Kerawalapitiya LNG power plant tender imbroglio
Posted on March 23rd, 2019
by C.A.Chandraprema Courtesy The Island
Even though the UNP opened up the economy in 1977 and eschewed the
protectionist, closed economic model followed by the preceding Sirima
Bandaranaike government, the UNP at least when it was under
J.R.Jayewardene, never took leave of their senses. Despite their stated
ideology of an open economy, when common sense or a lack of
alternatives required it, the old UNP was not averse to adopt policies
that looked SLFPish. For example, when the Pelwatte Sugar Co was
started in the 1980s, sugar was produced in a factory with foreign
collaboration from sugarcane grown in the Moneragala district, and the
duties on imported sugar were increased slightly so as to make the sugar
from Pelwatte competitive on the local market. After a few years, if
this writer recalls correctly, it was not necessary to maintain the
import duty because Pelwatte sugar could be sold at the world market
price.
Even if Pelwatte sugar would always need to be
protected with a tariff on imported sugar, it still made sense to
continue with it. The reason why the UNP government of the time started
that sugar factory was because there was no other means for the people
of Moneragala to make a proper living. Ranjan Wijeratine was one of
the principal backers of the Pelwatte project. Since paddy cultivation
could not be carried out in the Moneragala district, sugar was deemed
to be the ideal cash crop for the people living there. Pelwatte sugar
which was started in the 1980s is an example of how people like
J.R.Jayewardene and Ranjan Wijeratne were able to put commonsense
before ideology for the benefit of the people and the country.
Of
course, as one can imagine, that was an era when capitalist enterprise
was considered to be evil and there were voices raised from the
opposition alleging that the people were being made to consume imported
sugar at a higher price so that a ‘capitalist enterprise’ could make
money. But that is not how people will look at that endeavour now.
Today, the prevailing attitude is that if it is a local enterprise or
at least a largely local enterprise, using local inputs, that is ipso
facto a good thing irrespective of whether the operation is owned by
the government or the private sector. It is now respectable to be a
local capitalist. Foreign ownership however is another matter
altogether. The greater the extent of foreign involvement, the less
attractive the entity becomes. People are questioning the wisdom behind
the sale of a part of the Ceylon Petroleum Corporation fuel
distribution network to the Indian Oil Company. That transaction has
enabled the Indians to import fuel, sell it in Sri Lanka and repatriate
their profits. There is no technology transfer or anything that Sri
Lanka gets out of it and the suspicion is that that sale was motivated
only by the need for someone to make a killing on bribes.

The
slogan ‘ganna ape de’ now has traction among the people. That slogan in
fact is gaining traction even in countries like the USA which was once
an ardent advocate of free trade. The ideology of free trade taken to
its logical conclusion would mean that if a country cannot produce
something at less than the world market price of that item, then it
made sense to import it. That kind of an approach is however not
conducive to ensuring livelihoods for all people in an economy. The
only arrangement that makes sense is a mix of free trade with the
promotion and protection of certain industries which are of importance
to the economy, for the food security of the nation and for the
livelihoods of the people.
The question that arises is
whether the present procurement guidelines of the government and the
attitudes of the people entrusted with implementing it, reflect this
commonsense approach. We see from the current controversy surrounding
the award of the tender to construct a 300 MW heavy fuel oil/liquid
natural gas power plant in Kerawalapitiya, that Sri Lanka’s Procurement
Appeal’s Board places local, largely government owned companies on an
equal footing with largely foreign owned entities. That approach will
be necessary if the said project is funded by a multilateral donor like
the ADB or the World Bank because those institutions being
multilateral lending organizations require open international bidding
for their projects.
However when funding for a project is
obtained through the export financing arrangements of certain
countries, the recipient is required to select a bidder from among a
few nominated by the lender. When a country does not obtain
multilateral or bilateral funding for a project, but invites tenders for
important infrastructure projects on a build, operate, own and
transfer basis, that constitutes a business opportunity in Sri Lanka.
Since there is an ‘own and operate’ component in it in addition to the
building and transferring, one would think that largely locally owned
entities should be given priority in awarding such tenders so that the
profits do not flow out of Sri Lanka or that such outflow would be
minimized. What has happened with regard to the Kerawalapitiya LNG
power project is that a largely local and largely government owned
company has been sidelined in favour of a mainly foreign consortium
with junior local partners. At least it is clear that when it comes to
the rival bidder, the technical and engineering expertise available
will be whatever the foreign partner brings in.
LNG power plant tender
Proposals
for a 300 MW heavy fuel oil/liquid natural gas fired power plant at
Kerawalapitiya were called through public advertisement on 16 November
2016 by the CEB on build, operate, own and transfer basis. Eight
proposals were received and the bids were opened on 21 April 2017. The
Technical Evaluation Committee (TEC) had rejected two bids out of eight
on the ground that they have not met the minimum functional
specifications, and has recommended six bids for financial evaluation
including five bids that had not included some of the necessary
equipment. That was subject to the condition that the five bidders
concerned would provide the required installations without any
additional cost to the CEB.
The Standing Cabinet Appointed
Procurement Committee (SCAPC) had rejected the conditional
recommendation of TEC and has directed the TEC to open the financial
proposal of the only bid which was commercially and technically
responsive. However, when TEC opened this bid, it was found that there
is no hard copy of the signed financial bid. Only a soft copy had been
submitted. The bid had then been rejected. Thereafter, the Ministry of
Power and Renewable Energy had proposed to the Cabinet to give all
eight bidders equal opportunity to correct the errors and resubmit
technical and financial proposals. The Cabinet on 29 August 2017 had
directed SCAPC to follow the TEC recommendation and open the five bids
recommended by the TEC.
Pursuant to that evaluation, on 04
April 2018, SCAPC had decided to accept the proposal of Lakdhanavi Ltd.
which was the lowest bid received, as recommended by TEC. An
unsuccessful bidder M/s. Consortium of GCL, WindForce & RenewGen
appealed to the Procurement Appeals Board (PAB) against the award of
the tender to Lakdhanavi Ltd, citing among others the following issues: *
Conflict of interest between the project entity CEB and Lakdhanavi
Ltd. * Reliance of Lakdhanavi on government concessions * Financial
viability of Lakdhanavi bid * Loss to the CEB an effective major
shareholder of Lakdlianavi * Return on investment based on figures
quoted by Lakdhanavi. *Additional equity investment by Lakdhanavi
shareholders
It will be noticed that the last four matters
raised with the Procurements Appeal Board by the appellant M/s.
Consortium of GCL, WindForce & RenewGen appear to be designed to
protect the CEB and Lakdhanavi from themselves. A rival bidder was
arguing that if the tender was awarded to Lakdhanavi, its shareholders
(mainly the government) would have to invest additional equity to see
the project through and that its owning entity (the CEB) would suffer
losses as the return on investment was not sufficient. The PAB upheld
the argument of a conflict of interest between the CEB and Lakdhanavi
Ltd on the following grounds.
= Lakdhanavi Ltd is a
‘subsidiary’ of the CEB and the latter includes the former even in
its consolidated accounts, the connection between the two entities
being that the CEB has 63% controlling shares of Lanka Transformers
Limited Holdings (Pvt.) Ltd and LTL in turn holds 81.6% shares of
Lakdhanavi.
= The Chairman and General Manager of the CEB
are Ex-Officio Directors of Lanka Transformers Limited and CEB holds
the right to appoint another 03 members to the 08 member board. Three
Directors of LTL (not the CEB representatives) represent the Director
Board of Lakdhanavi.
= The Technical Evaluation Committee
consists of 13 members and nine of them are CEB officers. Out of the
five members of SCAPC, one officer is from the CEB.
= Due
to this conflict of interest, donor agencies such as WB, ADB and JICA
do not allow Lakdhanavi to participate in CEB tenders.
= During
the pre-bid meeting several international bidders had complained that
the bid is tailor made for Lakdanavi Ltd as the procurement entity is
their parent company.
One would think that the very
fact that the CEB has a subsidiary which is quite capable of carrying
out this project should have clinched the deal for Lakdhanavi without
having to compete with other companies. It is quite clear that
Lakdhanavi has the technical expertise and the engineering know how to
do the project on their own whereas the other bidders would be
dependent on their foreign partners to do the actual construction and
maintenance of the power plant. Since the CEB owns the majority shares
in Lakdhanavi, why would it have been wrong to simply award the
project to Lakdhanavi as an internal arrangement? This is a prime
example of the ideology of free trade taking precedence over
commonsense. We saw the same thing happening with regard to the sale of
government securities. When the Rajapaksa government was in power, the
principal way for bonds to be sold was through direct placements with
primary dealers at an agreed interest rate.
To the new
rulers who came into power in January 2015, such an arrangement smacked
of a ‘command economy’ and they made auctions the main way in which
bonds were sold. The result of that was the great bond scam and a
doubling of the interest rate which in turn has had a knock on effect
throughout the economy and has contributed in no small measure to the
slowdown of the economy. What that showed was that one cannot run a
country without having the commonsense to dispense with ideology when
the necessity to do so arises.
The Procurements Appeal Board
based on the representations of the appellant, made further
observations on the Kerawalapitiya LNG power plant tender which were
designed to protect the CEB and Lakdhanavi from themselves as follows:
The recommended bidder Lakdhanavi has submitted the lowest financial
bid of US $ 175 Million for the construction of the power plant with
the lowest tariff of Rs. 14.98 per kilo watt hour. A project of this
nature cannot be completed with US $ 175mn. The bid prices of all
other bidders are around US $ 300 million. On an earlier occasion,
Lakdhanavi had put in a bid price for the 300 MW heavy fuel oil
combined cycle power plant in Kerawalapitiya at US $ 225 million but
had spent US 310 million to complete the project.
The TEC
had stated in a report that Lakdhanavi has informed their bank that the
total project cost is US $ 330mn including the cost of machinery from
Germany estimated at US $ 190mn. However they have submitted a bid for
US $ 175mn. The bid price is based on the assumption that they are
entitled to VAT, NBT and PAL exemptions for machinery. SCAPC has
inquired from TEC, the practicability of building the power plant at
the capital cost of US $ 175 million. The TEC referring to power plant
cost in the Asian region including China and stated it varies from US $
155mn to US $ 292mn. and therefore the quoted price of US $ 175mn can
be considered practical. The PAB had stated that it is most surprising
to note that TEC had not taken into account the USD 330 million cost of
the previous power plant constructed by Lakdhanavi in Kerawalapitiya
in deciding whether a 300 MW thermal power plant could be built for USD
175 million.
Furthermore, the PAB observed that the
Lakdhanavi tariff has been computed without VAT, NBT and Ports and
Airports Levy assuming exemption from such taxes. The other bidders
have included these taxes in their estimates. SCAPC/TEC has requested
clarification from Lakdhanavi regarding their willingness to bear the
cost of VAT, NBT and PAL on import of plant and machinery during the
construction period without changing the tariff offered in their
financial proposal. The PAB observed that the mere act of making that
inquiry amounts to unfair tender practice in favour of Lakdhanavi.
The
PAB had accepted the argument of the appellant about the inadequacy of
the equity rate of return per annum of around 7% that can be expected
on the figures quoted by Lakdhanavi. With other additional costs such
as cost of VAT, NBT and PAL on imports at implementation, if there is
no increase in the tariff, the return may be around 5%. With such rate
of return on investment that the PAB observed that the banks would not
be willing to lend money to Lakdhanavi for the project. The mere fact
that the PAB made an issue of the tax that had to be paid in relation
to an entity that belongs largely to the very government imposing such
taxes shows how far we have deviated from commonsense. That is a matter
that should have been decided between the CEB which owns Lakdhanavi and
the Treasury.
The PAB concluded that without considering
any of these issues in the financial proposal, TEC has given full score
of 25 points to Lakdhanavi bid, which cannot justified. The SCAP and
TEC had asked Lakdhanavi to give confirmation that they will bear the
cost of VAT and NBT. Lakdhanavi had given the undertaking that if they
are deprived of a VAT, NBT and PAL exemption for importation of
machinery and equipment, they will consider such payments as an extra
cost and absorb it. The Technical Evaluation Committee had recommended,
awarding the tender to Lakdhanavi on the strength of this undertaking.
The PAB further noted that Lakdanavi Ltd was not sure of the funding
sources of their project even by the time they came for the appeal
hearing. Representative of Lakdanavi Ltd had stated that they are
negotiating with the National Development Bank to obtain funds.
When
further details on the loan were requested by the PAB, representatives
of Lakdanavi had stated that once they receive the letter of Intent
they will discuss further details about the project financing. That is
not surprising because given the profile of Lakdhanavi they would have
had the confidence of being able to raise that money from the local
banking system. Lakdhanavi Ltd and its parent company Lanka
Transformers Ltd which are both entities in which the government has a
majority stake, claim some impressive achievements.
Lakdhanavi as a CEB subsidiary
Lakdhanavi
Ltd was set up in 1996 to get into the thermal power generation
business as a subsidiary of Lanka Transformers Ltd (LTL). The Ceylon
Electricity Board CEB has 63% of the shares in Lanka Transformers Ltd
and LTL in turn owns 81.6% shares of Lakdhanavi. Having started with a
25MW power plant, Lakdhanavi set up Heladhanavi Ltd a 100 MW Power
Plant as a joint venture with Hemas PLC. It also built the 300MW,
Combined Cycle Power plant in Kerawalapitiya. Lakdhanavi has
constructed a thermal power plant in the Maldives in 2016 and have
three thermal projects totaling 215 MW in Bangaladesh.
The
parent company of Lakdhanavi, Lanka Transformers Ltd (LTL) was started
as a Joint Venture with 70% holding by CEB and 30% by Bonar Long a
Scottish company in 1980 to manufacture transformers for the use of the
CEB. The factory was located in Moratuwa with a capacity to produce
700 transformers. Since then there have been no imports of transformers
to Sri Lanka. LTL has supplied more than 40,000 transformers to the
CEB. From 2003, LTL has been exporting transformers and now exports
more transformers than it sells within Sri Lanka. The Moratuwa factory
now produces more than 4,000 transformers annually.
In 2015
LTL had acquired a Indian Switchgear Company in India which
manufactures components required by power utilities. In 1991, LTL set up
a galvanizing facility to protect steel structures such as
transmission towers used by the CEB from corrosion. It now does
galvanizing for the construction industry as well. In 1996, LTL set up a
modern steel fabrication facility in Bandaragama. In addition to this,
they have ventured into mini hydropower stations, wind power
facilities, and also got into hydro power projects in Nepal. LTL also
constructs transmission lines and substations and has a specialized
subsidiary called Ceylex Engineering which now does projects in
Tanzania, Kenya and Ethiopia as well. Celyex is involved in constructing
five power plants totaling 600MW capacity in Bangladesh as a
contractor.
The diversification of LTL has been such that
in 2017, LTL had only 16% of its revenue from the CEB and the rest
would come from overseas or from the private sector in Sri Lanka or
other government entities that use the services of LTL and its many
offshoots. One would think that any company that gets more than 80% of
its revenue from exports and services offered to the private sector can
be trusted to know what it can and cannot finance. One of the reasons
why the PAB did not award the tender to Lakdhanavi is because they were
not sure whether the bank is aware that the bidder has to bear an
additional Rs. 3 Billion for payment of VAT, NBT and PAL and an
additional Rs. one billion for the LNG compressor which are not
included in the tariff.
The PAB observed that a clear
financing plan is necessary because there is no time for bidders to
look for funding after getting the Letter of Intent as that will delay
the construction. That sounds hollow in a country where power projects
have been delayed for years and decades for an umpteen number of
reasons. How many years did it take for any government to screw up
enough courage to build the Norochcholai and Upper Kotmale power
projects? Why is the proposed Sampur power plant still in abeyance? In
such circimstances, what difference will the passage of a few weeks or
months make while Lakdhanavi finds a suitable funder from among the
local banking community? If a company has done consistently well and
has a large export market, local banks will be falling over one another
to give money to such a company.
The PAB held that the TEC’s behavior is biased or irresponsible because it gave full marks for the Lakdhanavi financing plan despite the shortcomings of their financial proposal and that TEC has not paid due diligence to the financial viability of the project. They therefore recommended that the award to Lakdhanavi be reversed and the tender awarded to GCL Windforce & RenewGen at the tariff of Rs. 15.97 per kilowatt hour. The question that arises in all this is, if the CEB has a subsidiary that has already carried out a very similar project locally and is doing thermal power plants overseas, why was this project not handed over to them as an internal arrangement?