POWER PLAYS
Lakdhanavi goes to SC over tender issue
Why the Power Ministry thinks that Lakdhanavi’s proposal is good enough to be implemented if PAB as well as its Secretary thought it is unviable
Media reported last week that Sri Lanka’s power generation capacity is in dire straits. It warned of imminent load shedding commonly called power cuts to be implemented by the Ceylon Electricity Board (CEB).
Power cuts are disliked by all of us. However, it is interesting to note that power cuts were
almost there with us in both 2017 and 2018. In both occasions, it was averted only by resorting to very expensive emergency power purchases.
As revealed in a recent Cabinet Paper submitted by Minister Ravi Karunanayake, the CEB had spent Rs. 5.3 billion in 2017 to avoid power outages.
In that year the CEB ended up with a loss of Rs. 47 b. Again in 2018, CEB spent Rs. 2.1b in emergency power and ended up with a loss of Rs. 26b.
The present dry weather is very typical in this period. It has nothing to do with the impending power crisis. In fact, the CEB had reasonable storage in their hydropower plants at the beginning of the year. Every year, the demand for electricity increases by around five per cent. That is approximately 200MW of capacity.
When demand goes up by 200MW, authorities must also increase the supply by a similar amount by adding new power plants to the system. However, the last such power plant was added to the system way back in 2014. For five long years, the Ministry of Power and Energy has not been able to facilitate new power plant construction.
Recently the local media organisations were invited to a press conference by the Power and Energy Minister Ravi Karunanayake.
The objective was to justify the award of two 300MW LNG operated power plants by the Ministry. However, the press conference quickly degenerated to a verbal war between one of the companies which were awarded a project, Lakdhanavi Ltd and the Secretary to the Ministry Dr B.M.S Batagoda.
“We have since studied how these two projects were awarded. The facts are startling, to say the least. It also explains why Sri Lanka is not getting new power plants and why CEB has such enormous losses,” he said.
The story begins in 2016 when CEB tendered only for one project of 300MW power plant in Kerawalapitiya. The tender document specified power plant will operate for two years on diesel until LNG terminal was built to operate for the next 18 years on LNG.
The Tender Board appointed by the Cabinet, which is also called SCAPC, had five members including Dr Suren Batagoda.
Lakdhanavi alleged Batagoda dictated terms in SCAPC. Batagoda, however, countered saying he was a mere member and had no say in the matters.
After a long-drawn evaluation, in October 2017, the Technical Evaluation Committee (TEC) had recommended to SCAPC that Lakdhanavi Ltd, which offered the lowest tariff at Rs. 14.98/unit ranked No. 1 bidder and to start negotiations.
SCAPC had however not accepted TEC report. SCAPC picked up on an exemption of taxes for imported machinery which Lakdhanavi had used to reach its project cost.
It asked TEC further clarifications and to re-evaluate. In response, on a second and third time also TEC, in December 2017, had recommended Lakdhanavi as Rank No. 1 subject to Lakdhanavi agreeing not to pass any additional tax expenses to CEB.
For an independent observer, such an undertaking seemed to have solved the tax problem given the next best bid available to CEB being almost one rupee more for each unit of electricity given. That boils down to an extra cost of Rs. 2 Billion every year.
SCAPC, however, did not call Lakdhanavi for negotiations despite such an undertaking. They still hanged on to the tax issue and asked TEC, in case Lakdhanavi has to bear the taxes, whether it has enough budget available to construct the power plant. In the press conference, Batagoda showed a letter where the Finance Ministry had given a letter saying the tax exemption programme has been suspended from 2016. Lakdhanavi says they asked in early 2017 from CEB a clarification whether exemptions are available, CEB asked all Bidders to follow the relevant Acts.
The act clearly provides exemptions. The opinion of a legal expert is that the Ministry of Finance cannot suspend an exemption granted in law.
However, SCAPC seems to have won the day when in January 2018, TEC said Lakdhanavi’s will not have a viable project if it is denied exemptions and hence rejected Lakdhanavi’s bid. The representative of the Finance Ministry in TEC interestingly has dissented against the government going for more expensive bid, stating that viability of the project or otherwise is a matter for the Bidder and that a decision should not be made without asking Lakdhanavi.
This, TEC did in March 2018 and Lakdhanavi had agreed to bear the taxes if necessary and to do the project at a lower profit. Thus, after full one-year, SCAPC decided to award the project to Lakdhanavi in April 2018.
Representatives of Lakdhanavi in the press conference alleged that at this point, Batagoda manipulated the entire process by asking losing bidders to appeal to Procurement Appeal Board (PAB).
They said a referral to PAB is only possible under 2006 Procurement Guideline. That guideline is, as per them, applicable only where government funds are used to procure. This is a Private Public Partnership (PPP) project where the government does not spend to construct the power plant. The chosen bidder constructs and sells electricity to the CEB for 20 years to recover its investment.
After that bidder transfers the power plant to CEB’S ownership.
Thus, Lakdhanavi contends 1998 guideline must have been used which is especially for PPP projects.
The bidder who was ranked second, a Chinese-led consortium called GCL, appealed to PAB with not less than 10 reasons why Lakdhanavi’s bid should have been rejected.
The PAB referred the allegations to TEC, which rejected all of them.
This PAB report is the only reason cited by freshly appointed Minister Ravi Karunanayake in February 2019 to ask for the Cabinet Approval to award the project to more expensive GCL overlooking the lowest bidder Lakdhanavi.
However, Karunanayake seems to have decided to play it safe. Lakdhanavi was jumping up and down shouting against PAB report.
Karunanayake therefore in the same Cabinet Paper recommended a “Special” project to be awarded to Lakdhanavi by splitting the land originally proposed for only one project.
Lakdhanavi and GCL power plants will sit side by side. Lakdhanavi will get Rs. 14/98 per unit of electricity, the Chinese will get Rs. 15.97/unit.
The issue anybody will ask is why the Power Ministry thinks that Lakdhanavi’s proposal is good enough to be implemented if PAB and well as its Secretary thought it is unviable.
If the reason is that Ministry is not accepting PAB report, Lakdhanavi should stand to get the original project in place of GCL, thus saving Rs. 40B to the country.
If not Lakdhanavi should have been rejected and not given any project.
In the press conference, Batagoda struggled to provide a convincing answer. The truth may be that the Ministry wanted Lakdhanavi to keep its big mouth shut and not criticize the Ministry’s smart manipulation to cause Rs. 40 billion loss to this country.
Lakdhanavi has now gone to the Supreme Court seeking justice. It is seeking an injunction to stop the tender being awarded to GCL. It rejects the “special” project given and says it should rightfully get the project through the tender.
Whatever the merits of Lakdhanavi’s case are and the outcome of its court action, this story is shocking proof of the extent to which a powerful bureaucracy can complicate such an important procurement and delay the setting up of much-needed power plants at lowest possible cost.
We have since studied how these two projects were awarded. The facts are startling, to say the least. It also explains why Sri Lanka is not getting new power plants and why CEB has such enormous losses
They said a referral to PAB is only possible under 2006 Procurement Guideline. That guideline is, as per them, applicable only where government funds are used to procure.
A RECENT CABINET PAPER SAYS CEB SPENT RS. 5.3BN IN 2017 TO AVOID POWER OUTAGES
IN 2017, CEB INCURRED A LOSS OF RS. 47BN
IN 2018, CEB SPENT RS. 2.1BN IN EMERGENCY POWER AND INCURRED A LOSS OF RS. 26BN