Kantale sugar factory crisis: Indian investors take Govt. to arbitration in Singapore

The Kantale sugar factory's Indian investors, whose bribery complaint led to the arrest last year of President Maithripala Sirisena’s Chief of Staff, have taken the Sri Lankan Government to arbitration in Singapore after it failed to transfer the lands and equipment necessary for the project to proceed.

The former presidential chief of staff I. H. K. Mahanama and State Timber Corporation Chairman P. Dissanayake were caught by Bribery Commission sleuths in May last year while counting a cash bribe of Rs 20 million in the back of a car. It was the first installment of a Rs 100 million payment allegedly solicited by Dr. Mahanama in exchange for transferring machinery, scrap metal and other assets belonging to the Kantale sugar factory to MG Sugars Lanka (Pvt) Ltd.

MG Sugars is a joint venture of the Sri Lanka Government ( the Treasury holds 51 percent of shares), Shri Prabulingeshwar Sugars and Chemicals Ltd of Bangalore and SLI Development Pvt Ltd of Singapore. In 2015, it signed a US$ 100 million deal to review the Kantale sugar factory but has struggled since then to have all of its assets transferred.

After the officials’ arrests, the company was hopeful that the impediments would be removed, authoritative sources said. The investors had even written to Prime Minister Ranil Wickremesinghe, asking him to “at least now” release the Kantale sugar factory infrastructure so that their project could go ahead.

This, however, did not happen and the company proceeded with arbitration, authoritative sources said. The hearing took place in Singapore. It is now concluded and the award will be delivered soon.

Notwithstanding the case, MG Sugars has written to the Government expressing a willingness to continue with the project. But the investors have had a tough time since signing on. In his previous role as Lands Ministry Secretary, Dr Mahanama even secured Cabinet approval to auction the assets MG Sugars was claiming under its agreement.

The company then filed arbitration proceedings in a Singapore tribunal to stop the Government of Sri Lanka from selling the machinery and scrap. In October 2017, the Singapore International Arbitration Centre granted MG Sugars Lanka an inter- im award preventing the Lands Ministry from disposing of the machinery and other assets pending a final decision.

Investigations later revealed Dr Mahanama was allegedly angling for a bribe. The machinery was valued at Rs 540 million. This is the amount he is initially said to have been solicited, before agreeing to settle for Rs 100 million. His accomplice, Mr Dissanayake, was “more of a go- between”.

The Kantale deal has been dragging on since August 2015 in a textbook case of the agonies faced by foreigners seeking to set up business in Sri Lanka. That month, MG Sugars Lanka signed the Board of Investment (BOI) and shareholder agreements for the revival and restructuring of the factory.

The 30- year deal was structured as a build, operate and transfer project with 51 percent of shares held by the Government. For their total investment of US$ 100 million, the foreign parties would get the remaining 49 percent. The operation was expected to generate around 1,200 jobs and meet a large percentage of the country’s sugar requirement. MG Sugars Lanka was to receive 500 acres for its nursery, housing and other facilities. This transaction, too, was also significantly delayed with the transfer taking place only last year.

Meanwhile, a total of 20,000 hectares was to be cultivated by farmers under a tripartite agreement with the company guaranteeing a market for their produce. But a dispute then arose over the machinery and scrap metal. The investors maintained that it is explicit under the relevant agreement that these must come to them. Dr Mahanama disputed that. The matter was referred to the Attorney General’s Department which initially gave an opinion in favour of MG Sugars but later reversed it.

This cleared the way for Dr Mahanama to call for tenders to sell the machinery for scrap iron-- and the investors went for international arbitration, obtaining an interim order to prevent the auction. Around this time, financial gratification was allegedly being sought to push the deal forward.

The investors apprised Prime Minister Wickremesinghe of their dilemma. On his advice, they sent a written complaint to his office with copies to the President and Lands Minister. The PM’s office encouraged them to take the case to the Commission to Investigate Allegations of Bribery or Corruption (CIABOC). This led to the arrests.