Kerawalapitiya LNG plant tender exposes

deterioration in the political system

Wednesday, 11 July 2018

Sri Lanka has failed to implement a single major electricity generating power
plant since 2014. Meanwhile, the country’s electricity demand increases by 70-
80 MW per year, creating a major energy crisis by 2020. As part of the
solution to the impending power crisis, in November 2016 international
tenders were called for the supply of 300MW capacity Liquefied Natural Gas
(LNG) power generation plant, to be located at Kerawalapitiya, on Build,
Own, Operate and Transfer (BOOT) project basis for a 20-year period.

Tender procedure

In large tenders, tenderers are expected to submit a Bid Bond, to qualify to

bid for the project and a Performance Guarantee – An insurance guarantee
ensuring that the Contractor would perform all their obligations under the
contract.
The tender itself is in two parts: Technical Proposal and the Financial
Proposal. The tenders would be evaluated by the Technical Evaluation
Committee (TEC) and the Standing Cabinet Approved Procurement
Committee (SCAPC). The Technical Proposal evaluation ensures the Bonds
are proper and ensure that the tenderer has sufficient experience, technical
and financial capability to carry out the project. Technical Proposals are
opened first and those acceptable to TEC, Financial Proposals would be
opened.

When the tenderer is selected, a contract agreement would be signed,

generally based on FIDIC Conditions of Contract. (FIDIC is a French
acronym for Fédération Internationale Des Ingénieurs-Conseils, which means
the International Federation of Consulting Engineers).

Procurement Appeal Board (PAB)

If the tenderers are not satisfied with the decisions of the TEC or the SCAPC,
they could appeal to PAB who is expected to review the decisions. The system
supposedly ensure transparency in procurement and the entire procedures
are expected to be confidential.

Tender for Kerawalapitiya LNG Plant

When the tenders closed in April 2017, eight companies had submitted bids.
Among them were 1. Consortium of Samsung C&T, 2. Korea Midland Power
Co (KOMIPO), 3. GSL Energy, 4. Lakdhanavi Ltd., 5. China’s Golden
Concord Holdings (GCL) with local partners WindForce and RenewGen.

In the current scenario, the TEC consisted of 13 members, some from CEB
and others nominated by the Ministry of Power and Energy. Here most
technical paperwork of the tender evaluation was carried out by the CEB
engineers in the TEC, along with others.

The tenderers were expected to submit their bids with a hard copy (in book
form) and a soft-copy (CD). Although the tender contents were supposed to be
confidential, technology allows contents of the soft-copy be sent to anywhere
in the world. When decisions were made in selecting one party, others
appealed to the PAB. Ministry of Power and Energy too changed the
composition of TEC and SCAPE several times, naturally giving different
decisions.

Conflict of interest

TEC initially refused to open the Lakdhanavi tender due to conflict of

interest. Lakdhanavi is a subsidiary of Lanka Transformers Ltd, affiliated to
Ceylon Electricity Board and would result a conflict of interest situation.
However, it was pointed out that earlier too, different Procurement Appeal
Boards (PABs) have rejected two tender awards to Lanka Transformers Ltd.
(LTL) pointing at conflict of interest as CEB is the major shareholder of LTL.
However, the decisions were reversed by the Supreme Court and the Cabinet.
In addition, the Supreme Court reversed the decision of the PAB to re-award
the New Galle Transmission Development Project Lot B to LTL. Also the
Cabinet reversed the decision of the PAB, and awarded the 24MW diesel
power plant tender in Jaffna to LTL.

When above was pointed out TEC agreed to open the Lakdhanavi’s tender.

First round

The first round in opening financial proposals, saw the Samsung Consortium,
being knocked off. Korean consortium complained their commercial proposal
was disregarded “because of a really trivial document error”. At the opening
of the financial bids, TEC officials were unable to open the Consortium’s pen-
drive with their laptop. Samsung’s formal representative complained the
laptop to be inferior and the tenderer’s offer to open the pen-drive with their
laptop was disallowed.

Tender from Samsung

Samsung complained to PAB that it was the only properly qualified bidder, as
the tender demanded a plant capable of using liquid fuel, later be converted to
liquefied natural gas, as the country does not have a gas receiving station.
Other seven bidders had not conformed to the minimum functional
specifications. But later, it was discovered that Samsung’s bid was costly, the
tariff was higher.

Delays

A second SCAPC was appointed with instructions to open the financial bids of
other five bidders shortlisted by the TEC. Recommended bidders included
Consortium of Samsung C&T, KOMIPO and GS Energy. There was so much
controversy in the tender analysis, various members supporting different
tenderers, influence by the politicians. Members of TEC, SCAPC as well as
PAB changed several times. During the evaluation period Tender Committees
changed so much, on four occasions TEC recommended the tender be
awarded to Lakdhanavi Ltd.

The 13-member TEC took almost one year to recommend awarding of the
project. But finally the contest narrowed down to two parties – Lakdhanavi
Ltd., a subsidiary of prestigious LTL Holdings and Golden Concord Holdings
(GCL) with its local partners WindForce and RenewGen headed by
Chairman Ali Asghar Akbarally and Vice President Yu Xiaodong.

Offers from Chinese

vs. Lakdhanavi

When tender prices were compared Lakdhanavi Ltd. had offered the lowest
tariff rate of Rs. 14.98 per unit, with their plant costing $ 175 million, while
China’s Golden Concord Holdings (GCL) offered a tariff of Rs. 15.97 per
unit, indicating the project cost at $ 299 million. Lakdhanavi’s project cost
was much lower than the Government’s estimate, suggesting a lower quality,
cheap project, questionable in delivering an acceptable product. However, one
rupee difference between the two tenderers generating 300MW power would
result a potential loss of Rs. 2 billion per year or Rs. 42.5 billion over the 20-
year contract period. A substantial sum to the heavily debt-ridden CEB.

Concerns over

Lakdhanavi bid

The main concerns over Lakdhanavi bid were conflict of interest and the
financial viability. The Chinese supplier had argued at the PAB hearing that
Lakdhanavi Ltd. would not be able to complete the project at $ 175 million as
the company was expecting an exemption of VAT and NBT for steam
turbines, gas turbines and other auxiliary items, which account for 22% of the
project cost.

Lakdhanavi’s $ 175 million plant cost was based on exemption of VAT and
NBT for power generation equipment, accounting for 22% of the project cost.
If the exemptions are disallowed, the Company would infuse Rs. 4 billion,
raising the project cost. No one questioned the $299 quoted by the Chinese be
reasonable.

Lakdhanavi officials affirmed that they were considering financing from

Germany based KfW Development Bank. Also noted it was customary to
request a higher loan amount up for negotiations.

Capability of Lakdhanavi

Lakdhanavi Ltd. is the largest independent power producer in the country,

the power plant construction and operation subsidiary of LTL Holdings Ltd.,
a subsidiary of CEB. Since its inception in 1997, Lakdhanavi has completed
six power projects locally, including the 300MW Combined Cycle Power Plant
in Kerawalapitiya. Lakdhanavi through LTL had been in operation in
Bangladesh running four power plants. In 2017 won the international tender
for the construction of a 114 MW power plant in Bangladesh, the 5th power
plant by LTL. Above shows Lakdhanavi is technically competent to undertake
the project.

Tender award

At the beginning, some TEC members refused to consider the tender of

Lakdhanavi Ltd., quoting conflict of interest as CEB is a partner of
Lakdhanavi. The tender award dragged further owing to disagreements in
opening the financial bid of Samsung JV Korea Group without considering
bids of other seven firms. Apparently, TEC members had different views
possibly supporting different tenderers. Finally in April 2018, both TEC and
SCAPC decided to award the contract to the lowest tenderer Lakdhanavi
Ltd.

However, Samsung JV Korea Group and GCL Windforce and RenewGen

appealed to the PAB to amend the decision. Following the appeal, the
Procurement Appeal Board (PAB) rejected the 300MW Kerawalapitiya
Liquefied Natural Gas (LNG) power plant tender contract from the lowest
bidder, Lakdanavi Ltd, and instead recommended the contract to be awarded
to the second lowest bidder, GCL Windforce and RenewGen. The decision
possibly due to political influence.

Government’s policy on power generation

Patali Champika Ranawaka, former Minister for Power and Energy, during
January to August 2015 presented the ‘Sri Lanka Energy Sector Development
Plan for a Knowledge-based Economy, 2015-2025’. The plan proposes to
increase generation capacity to 6,400MW by 2020, generate 1000MW of
electricity using gas discovered in Mannar and convert existing thermal plants
to natural gas; develop renewable power as bio-mass, mini-hydro, solar and
wind-power to generate 1114MW. Also to achieve self-sufficiency in energy
and produce entire petroleum requirement by 2025, based on gas from
Mannar becoming available by 2020.

Ranjith Siyambalapitiya took over the Ministry in August 2015 and had been
silent on the former Minister’s energy policy within the Yahapalanaya
Government, although the former Minister continues to be a Cabinet
Member. Meanwhile, Public Utilities Commission of Sri Lanka (PUCSL)
involved in the power generation plan war with CEB on usage of coal, prior to
approval of the “Long-Term Generation Expansion Plan for 2018-2037”,
PUCSL had requested “energy policy guidelines” from the Ministry of Power
and Energy, but the Ministry had been silent.

Payment of CEB

staff taxes
Some months ago, the Minister Siyambalapitiya submitted a Cabinet Paper
for the CEB to bear taxes payable by CEB officials, but the Cabinet turned
the request down. But CEB had continued to bear the burden and was
queried by the Auditor General. The payment was highlighted in the Daily FT
Editorial which disclosed a payment of a staggering sum of Rs. 1,400 million.

It is well known that CEB is not alone in the game. Water Board, Ports
Authority, Petroleum Corporation and SriLankan got themselves exempted
from normal Government status and staff have received exceptionally high
salaries and various allowances. Now, CEB got caught to Auditor General,
how about others?

Minister’s Cabinet proposal

In June, Power Minister Ranjith Siyambalapitiya submitted a Cabinet

proposal seeking approval to award the Kerawalapitiya tender to China’s
Golden Concord Holdings. He briefed the Cabinet to disregard Lakdhanavi
offer as Lakdhanavi’s cost being too low and implementation is questionable.

But Minister Patali Champika Ranawaka responded to the Minister that if

the tender were offered to the higher bidder would cause a loss of $42 million
to the State over 20 years. During the discussion Ministers Mahinda
Samarasinghe and Nimal Siripala de Silva supported the Power Minister.
Minister Silva questioned the ability to execute the project at low cost.

Finance Minister’s role

Finance Minister Mangala Samaraweera made his observations in a memo to

the Cabinet in response to the Kerawalapitiya Cabinet memo in favour of the
Chinese company, highlighting conflict of interest. The Finance Minister may
not have been aware of Court decisions over the matter. Also, the award of
tender to Chinese at the higher rate would cost the country Rs. 22.5 billion for
the next 20 years. The Finance Minister may have overlooked the CEB’s
losses and outstanding long-term and short-term debts.

According to Economynext, “Sri Lanka’s State-run Ceylon Electricity

Board’s short-term debt has soared to Rs. 138 billion. Outstanding long-term
liabilities of the CEB to banks and the Government also rose to Rs. 319.6
billion. CEB lost Rs. 13.2 billion in 2016 and Rs.45.7 billion in 2017. The losses
were funded with short term liabilities to the banking sector, the Ceylon
Petroleum Corporation and Independent Power Producers, which grew to
Rs.130 billion.”

Finally, the Cabinet appointed a three-member committee to investigate. But

later had to postpone the decision pending the Supreme Court ruling over the
Fundamental Rights petition filed by the National Movement for Consumer
Rights Protection in Sri Lanka, against the award of the tender to a higher
bidder.

German

Ambassador’s speech

German Ambassador to Sri Lanka Jorn Rohde questioned the

“transparency” and “openness” of the tender procedure regarding attempt to
award of Kerawalapitiya LNG power plant tender to a higher bidder. He
questioned the PAB’s reversal of the original decision to award the tender to
the lowest bidder, LTL Holdings that uses German technology.

The Ambassador highlighted the need to have an open and transparent tender
process. When the lowest bidder was unanimously selected. Suddenly, the
PAB reversed the decision. The questions raised, I am told, have all been
answered in the selection process at SCAP and at the TEC.

The Ambassador continued: “Only when an open and fair tender procedure is
guaranteed, Sri Lanka will be an attractive place for an investor. In Germany,
these procedures are observed with close attention.”

Discussion

The award of the Kerawalapitiya tender dragged for over a year; to address
the power shortage, CEB will have to supplement with power bought from
private power producers costing between Rs. 28 to 32 per unit (over double
the tender rate).

The Finance Minister in his memo to the Cabinet wished the tender be
awarded to the Chinese company, highlighting conflict of interest. TEC is
scheduled to examine the tenderers experience and financial capability of
undertaking a project. Only tenderers conforming to requirement would be
entertained. As for Lakdhanavi’s conflict of interest, issue had been resolved
by the Supreme Court. The Finance Minister may not have been aware of
Court decisions.

The Minister Power and Energy in charge of the project, submitted a Cabinet
proposal seeking approval to award the tender to CGL China. He briefed the
Cabinet to disregard Lakdhanavi offer as Lakdhanavi’s cost being too low
and implementation is questionable. The Minister should have been aware of
Lakdhanavi’s background, the biggest independent power supplier in the
country, having implemented 7 power generation projects in Sri Lanka and
four projects in Bangladesh.

The project cost is relevant only to the tenderer, as the country would pay
only for the power supplied at the tendered price Lakdhanavi’s Rs. 14.98 per
vs. GCL’s Rs.15.97 per unit, resulting a saving of Rs.2 billion a year. Biggest
worry of the low priced tender was the quality of product. The German
Ambassador’s statement cleared the concerns, German technology used is far
superior to Chinese, with funding coming from a German bank. Germans
would be sure to ensure a quality product, be delivered on time, addressing all
doubts on the tenderer.

The Power and Energy Minister under whom the project falls should have
been happy to award the tender at a lower price to a local company. Did the
Minister understand his predecessor’s clean energy policy was a new policy
ever discussed? When CEB produced the Long-Term Power Generation
policy with almost exclusive coal and when PUSCL asked for energy policy he
never had any. Did the Minister ever looked up CEB’s losses, long- and short-
term liabilities and staff salaries and various allowances, prior to submitting
the Cabinet paper for CEB to absorb taxes payable by the employees, an
illegal gesture?

The award of the Kerawalapitiya tender dragged for over a year, as most
parties, politicians and administrators did not understand the tender
procedure. When proper tender procedures are administered, all concerns
would be addressed by the system. The international tendering system and the
Conditions of Contract had been developed over centuries for the very
purpose.

The tender procedure adopted displayed the world, the corruptive nature of
our politicians and officials in award of international tenders. It is
unfortunate for the country to have ignorant politicians and administrators
making decisions on technical projects costing billions of rupees, considering
only their personal gains.

Posted by Thavam