Commercial debt jam, large-scale projects, and corruption
The Japanese Government, a key development partner, recently asked the Government to clarify its policies on debt moratorium, plans for the energy sector, and the rationale for delaying the Light Rail Transit (LRT) project in reply to the request for funding of a new transmission line.
All major donors will probably ask the Government to shed light on the debt situation. Donors generally don’t pull out of countries they are assisting -- they have a stake in safeguarding their political and economic interests in Sri Lanka. But they will go slow on new project approvals waiting for the Government to spell out policies.
The Government’s request for a moratorium may not be viewed favourably by all donors. First, most projects have positive economic benefits. Second, project loans are soft with repayments periods ranging from 15 to 40 years with low interest. Third, Sri Lanka has always had a positive cash flow on all projects as a whole with gross disbursement exceeding loan amortisation. Currently, we have an outstanding project debt of about US$ 18 billion. Loan amortisation accounts for about $ 1 billion every year and the Government will receive much more funds depending on our ability to implement projects expeditiously. Sri Lanka is therefore, unlikely to face a debt crisis on the project front in the foreseeable future.
However, the Government faces a grave crisis on its commercial borrowing. The repayment period on commercial loans, currently totalling US$ 17 billion, is 10 years or less. From 2020 to 2030 we have loan repayment obligations of around US$ 2 billion a year aside from high interest payments.
The previous Rajapaksa administration resorted to massive commercial borrowing indulging in unproductive current expenditures and political shenanigans. It left a US$ 10 billion outstanding debt pile for the incoming Sirisena government which continued with more commercial borrowing from 2015 to 2019, securing an additional US$ 15 billion in commercial loans while repaying US$ 8 billion. These costly funds were mainly used for consumption. Their economic performance was dismal due to lack of direction in policies, political uncertainty, and failure to create a more favourable foreign investment climate.
The chickens have now come home to roost: the Government is now confronted with the daunting task of how best to roll over the huge commercial debt overhang of US$ 17 billion in the next decade.
Incoherent ad-hoc measures, such as the “no-questions-asked” policy on foreign remittances, severe import restrictions, the $ 500 million term-loan from China, the $ 400 million swap arrangement with India, the recent floating of a $ 500 billion commercial bond, and the requesting of a donor waiver on accumulated debt, are all desperate attempts by the Government to forestall a balance of payment crisis. Excess borrowing of about $2 billion by the last regime in 2019, however, will stand them well this year on the external front. The Government’s faulty strategy will exacerbate the rollover crisis as their term wears on.
Amidst this conundrum, a flood of project proposals on the energy and road sectors are reported. The energy sector proposals include establishment of a coal power plant and a minimum of two liquefied natural gas plants. The road sector includes a dizzying set of proposals on different sections of the Central Expressway, an elevated highway connecting with the Kelaniya bridge, and the first section of the Ruwanpura Expressway. The Cabinet approved most of these proposals on the grounds of a looming energy crisis, the critical need to expand the road network etc.
The so-called priority projects have some common features. First, they are large-scale, costing approximately $ 300 million or more. Second, foreign donor funds have yet to be secured for any of them. Third, the exact budget for each project is still under negotiation. Fourth, export financing is being cited as the main funding mechanism. This type of financing is expensive since the loan repayment period is less than 13 years with the interest rate around 5%. None of the road projects will be economically viable with export financing. For the energy sector, the additional cost will have to be borne by the Government/ CEB, or the consumer.
Project sponsors in every case are a triumvirate led by an identified foreign contractor and an amorphous group of local agents and political hangers-on. A pervasive undercurrent of corruption is inevitable in these types of transactions. With a large stake in “commission earnings”, influence peddling becomes a key factor: project rankings get shifted around with the procurement procedure analogous to a horse race.
The Japanese aid agency, JICA’s recent request for clarification on energy generation plans while withholding support for the new transmission line project should be assessed in this context. Delaying the LRT project is a thorny issue: it arose out of the Master Plan for Colombo in 2014 undertaken at the request of the previous Rajapaksa government. It took five torturous years of negotiation and multiple feasibility studies for the project agreement to be signed in 2019. Government spokesmen have been trotting out various reasons for postponing the LRT project. These include inter alia, lack of fiscal space; and that it can be undertaken at lesser cost or through a private- public partnership (PPP) arrangement.
Lack of fiscal space is a misleading statement as the proposed loan is on very soft terms from Japan: a 40-year repayment schedule with a 12-year grace period and 0.1% interest to boot. The Government will pay $ 0.3 million per year until 2031 and about $ 10 million per year for the subsequent 28 years if the LRT project which is targeted at addressing the worsening traffic corridor at Malabe, outside Colombo, is implemented on schedule. The annual repayment amount is a ‘drop in the ocean’ compared to the Government’s debt servicing obligation of over US$ 4 billion per year. Any delay in implementation will only escalate costs.
Japan is one of Sri Lanka’s oldest development partners, one that has supported Sri Lanka’s social and economic progress with large-scale development aid (along with the World Bank and ADB) on soft terms. Snubbing Japan is a big mistake. Its proposal for an LNG (liquefied natural gas) plant and section 3 of the Colombo port are in ‘suspended animation’. Union theatrics at the port this week over the use, or non-use of the Chinese cranes is interesting. Completing the LRT project on schedule in 2026 and calling for bids for a management contract to run the project operations is a suitable form of PPP. This type of franchise arrangement where the Government sets fares and timetables and issues performance-based payments to the operator is a model which has been successful elsewhere.
In any case, PPP-financing will be on commercial terms with users or the Government paying a higher price. International experience indicates that structuring a PPP contract, even if done properly, in which risks are shared equitably between the Government and the private sector, is an extremely difficult and protracted exercise. Unlike the LRT project which is due to commence contract bidding this year, a complex PPP activity will take many years to come on-stream. The latest proposal for a fresh PPP appears to be nothing but a ruse to bring shadowy parties into play.