{"id":86682,"date":"2019-03-23T15:28:47","date_gmt":"2019-03-23T22:28:47","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=86682"},"modified":"2019-03-23T15:28:47","modified_gmt":"2019-03-23T22:28:47","slug":"kerawalapitiya-lng-power-plant-tender-imbroglio","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2019\/03\/23\/kerawalapitiya-lng-power-plant-tender-imbroglio\/","title":{"rendered":"Kerawalapitiya LNG power plant tender imbroglio"},"content":{"rendered":"

by C.A.Chandraprema Courtesy The Island<\/em><\/span><\/h2>\n\n\n

Even though the UNP opened up the economy in 1977 and eschewed the \nprotectionist, closed economic model followed by the preceding Sirima \nBandaranaike government, the UNP at least when it was under \nJ.R.Jayewardene, never took leave of their senses. Despite their stated\n ideology of an open economy, when common sense or a lack of \nalternatives required it, the old UNP was not averse to adopt policies \nthat looked SLFPish. For example, when the Pelwatte Sugar Co was \nstarted in the 1980s, sugar was produced in a factory with foreign \ncollaboration from sugarcane grown in the Moneragala district, and the \nduties on imported sugar were increased slightly so as to make the sugar\n from Pelwatte competitive on the local market. After a few years, if \nthis writer recalls correctly, it was not necessary to maintain the \nimport duty because Pelwatte sugar could be sold at the world market \nprice.
<\/p>\n\n\n\n

Even if Pelwatte sugar would always need to be \nprotected with a tariff on imported sugar, it still made sense to \ncontinue with it. The reason why the UNP government of the time started\n that sugar factory was because there was no other means for the people\n of Moneragala to make a proper living. Ranjan Wijeratine was one of \nthe principal backers of the Pelwatte project. Since paddy cultivation \ncould not be carried out in the Moneragala district, sugar was deemed \nto be the ideal cash crop for the people living there. Pelwatte sugar \nwhich was started in the 1980s is an example of how people like \nJ.R.Jayewardene and Ranjan Wijeratne were able to put commonsense \nbefore ideology for the benefit of the people and the country.
<\/p>\n\n\n\n

Of\n course, as one can imagine, that was an era when capitalist enterprise \nwas considered to be evil and there were voices raised from the \nopposition alleging that the people were being made to consume imported\n sugar at a higher price so that a \u2018capitalist enterprise\u2019 could make \nmoney. But that is not how people will look at that endeavour now. \nToday, the prevailing attitude is that if it is a local enterprise or \nat least a largely local enterprise, using local inputs, that is ipso \nfacto a good thing irrespective of whether the operation is owned by \nthe government or the private sector. It is now respectable to be a \nlocal capitalist. Foreign ownership however is another matter \naltogether. The greater the extent of foreign involvement, the less \nattractive the entity becomes. People are questioning the wisdom behind\n the sale of a part of the Ceylon Petroleum Corporation fuel \ndistribution network to the Indian Oil Company. That transaction has \nenabled the Indians to import fuel, sell it in Sri Lanka and repatriate\n their profits. There is no technology transfer or anything that Sri \nLanka gets out of it and the suspicion is that that sale was motivated \nonly by the need for someone to make a killing on bribes.
<\/p>\n\n\n\n

\"\"\/<\/figure>\n\n\n\n

The\n slogan \u2018ganna ape de\u2019 now has traction among the people. That slogan in\n fact is gaining traction even in countries like the USA which was once\n an ardent advocate of free trade. The ideology of free trade taken to \nits logical conclusion would mean that if a country cannot produce \nsomething at less than the world market price of that item, then it \nmade sense to import it. That kind of an approach is however not \nconducive to ensuring livelihoods for all people in an economy. The \nonly arrangement that makes sense is a mix of free trade with the \npromotion and protection of certain industries which are of importance \nto the economy, for the food security of the nation and for the \nlivelihoods of the people.   
<\/p>\n\n\n\n

The question that arises is \nwhether the present procurement guidelines of the government and the \nattitudes of the people entrusted with implementing it, reflect this \ncommonsense approach. We see from the current controversy surrounding \nthe award of the tender to construct a 300 MW heavy fuel oil\/liquid \nnatural gas power plant in Kerawalapitiya, that Sri Lanka\u2019s Procurement \nAppeal\u2019s Board places local, largely government owned companies on an \nequal footing with largely foreign owned entities. That approach will \nbe necessary if the said project is funded by a multilateral donor like\n the ADB or the World Bank because those institutions being \nmultilateral lending organizations require open international bidding \nfor their projects.
<\/p>\n\n\n\n

However when funding for a project is \nobtained through the export financing arrangements of certain \ncountries, the recipient is required to select a bidder from among a \nfew nominated by the lender. When a country does not obtain \nmultilateral or bilateral funding for a project, but invites tenders for\n important infrastructure projects on a build, operate, own and \ntransfer basis, that constitutes a business opportunity in Sri Lanka. \nSince there is an \u2018own and operate\u2019 component in it in addition to the \nbuilding and transferring, one would think that largely locally owned \nentities should be given priority in awarding such tenders so that the \nprofits do not flow out of Sri Lanka or that such outflow would be \nminimized. What has happened with regard to the Kerawalapitiya LNG \npower project is that a largely local and largely government owned \ncompany has been sidelined in favour of a mainly foreign consortium \nwith junior local partners.  At least it is clear that when it comes to\n the rival bidder, the technical and engineering expertise available \nwill be whatever the foreign partner brings in.
<\/p>\n\n\n\n

LNG power plant tender
<\/p>\n\n\n\n

Proposals\n for a 300 MW heavy fuel oil\/liquid natural gas fired power plant at \nKerawalapitiya were called through public advertisement on 16 November \n2016 by the CEB on build, operate, own and transfer basis. Eight \nproposals were received and the bids were opened on 21 April 2017. The \nTechnical Evaluation Committee (TEC) had rejected two bids out of eight\n on the ground that they have not met the minimum functional \nspecifications, and has recommended six bids for financial evaluation \nincluding five bids that had not included some of the necessary \nequipment. That was subject to the condition that the five bidders \nconcerned would provide the required installations without any \nadditional cost to the CEB.
<\/p>\n\n\n\n

The Standing Cabinet Appointed \nProcurement Committee (SCAPC) had rejected the conditional \nrecommendation of TEC and has directed the TEC to open the financial \nproposal of the only bid which was commercially and technically \nresponsive. However, when TEC opened this bid, it was found that there \nis no hard copy of the signed financial bid. Only a soft copy had been \nsubmitted. The bid had then been rejected. Thereafter, the Ministry of \nPower and Renewable Energy had proposed to the Cabinet to give all \neight bidders equal opportunity to correct the errors and resubmit \ntechnical and financial proposals. The Cabinet on 29 August 2017 had \ndirected SCAPC to follow the TEC recommendation and open the five bids \nrecommended by the TEC.
<\/p>\n\n\n\n

Pursuant to that evaluation, on 04 \nApril 2018, SCAPC had decided to accept the proposal of Lakdhanavi Ltd.\n which was the lowest bid received, as recommended by TEC. An \nunsuccessful bidder M\/s. Consortium of GCL, WindForce & RenewGen \nappealed to the Procurement Appeals Board (PAB) against the award of \nthe tender to Lakdhanavi Ltd, citing among others the following issues: *\n Conflict of interest between the project entity CEB and Lakdhanavi \nLtd. * Reliance of Lakdhanavi on government concessions * Financial \nviability of Lakdhanavi bid * Loss to the CEB an effective major \nshareholder of Lakdlianavi * Return on investment based on figures \nquoted by Lakdhanavi. *Additional equity investment by Lakdhanavi \nshareholders
<\/p>\n\n\n\n

It will be noticed that the last four matters \nraised with the Procurements Appeal Board by the appellant M\/s. \nConsortium of GCL, WindForce & RenewGen appear to be designed to \nprotect the CEB and Lakdhanavi from themselves. A rival bidder was \narguing that if the tender was awarded to Lakdhanavi, its shareholders \n(mainly the government) would have to invest additional equity to see \nthe project through and that its owning entity (the CEB) would suffer \nlosses as the return on investment was not sufficient. The PAB upheld \nthe argument of a conflict of interest between the CEB and Lakdhanavi \nLtd on the following grounds.
<\/p>\n\n\n\n

=  Lakdhanavi Ltd is a\n \u2018subsidiary\u2019 of the CEB and the latter \tincludes the former even in \nits consolidated accounts, the connection \tbetween the two entities \nbeing that the CEB has 63% controlling shares of \tLanka Transformers \nLimited Holdings (Pvt.) Ltd and LTL in turn holds 81.6% \tshares of \nLakdhanavi.
<\/p>\n\n\n\n

=  The Chairman and General Manager of the CEB \nare Ex-Officio Directors \tof Lanka Transformers Limited and CEB holds \nthe right to appoint another 03 \tmembers to the 08 member board. Three \nDirectors of LTL (not the CEB \trepresentatives) represent the Director \nBoard of Lakdhanavi.
<\/p>\n\n\n\n

=  The Technical Evaluation Committee \nconsists of 13 members and nine of \tthem are CEB officers. Out of the \nfive members of SCAPC, one officer is from \tthe CEB.
<\/p>\n\n\n\n

=  Due\n to this conflict of interest, donor agencies such as WB, ADB and \tJICA\n do not allow Lakdhanavi to participate in CEB tenders.
<\/p>\n\n\n\n

= During\n the pre-bid meeting several international bidders had complained \tthat\n the bid is tailor made for Lakdanavi Ltd as the procurement entity is \n\ttheir parent company.
<\/p>\n\n\n\n

One would think that the very \nfact that the CEB has a subsidiary which is quite capable of carrying \nout this project should have clinched the deal for Lakdhanavi without \nhaving to compete with other companies. It is quite clear that \nLakdhanavi has the technical expertise and the engineering know how to \ndo the project on their own whereas the other bidders would be \ndependent on their foreign partners to do the actual construction and \nmaintenance of the power plant.  Since the CEB owns the majority shares\n in Lakdhanavi, why would it have been wrong to simply award the \nproject to Lakdhanavi as an internal arrangement? This is a prime \nexample of the ideology of free trade taking precedence over \ncommonsense. We saw the same thing happening with regard to the sale of \n government securities. When the Rajapaksa government was in power, the \nprincipal way for bonds to be sold was through direct placements with \nprimary dealers at an agreed interest rate.
<\/p>\n\n\n\n

To the new \nrulers who came into power in January 2015, such an arrangement smacked\n of a \u2018command economy\u2019 and they made auctions the main way in which \nbonds were sold. The result of that was the great bond scam and a \ndoubling of the interest rate which in turn has had a knock on effect \nthroughout the economy and has contributed in no small measure to the \nslowdown of the economy. What that showed was that one cannot run a \ncountry without having the commonsense to dispense with ideology when \nthe necessity to do so arises.
<\/p>\n\n\n\n

The Procurements Appeal Board\n based on the representations of the appellant, made further \nobservations on the Kerawalapitiya LNG power plant tender which were \ndesigned to protect the CEB and Lakdhanavi from themselves as follows:  \n The recommended bidder Lakdhanavi has submitted the lowest financial \nbid of US $ 175 Million for the construction of the power plant with \nthe lowest tariff of Rs. 14.98 per kilo watt hour. A project of this \nnature cannot be completed with US $ 175mn.  The bid prices of all \nother bidders are around US $ 300 million. On an earlier occasion, \nLakdhanavi had put in a bid price for the 300 MW heavy fuel oil \ncombined cycle power plant in Kerawalapitiya at US $ 225 million but \nhad spent US 310 million to complete the project.
<\/p>\n\n\n\n

The TEC \nhad stated in a report that Lakdhanavi has informed their bank that the\n total project cost is US $ 330mn including the cost of machinery from \nGermany estimated at US $ 190mn. However they have submitted a bid for \nUS $ 175mn. The bid price is based on the assumption that they are \nentitled to VAT, NBT and PAL exemptions for machinery. SCAPC has \ninquired from TEC, the practicability of building the power plant at \nthe capital cost of US $ 175 million. The TEC referring to power plant \ncost in the Asian region including China and stated it varies from US $\n 155mn to US $ 292mn. and therefore the quoted price of US $ 175mn can \nbe considered practical. The PAB had stated that it is most surprising \nto note that TEC had not taken into account the USD 330 million cost of\n the previous power plant constructed by Lakdhanavi in Kerawalapitiya \nin deciding whether a 300 MW thermal power plant could be built for USD\n 175 million.
<\/p>\n\n\n\n

Furthermore, the PAB observed that the \nLakdhanavi tariff has been computed without VAT, NBT and Ports and \nAirports Levy assuming exemption from such taxes. The other bidders \nhave included these taxes in their estimates. SCAPC\/TEC has requested \nclarification from Lakdhanavi regarding their willingness to bear the \ncost of VAT, NBT and PAL on import of plant and machinery during the \nconstruction period without changing the tariff offered in their \nfinancial proposal. The PAB observed that the mere act of making that \ninquiry amounts to unfair tender practice in favour of Lakdhanavi.
<\/p>\n\n\n\n

The\n PAB had accepted the argument of the appellant about the inadequacy of \n the equity rate of return per annum of around 7% that can be expected \non the figures quoted by Lakdhanavi. With other additional costs such \nas cost of VAT, NBT and PAL on imports at implementation, if there is \nno increase in the tariff, the return may be around 5%. With such rate \nof return on investment that the PAB observed that the banks would not \nbe willing to lend money to Lakdhanavi for the project. The mere fact \nthat the PAB made an issue of the tax that had to be paid in relation \nto an entity that belongs largely to the very government imposing such \ntaxes shows how far we have deviated from commonsense. That is a matter \n that should have been decided between the CEB which owns Lakdhanavi and\n the Treasury. 
<\/p>\n\n\n\n

The PAB concluded that without considering \nany of these issues in the financial proposal, TEC has given full score\n of 25 points to Lakdhanavi bid, which cannot justified. The SCAP and \nTEC had asked Lakdhanavi to give confirmation that they will bear the \ncost of VAT and NBT. Lakdhanavi had given the undertaking that if they \nare deprived of a VAT, NBT and PAL exemption for importation of \nmachinery and equipment, they will consider such payments as an extra \ncost and absorb it. The Technical Evaluation Committee had recommended, \n awarding the tender to Lakdhanavi on the strength of this undertaking. \nThe PAB further noted that Lakdanavi Ltd was not sure of the funding \nsources of their project even by the time they came for the appeal \nhearing. Representative of Lakdanavi Ltd had stated that they are \nnegotiating with the National Development Bank to obtain funds.
<\/p>\n\n\n\n

When\n further details on the loan were requested by the PAB, representatives \n of Lakdanavi had stated that once they receive the letter of Intent \nthey will discuss further details about the project financing. That is \nnot surprising because given the profile of Lakdhanavi they would have \nhad the confidence of being able to raise that money from the local \nbanking system. Lakdhanavi Ltd and its parent company Lanka \nTransformers Ltd which are both entities in which the government has a \nmajority stake, claim some impressive achievements.
<\/p>\n\n\n\n

Lakdhanavi as a CEB subsidiary
<\/p>\n\n\n\n

Lakdhanavi\n Ltd was set up in 1996 to get into the thermal power generation \nbusiness as a subsidiary of Lanka Transformers Ltd (LTL). The Ceylon \nElectricity Board CEB has 63% of the shares in Lanka Transformers Ltd \nand LTL in turn owns 81.6% shares of Lakdhanavi. Having started with a \n25MW power plant, Lakdhanavi set up Heladhanavi Ltd a 100 MW Power \nPlant as a joint venture with Hemas PLC. It also built the 300MW, \nCombined Cycle Power plant in Kerawalapitiya. Lakdhanavi has \nconstructed a thermal power plant in the Maldives in 2016 and have \nthree thermal projects totaling 215 MW in Bangaladesh.
<\/p>\n\n\n\n

 The \nparent company of Lakdhanavi, Lanka Transformers Ltd (LTL) was started \nas a Joint Venture with 70% holding by CEB and 30% by Bonar Long a \nScottish company in 1980 to manufacture transformers for the use of the\n CEB. The factory was located in Moratuwa with a capacity to produce \n700 transformers. Since then there have been no imports of transformers\n to Sri Lanka. LTL has supplied more than 40,000 transformers to the \nCEB. From 2003, LTL has been exporting transformers and now exports \nmore transformers than it sells within Sri Lanka. The Moratuwa factory \nnow produces more than 4,000 transformers annually.
<\/p>\n\n\n\n

 In 2015\n LTL had acquired a Indian Switchgear Company in India which \nmanufactures components required by power utilities. In 1991, LTL set up\n a galvanizing facility to protect steel structures such as \ntransmission towers used by the CEB from corrosion. It now does \ngalvanizing for the construction industry as well. In 1996, LTL set up a\n modern steel fabrication facility in Bandaragama. In addition to this,\n they have ventured into mini hydropower stations, wind power \nfacilities, and also got into hydro power projects in Nepal. LTL also \nconstructs transmission lines and substations and has a specialized \nsubsidiary called Ceylex Engineering which now does projects in \nTanzania, Kenya and Ethiopia as well. Celyex is involved in constructing\n five power plants totaling 600MW capacity in Bangladesh as a \ncontractor.
<\/p>\n\n\n\n

 The diversification of LTL has been such that \nin 2017, LTL had only 16% of its revenue from the CEB and the rest \nwould come from overseas or from the private sector in Sri Lanka or \nother government entities that use the services of LTL and its many \noffshoots. One would think that any company that gets more than 80% of \nits revenue from exports and services offered to the private sector can\n be trusted to know what it can and cannot finance. One of the reasons \nwhy the PAB did not award the tender to Lakdhanavi is because they were\n not sure whether the bank is aware that the bidder has to bear an \nadditional Rs. 3 Billion for payment of VAT, NBT and PAL and an \nadditional Rs. one billion for the LNG compressor which are not \nincluded in the tariff.
<\/p>\n\n\n\n

 The PAB observed that a clear \nfinancing plan is necessary because there is no time for bidders to \nlook for funding after getting the Letter of Intent as that will delay \nthe construction. That sounds hollow in a country where power projects \nhave been delayed for years and decades for an umpteen number of \nreasons. How many years did it take for any government to screw up \nenough courage to build the Norochcholai and Upper Kotmale power \nprojects? Why is the proposed Sampur power plant still in abeyance? In \nsuch circimstances, what difference will the passage of a few weeks or \nmonths make while Lakdhanavi finds a suitable funder from among the \nlocal banking community? If a company has done consistently well and \nhas a large export market, local banks will be falling over one another\n to give money to such a company.
<\/p>\n\n\n\n

 The PAB held that the \nTEC\u2019s behavior is biased or irresponsible because it gave full marks \nfor the Lakdhanavi financing plan despite the shortcomings of their \nfinancial proposal and that TEC has not paid due diligence to the \nfinancial viability of the project. They therefore recommended that the \naward to Lakdhanavi be reversed and the tender awarded to GCL Windforce\n & RenewGen at the tariff of Rs. 15.97 per kilowatt hour. The \nquestion that arises in all this is, if the CEB has a subsidiary that \nhas already carried out a very similar project locally and is doing \nthermal power plants overseas, why was this project not handed over to \nthem as an internal arrangement?<\/p>\n","protected":false},"excerpt":{"rendered":"

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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[118,106],"tags":[],"class_list":["post-86682","post","type-post","status-publish","format-standard","hentry","category-corruption-and-bribery","category-106"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/86682","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=86682"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/86682\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=86682"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=86682"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=86682"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}