issue ‘normal process (10 days)’ passports.

The Cabinet paper that handed over the contract to De La Rue Lanka Ltd had said a tender process is not needed as 40 per cent of the company’s shares are owned by the Finance Ministry making it a state-affiliated company. However, Epci Lanka, pointed  out that To be a state-affiliated company the state should obtain either 50 per cent or more shares of the business.  The case is pending.

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