In the hope of securing a concessional export credit facility from the Exim Bank of China, the Sri Lankan Government awarded the contract of Gampaha, Attanagalla, and Minuwangoda Integrated Water Supply Scheme (GAMWSS) at a higher price to a Chinese contractor that had little to no experience or expertise in the relevant sector, the Economics and Legal Research Teams of Verité Research in its ‘The Lure of Chinese Loans’ August 2022 report revealed.

The report analyses the origin and the evolution of the GAMWSS, which was awarded to a company that submitted an Unsolicited Proposal (USP). The proposal did not go through the standard procurement process, but approval to proceed with the USP was granted based on the recommendation of the Standing Cabinet Appointed Review Committee (SCARC). The USP was submitted by the China Machinery Engineering Corporation (CMEC) in 2010. The contract for GAMWSS was awarded to the CMEC for USD 229.5 million in 2013, upon Cabinet approval and based on the recommendation of the SCARC.

In addition to failing to meet the intended objectives, the Government also agreed to pay the CMEC a price 33.4 per cent higher than the total cost estimate of the NWSDB engineers. Further, the GAMWSS exposed the hidden debt problem relating to Chinese loans, where the loans were taken out of the books of the central government and hidden in the books of the State-Owned Enterprises (SOEs), despite the final liability of paying these debts ultimately falling on the central government.

The report further analyses that the contract was awarded without a firm commitment of funds, nor conducting the minimum due diligence required. As the Government failed to secure the expected credit facility, the project completion was also delayed by more than seven years. Further, the analysis highlights the ineffectiveness of the oversight processes in place to detect and prevent malpractices. The case study also sheds light on the hidden costs that the country incurred in securing funds through the special framework to finance its infrastructure.

The key drawback in the design was the excessive official discretion built into the decision-making process by the vaguely defined reasons introduced to justify deviations, complete disregard of the level of concessionality (or the grant element) in determining the suitability of funding and making the technical evaluation by an independent committee optional. The analysis of GAMWSS revealed that in addition to the flaws in the design, the special framework failed to realise its objectives in practice due to the lax application of its provisions.

The funding for the project was secured by the National Water Supply and Drainage Board of Sri Lanka (NWSDB) through loans taken from the China Development Bank (CDB) (USD 195 million) in 2016 and the Bank of Ceylon (BOC) (USD 34.5 million) in 2017 with guarantees from the Treasury. The NWSDB is the implementing agency of the project. 

By Sulochana Ramiah Mohan