CBK demands suspension of multimillion dollar Chinese water project

A multimillion dollar Chinesefunded water supply project has run into controversy with former President Chandrika Bandaranaike Kumaratunga openly demanding its suspension and an inquiry on the grounds that it is overpriced.

In August 2016, the National Water Supply and Drainage Board ( NWSDB) awarded a contract to China Machinery Engineering Corporation ( CMEC) for the Gampaha, Attanag alla and Minuwangoda Integrated Water Supply Scheme. The project cost is US$ 229.5mn (Rs 35.8bn). It is 85 per- cent funded by a China Development Bank (CDB) loan while the Bank of Ceylon will lend the Government 15 percent of the contract price or US$ 34mn (Rs 5.3bn) as local funding.

The Treasury has already disbursed US$ 8.77mn ( Rs 1.3bn) as insurance and management fees. But Ms Kumaratunga, who played a key role in the formation of the incumbent Government, is now calling for all payments to CMEC to be halted and for the conduct of an investigation.

“Suffice it to state that this is shocking conduct on the part of our good governance regime to permit the cover up of a massive fraud in the award of the above contract,” she states, in a letter to Finance Minister Mangala Samaraweera. The letter was seen by the Sunday Times. She says "this Government has not taken action to inquire properly into this matter even after I brought it to the notice of the highest authorities, all of whom seem to have been satisfied with a scrappy report from the ERD [External Resources Department].”

Between January and December 2016, the Auditor General’s Department has queried the project three times. While the National Water Supply and Drainage Board (NWSDB) has clarified some of these concerns, the Department recently sent two more sets of queries which are yet to be answered.

One of the issues previously flagged was the significant disparity between the NWSDB’s estimated project cost--US$ 172mn--and the price at which the contract was signed--US$ 229.5mn. This is a difference of 34.8 percent. The gap was later narrowed.

The project first surfaced as an unsolicited proposal under the Rajapaksa administration. In 2010, the Cabinet decided to use preferential buyers’ credit from China to implement it. Technical and financial proposals were only obtained from CMEC.

In 2012, the Standing Cabinet Appointed Procurement Committee ( SCAPC) noticed a “considerable deviation” between the cost estimated by NWSDB engineers for pipe- laying and price cited by the bidder.

Cabinet subsequently called for negotiations to bring down the gap between contract cost and engineers’ estimate. It was decided that, as the project would start in 2014 and end in 2017, the engineers’ estimate should also be revised according to the actual inflation rate published by the Government. It was therefore raised to US$ 193.7mn.

It was then agreed by Cabinet to award CMEC the contract at a total fixed all inclusive price of US$ 229.5mn. This is 18.5 percent higher than the revised engineers’ estimate. The contract agreement was signed in May 2013, subject to finalisation of the loan agreement. CMEC started preliminary works in February 2014.

With the change of Government in January 2015, a project review committee appointed to inquire into unsolicited water supply projects recommended the continuation of the CMEC contract. The Cabinet granted approval and requested the External Resources Department of the Ministry of Finance to negotiate with CDB to secure funds.

In February 2016, Cabinet granted approval for a loan agreement between NWSDB and CDB to finance 85 percent of project cost and with the Bank of Ceylon for the remainder. And in August that year, the Cabinet authorised the Treasury to issue a letter of undertaking to CDB for US$ 146.3mn, which is 75 percent of the loan amount, in addition to a letter of guarantee.

But the Auditor General’s Department soon started raising concerns, including what it said was the violation of financial regulations in the award of the contract. The Sunday Times is in receipt of their queries.

“There appears to have been an unholy hurry to award the contract before guaranteeing the availability of funds,” Ms Kumaratunga’s letter to the Minister of Finance states. “Another shocking fact- NWSDB permitted CMEC to spend Rs 1,500 million before availability of funds was confirmed. The NWSDB had spent Rs 96.1 million in 2013 and 2014 without Cabinet approval. Several other expenditures were made without Treasury approval.”

No action, however, has been taken to cancel the contract. Neither has an inquiry been launched.

The ERD has maintained that such a move will have adverse financial implications, with the Government having to make penalty payments under the loan agreement. Additionally, the borrower may, with written notice to the lender, call off the loan but a cancellation fee of 3 percent on the amount of the available commitment will be collected.