CEP 3: Continuing tussle between 2 bidders shows up Sri Lanka’s compromised procurement process
The construction consortium accused by a Chinese competitor of submitting an inflated bid for the Central Expressway Project’s third section (CEP 3) hit back this week, alleging that the claimed bid of Metallurgical Corporation of China (MCC) is at least 65 percent higher over the project’s lifecycle than its own offer.
Lanka Infrastructure Development Consortium (LIDC) was tipped to sail away with the contract until MCC’s parent company, MCC International Incorporation Ltd (MCCI), publicised a letter it wrote to President Gotabaya Rajapaksa alleging irregularities in LIDC’s selection.
This letter, dated February 2022, claimed that MCC’s bid at US$ 1.05bn (Rs 367.49bn at the prevailing exchange rate) was significantly cheaper than what LIDC offered, which was US$ 1.87bn ( Rs 654.49bn). The difference was 56.7 percent higher.
But LIDC said in a statement this week that, not only is the MCC’s stated price unsubstantiated--as their financial bid was never opened--LIDC was the “only successful, technically qualified bidder for Section 3 of the Central Expressway Project from Rambukkana ( 12+ 890km) to Galagedara (32+450km)”.
The local consortium is made up of Access Engineering ( which shares its head office address with LIDC), Maga Engineering (Pvt) Ltd, International Construction Consortium ( Pvt) Ltd, K D A Weerasinghe & Co and NEM Construction (Pvt) Ltd.
The tussle between the two bidders provides insight into how Sri Lanka’s procurement process, particularly with regard to mammoth, high-cost projects, is routinely compromised. MCC was itself a beneficiary of the “unsolicited proposals” regime widely implemented between 2010 and 2015.
Neither LIDC nor MCCI have explained how they are so intimately knowledgeable about procurement details that are required to remain confidential from competing bidders. Had the Chinese not spilled the beans, even the price under negotiation would’ve remained secret to the public with the Highways Ministry barrelling ahead with the costly project amidst a raging economic crisis.
Meetings of the Cabinetappointed negotiating committee ( CANC) were shifted from the Highways Ministry to the Labour Ministry and some officials were replaced with a Finance Ministry representat ive even being removed after he raised concerns about due process.
The project hangs in the balance, not least because of a Finance Ministry circular issued on Tuesday which ruled out new commitments for development projects-- including those using domestic funds, as proposed by LIDC. The Finance Ministry also prohibited the initiation of actions for acquisition of lands or other assets in connection with projects where specific approval for commencement has not been obtained.
The local consortium now alleges that MCC made “massive blunders” in its bid; and that MCCI’s letter is “the first in a series of actions orchestrated by MCC and their influential local agents to discredit the LIDC’s bid and disrupt a legitimate Government procurement process”.
LIDC also claimed that MCC did not submit a valid bid security; had cited the financial details and experience of the parent company (a separate legal entity) instead of its own; did not have sufficient experience to carry out the project; and requested payments in US dollars over 15 years.
The consortium was also “made to understand” that MCC did not avail itself of the opportunity to provide clarifications--including submitting a valid bid bond--before the opening of providing financial bids.
The MCC letter to President Rajapaksa states, however, that when questioned whether its bid bond submitted through the Bank of China was ‘irrevocable and on- demand’, “The
Bank of China submitted a letter reiterating and confirming the submitted bid bond is irrevocable and on-demand”.
It was not possible to verify these facts independently. The Ministry of Highways--which was a key player in awarding unsolicited proposals to MCC in the past--remains non-transparent.
The LIDC statement this week also offers a technical comparison of its own price with the “claimed” price of MCC. Pricing has three components, it explains: construction; operation and maintenance; and cost of financing. Repayments were to be made over 15 years in 30 equal installments.
“LIDC’s price for the project has been quoted in Sri Lanka rupees whereas the price claimed by MCCI [sic] is quoted in US dollars,” it states, adding that its total offer for the construction of CEP section 3 yields a per-kilometer ( km) price of Rs 5.6bn per km. CEP section 2 was completed by local contractors in 2021 for a perkm price of Rs 3.6bn per km.
By contrast, the average price of CEP section 1 that is presently being built by MCC is US$ 27mn (Rs 9.4bn at the prevailing exchange rate) per km, LIDC claims.
But this now calls to questio , had awarded the CEP 1 tender to MCC if, as LIDC indicates, the Chinese company’s price was inordinately high in comparison with that of local contractors.
LIDC’s price for CEP 3 is significantly cheaper than MCC’s per-km cost for CEP 1 despite the third section being “more mountainous and challenging (including the necessity of a tunnel section and the impossibility of creating a pilot road, etc) than that of both CEP section 1 and section 2”. On what costing formula, then, did the Highways Ministry select MCC for the much easier Section 1?
LIDC continues that its offer for CEP 3 is notwithstanding the fact that the price of key construction inputs such as materials, labour and machinery have escalated on average more than 50% since the completion of CEP 2. Assuming there is still a reasonable profit margin, how much more inflated in price is CEP 1 that was awarded by the Highways Ministry to MCC?
Using certain parameters, including the semi-annuity payment mechanism, LIDC calculates its total project lifecycle cost to the Government to be Rs 354bn; and Rs 572.4bn based on MCCI’s claimed price (an exchange rate of Rs 545.13 per dollar is assumed as the 17-year average). This gives Sri Lanka a saving of Rs 227.4bn if LIDC gets the contract, it says.
“Based on the above calculation, it is evident that MCCI’s claimed price is in excess of 65% (or LKR 227.4 Billion) of LIDC’s price over the project lifecycle with the potential to be even much higher,” LIDC maintains. “This is notwithstanding the fact that their real price is not known in the public (and the price they claim is just an unsubstantiated statement), and that the Government of Sri Lanka (GOSL) will have to source invaluable foreign exchange (i.e. US dollars) to repay a foreign contractor of the project.”
“Furthermore, LIDC’s price of LKR 345 billion denotes the total cost of the project across its 17- year lifecycle, and does not reflect the time value of money and future depreciation of the rupee,” it adds. “In other words, if you apply a discount rate of 10% to account for the same, the present value of our bid (and the total cost to GOSL in today’s terms) is LKR 144.5 billion.”
LIDC also points to a battle between foreign contractors and the local construction industry for projects. “Together, the five member companies directly employ over 25,000 members and sustain over 100,000 citizens, annually contributing over LKR 100 billion to Sri Lanka’s GDP and LKR 2.5 billion to its tax base,” it states. “It is noteworthy to add here that the local construction sector has also been embroiled in decade- long battle to wrestle our industry away from the stranglehold of foreign players.”
It draws attention to the concluding paragraph of MCCI’s letter to President Rajapaksa which calls for its Chinese subsidiary to be allowed to submit an engineering, procurement and construction (EPC) contract or “unsolicited proposal” for the CEP 3 project.
“MCCI’s sole aim has been to sabotage an active public procurement process ( which they also took part in and failed) and instead urge the GOSL to entertain an unsolicited proposal for the project, based on an unsubstantiated claim or narrative,” LIDC asserts. “This is hiding in plain sight as their sole objective behind their campaign.”