Are Window Dressing & Off Balance Sheet Financing Strategies To Manage External Debt Crisis?

By Chandra Jayaratne –

Chandra Jayaratne

This is an open letter for the attention, review and action by the Auditor General, Speaker of Parliament, Parliamentary Committees on Public Finance, COPA and COPE, Institute of Chartered Accountants, Economists, Professionals and the Media.

Economy Next in November 2019[1] quoted that “Sri Lanka is eyeing public private partnerships on a built own operate transfer (BOOT) mode with gap funding from the government to build a new highway as the country tries to avoid racking up new debt”. This quote was in relation to a PPP project for an elevated highway from Orugodawatte to Rajagiriya. The Chairman, RDA was quoted as “I think PPP is a viable model,”-“The number of years (concession period) for operations we can vary. ECONOMYNEXT, in January 2021[2] stated “Sri Lanka’s will call investors for a fully foreign funded elevated highway in the capital Colombo to be built as a Build Operate Transfer (BOT) project”.

A media report in Sunday Morning 25th  April 2021 titled[3] “Proposed highways projects: Hit by delays” quoted “Likewise, there is no final decision on the proposed Elevated Highway Project from New Kelani Bridge to Athurugiriya, which saw vehement opposition from the residents in Battaramulla, as the proposed highway was to be constructed over the remaining areas of Colombo’s wetlands in Thalangama and Averihena.

As claimed by some experts, the reason for the delay in attracting foreign investments is mainly due to the government policy – the debt-free build-operate-transfer (BOT) method adopted recently.

According to them, when it comes to BOT projects, the investor expects considerable revenue and therefore, the applicability of the BOT method for Central Expressway Projects (CEP) was questionable, as the number of vehicles that would use the highway once completed would not be enough for the investor to cover expenses. It is learnt that the Government has suggested several other investments within the project, such as housing complexes to make the BOT viable. However, experts stressed that they doubt good investors would invest in such a huge project without any contribution from the Government.

The BOT method was suggested by Secretary to President P.B. Jayasundara to Gotabaya Rajapaksa, when he issued fresh instructions to the Ministry of Highways and the RDA to call for fresh proposals for the Elevated Highway Project from New Kelani Bridge to Athurugiriya and also to accept bids for Sections III and IV of CEP. Prior to calling for new proposals, the Ministry of Highways had obtained cabinet approvals to receive technical proposals for the Elevated Highway Project and discussions were ongoing with the China Harbour Engineering Company (CHEC). In his letter, Dr. Jayasundara stated that the Government will not encourage debt-funded projects or annuity (a series of payments made at equal intervals) payments to meet revenue shortfalls or guaranteed traffic, as these options are not affordable. It is further stated that several parties have submitted letters of intent or interest to the Board of Investment of Sri Lanka (BOI) for the two initiatives on a BOT basis. Most of them were of an unsolicited nature.

Sunday Morning of 6th June 2021[4] article titled “Athurugiriya-Kelaniya Elevated Highway: Setting a new precedent?” states “The full ownership of the first-ever build-operate-transfer (BOT) model Elevated Highway Project (EHP), which is to be constructed from the New Kelani Bridge to Athurugiriya via Rajagiriya, will be handed over to Sri Lanka after 18 years from the completion of construction, according to the Road Development Authority (RDA).The project is to be constructed by M/s China Harbour Engineering Corporation (CHEC), which already has a large project portfolio in Sri Lanka on a BOT basis, and the awarding of the construction contract to CHEC was approved by the Cabinet in April, based on the recommendations made by the Cabinet-Appointed Negotiating Committee. Accordingly, the construction work is scheduled to be completed by 2025.

RDA Chairman Chaminda Athuluwage told The Sunday Morning that the EHP was the first BOT project to be commenced in Sri Lanka and that the operation of the project, once completed, would be handled by the RDA staff, adding that the accounts of the roads, however, would be handled by the respective company. Explaining the nature of the BOT system, the RDA Chairman noted that the construction of the highway would be conducted by CHEC and the full ownership of the road would be handed over to Sri Lanka after 18 years. “The road will be like all other roads in the country and there won’t be any difference. RDA staff will operate the road, and once CHEC recovers the funds they have spent, they will hand over the road to RDA,” he explained, adding that while the BOT method is being used in other countries, it helps reduce the burden on the Treasury as the contractors invest the entire funds.

A well-informed source at the Road Development Authority (RDA) told The Sunday Morning that the proposal has been channeled through the Board of Investment (BOI) as an investment project by CHEC, for which the Highways Ministry will provide technical support.

Ceylon Today of 26th May 2021[5] in an article titled “Construction awarded to CHEC on BOT basis” notes that the Cabinet meeting on 8 April approved the build, operation, and transfer of the highway on pillars that connects the Athurugiriya Interchange and the New Kelani Bridge on a Build, Operate, and Transfer (BOT) basis. It goes on to quote the Co-Cabinet Spokesperson Minister Gamanpila stating “Cabinet has granted approval to award the construction of the expressway on pillars that connects the Athurugiriya Interchange and the New Kelani Bridge to the China Harbour Engineering Company Ltd (CHEC).  CHEC will need at least 15 years to function and earn profit. Implying that construction will take at least three years to complete the CHEC has the right to occupy the expressway for another 15 years in order to recover costs and earn profit.  Due to that, the ownership of the expressway would be passed to the Sri Lankan Government after 18 years. Cabinet paper has mentioned that cost is not the variable factor but the operating years”.

The Daily Ft of 8th June 2021[6]  notes that Secretary to the President Dr. P.B. Jayasundera delivering the keynote on day three of the Sri Lanka Investment Forum as highlighting the “ Government’s landmark achievements which global investors should take confidence from. One was the finalization of the $ 700 million BOT deal on the Colombo West Port Terminal involving India’s Adani and Sri Lanka’s John Keells Holdings. This is apart from Sri Lanka Ports Authority developing the East Container Terminal, both of which will augment much needed capacity at South Asia’s hub Colombo Port. The other is drawing a $ 800 million investment from China Harbour for the elevated highway connecting Kelaniya and Athurugiriya”. “We have moved from expensive foreign loan funded project financing to project promoter-led financing”.

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