The hurry to award the Central Expressway Project hara-kiri for Lanka’s economy
Having studied road construction costs in ninety-nine low and middle-income countries, the World Bank has derived an average construction cost for a nonurban four-lane expressway of $2.8 million/km, with a maximum of $7.8 million/ km. The CEP-3 construction cost alone ranges more than ten times this average
Namini Wijedasa writing in the Sunday Times of March 27 under the headline ' Highway Ministry Speeding ahead with controversial bid', raises the alarm that another controversial expressway contract may be awarded.
The proposed 19.6 km Rambukkana- Galagedera section of the Central Expressway Project ( CEP) appears to be yet another faux-pas, which is in no way beneficial to the country and its economy and will further impede Sri Lanka's economic recovery.
The hurry and the secrecy in which the authorities are proceeding can only be interpreted to benefit certain individuals. The question is: Should the cost of investments that only benefit certain individuals continue to be borne by the people?
Continuing legacy of a decade of reckless expressway spending
Expressway building began with a concept the RDA developed in the early 1990s. Financing difficulties delayed construction till 2001, when the ADB and JICA jointly financed the E01 to Matara ( Godagama). The contract was initially awarded on competitive bidding at $6 million/km, the final cost being $ 7.1 million/ km. The E03, the Katunayake Expressway, was the first to be awarded in 2009 on a negotiated basis. The cost increased to $ 14.9 million/ km, clearly revealing the large margins that could be earned from expressway construction when they are negotiated without competitive tendering. The E02 Outer Circular Highway ( OCH), financed by JICA, fell victim next. The OCH-2 was awarded to a Japanese company after the Cabinet decided to negotiate, resulting in spending $38.7 million/km, estimated to have been 2-3 times the cost if competitive bids had been called.
After 2012, expressways became a lucrative business for those in power and their cronies. No multi-lateral financing agency -- such as the ADB, WB, or JICA -- which funds expressways globally at low interest/concessionary rates, was interested in financing poorly planned and exorbitantly priced expressways. The Mahinda Rajapaksa Gover nment entertained non- competitive bids for the OCH- 3 from Kadawatha to Kerawelapitiya. Meanwhile, the alignment of Section 1 of the Central Expressway ( CEP) was shifted by the Rajapaksa government for political reasons, resulting in a costly new interchange at Enderamulla. This prompted my first article in the Sunday Times on December 21, 2014, exposing corruption.
The Yahapalana Government started well by reversing the interchange from Enderamulla to Kadawatha as originally planned and requested a 25.9% reduction from the contractor, the Metallurgical Corporation of China Ltd. (MCC). However, only 15% materialised with Section 1 of the CEP awarded to the same company without any competitive bid as part of the negotiated deal. This project has, in recent times, been subjected to huge variations due to political interventions and is likely to cost at least $ 21.2 million/ km when completed.
The Yahapalana government also awarded the extension of the Southern Highway from Matara to Mattala/Hambantota at the cost of $ 19.8 million/ km (2.8 times the E01 to Matara) in 2015. The return to non-competitive awards led to my second article in the Sunday Times on November 20, 2016, calling the Yahapalana government not to continue what its predecessor had done. But that too fell on deaf ears.
The CEP- 2 from Mirigama to Kurunegala was awarded to four consortia of local contractors at around the cost as section 1. But, the poor planning, design and project management resulted in the initial cost of Rs 137.4 bn increasing to at least Rs 170 bn, at $27.7 million/km.
The cur rent Gotabaya Rajapaksa government started working on a 12.9 km section of CEP- 3 from Potuhera to Rambukkana in 2020 by awarding contracts to local companies that worked on CEP- 2. But neither a cost estimate nor a proposal is available publicly.
Please see the table which shows that expressways have cost $ 7.3 billion to the national economy. This does not include the financing cost that ranges from 0.5 - 1% p. a. for the ADB, JICA borrowings, and 2-3% p.a. for others. Thus, a conservative estimate, including total financing cost, would exceed $9 billion.
A study of national budgets of the last six years reveals that 44% of all the foreign borrowings have been raised for roads and expressways. That the country has sunk deeper into economic hardship and financial bankruptcy shows that these highways, instead of making the economy more robust and more productive, have contributed to its downfall.
Moreover, even with this severe burden on the national economy, Sri Lanka will have only 389 km of expressway out of a road network of 120,000 km. The expressways will carry less than 2% of all vehicle km.
The hidden financing cost in cep-3 bid
The Potuhera-Galagedera section of CEP-3 runs through hilly terrain, and a higher cost per km is inevitable. The RDA's engineering cost of Rs 163 bn ($41.8 million/ km) was calculated in 2021. Though laudable and a departure from unsolicited proposals, this project's call for competitive bids has now run into several transparency issues. Unlike all other expressway projects, this bid is to build and maintain the facility for 15 years.
The MCC, involved in expressway construction in Sri Lanka since 2009 and having profited from several unsolicited awards, recently complained to the President that a bid of $1872 million payable in 30 semi- annual instalments of $62.4 million from a local company whom they have identified as LIDC, was being considered even though the MCC cost proposal was only $1070 million. It includes the cost of construction, operational and maintenance (O&M) for 15 years, and the cost of financing. Negotiations are underway where the bid value is being reduced to match the Engineer's estimate according to RDA documents. The original bid condition was for the semi- annual annuity to be paid in Rupees ( LKR) converted by the USD exchange rate prevailing at payment. The revised bid price is now to be given in LKR. The bidder is to be compensated for any depreciation of the LKR. Though this vague statement appears beneficial for the current foreign exchange crisis, it will nevertheless not reduce the cost of the project, which will remain at its dollar value.
However, the primary concern of the project is its financing cost. Based on the RDA Engineer's Estimate, the cost of civil works and the O&M cost for 15 years would be around $ 820 million. It leaves a margin of $ 250 million or ( 30%) as the financing cost for the MCC bid and $1052 million (128%) for the LIDC bid. If so, a quick calculation establishes that the cost of financing the MCC bid is around 3-4% p.a. In comparison, that of the LIDC is over 15% p. a., with both payments in the LKR equivalent to the prevailing dollar rate.
The move between 2009 and 2012 to obtain unsolicited proposals doubled and tripled expressway costs. The financing arrangement for the CEP- 3 appears to be a new strategy that will further raise this to global highs. Having studied road construction costs in ninety- nine low and middle- income countries, the World Bank has derived an average construction cost for a non- urban four- lane expressway of $ 2.8 million/ km, with a maximum of $ 7.8 million/ km. The CEP- 3 construction cost alone ranges more than ten times this average. The World Bank report reveals that when costs are higher, they usually relate to the Transparency Index, which measures corruption levels in a country.
RDA's studies show that the CEP- 3 will be a significant economic loss
The feasibility studies of the project (available on the project website) prove this so that even a court order should be possible to stop this wanton destruction of our economy at this precarious time.
Let me explain why I can say this boldly. There has been just one feasibility study carried out in 2016 for the entire CEP from Kadawatha to Dambulla, linking to Galagedera, totalling 170 km. It was estimated at Rs 476.5 billion, equivalent to $3.33 billion. The study has determined an internal economic rate of return (EIRR) of 9.0% for constructing this highway in four stages with a Net Present Value (NPV) of Rs 200.1 billion. It indicates the project to be a relatively poor economic investment.
The RDA's feasibility study reveals that while the CEP- 1 ( Kadawatha- Mirigama) has a higher return EIRR of 14.9%, the returns (NPV) diminish as it progresses. If the other sections are assessed individually, to perceive their viability, their EIRR is likely to fall below 9.0%, clearly establishing a prima- facie case that some of these sections are premature to build. With the current cost of the CEP at $28.1 million per km, ( 40% higher than the feasibility study), based on its sensitivity analysis, the EIRR for the entire CEP drops to 7.3%, well below-accepted levels.
The Environmental Study for CEP’s Potuhera-Galagedera section, presently under negotiations, reveals the EIRR of this section to be only 8.4%, with an NPV of Rs. 127.1 billion. Moreover, applying the proposed cost, which is an increase of 72% over the cost assumed in the feasibility study, makes the NPV negative, indicating that the proposed expressway will be a net economic loss to the country. This means the country will incur a net loss by proceeding with this project, even at the Engineer's Estimate and without financing costs. However, the related consultants, contractors, and individuals will line their pockets with profits. Thus, the people should call for an immediate halt to this project. Instead of continuing with this project, appropriate alternatives should be sought, focussing on the urgent need for short-term economic revival.
The alternatives
Studies show that spending under 50% of the cost of the CEP-3 on railway improvements will reduce express railway travel time to Kandy from 150 minutes to 90 minutes. The concessionary ADB financing facility available for railway electrification could be used. The Sahasara bus reform project that seeks to modernise the entire bus industry will also cost only 50% of the CEP-3. It has an EIRR of 21%.
But given the way those in power have benefited from expressway projects, the CEP- 3 project at four to five times the international cost is likely to go ahead unless people put a permanent stop. The feasibility studies estimate that the RambukkanaGalagedera expressway would carry 6,000 vehicles a day when completed. Traffic growing at 4.5% p. a. will total 40 million vehicle movements over the 15 years government would have to pay this annuity. Even if it is built at the MCC annuity cost of $ 70 million per year, and if the expressway will have a 50% residual value in 15 years, a toll charge of Rs 4,850 is required from each vehicle to cover costs. This rate will be more than twenty times the current toll rates. Therefore, the non-users would have to bear the loss of this project for years to come.
The call to #stopexpressways
The time has come to change this destructive culture that has pulled down Sri Lanka into the abyss of bankruptcy. This project is an excellent example of how it has happened over the last decade. It is projects such as these that the IMF must intervene to stop immediately. They are economically unproductive and financially unprofitable infrastructure projects. The newly appointed Economic Advisory Council and those who will have the unenviable task of resurrecting our economy must understand that it has been such showcase projects that have pulled the economy down in the first place. They should be replaced by alternatives such as those discussed above.
It is time for the hashtag generation to embark on a campaign to #stopexpressways. It is also time for the 400+ RDA engineers to serve the country over themselves. The RDA was a respected organisation up to the mid-2000s, but has now been corrupted systematically to aid and abet projects that profit individuals while suffocating the Sri Lankan economy.
Doctors, lawyers, and other professionals have protested against the corruption of their respective public institutions. It is time that engineers and especially the highway engineers took serious note of how their esteemed profession has become subservient to the political masters and their engineer lackeys. It is time for all those who have directly or indirectly taken part in this highway robbery to apologise, reform and redeem our profession or choose to go down with the economy. Allowing the CEP to be awarded at this time is an acid test that will challenge your conscience and your courage.