Sri Lanka’s Flawed Regulatory Framework Helped Generate Chinese Bad Lending – Analysis – Eurasia Review
Special regulatory framework for unsolicited proposals was deeply flawed, says Verite Research
While it is true that Chinese loans to Sri Lanka have tended to be non-performing and drain the island nation’s meager financial resources, Sri Lanka’s regulatory framework is also to blame for the dire situation. According to a report titled The lure of Chinese loans prepared by Dr. Subhashini Abesinghe and colleagues for Colombo-based Verite Research (https://www.veriteresearch.org/publication/the-lure-of-chinese-loans/).
The report says that the special regulatory framework used in the case of Unsolicited Proposals (UPS) to execute development projects was not designed to facilitate effective and efficient use of incoming funds.
Sri Lanka had an improved and proven system with safeguards in the form of procurement guidelines (PG 2006). But between 2010 and 2016, this was replaced in many cases in an effort to secure Chinese funds for ambitious post-war infrastructure development. New programs had to be designed to attract funds as access to concessional finance from abroad had become difficult given that Sri Lanka had been classified as a lower-middle-income economy in 2004. Sri Lanka had to look for other financing options, with lower costs and longer terms. deadlines.
In this context, “export credit instruments” have proven useful. Some developing countries, such as China, have offered to provide funds for infrastructure investment through export credits. These were low-cost funds with longer maturities than trade credit, but required the borrower to purchase goods and services (including the contractor) in the lender’s country, Verite explains. This system has contributed to economic development in foreign countries while keeping industries buzzing at home. In a sense, it was a win-win system.
But the good in the system has been subverted by Sri Lanka’s weak regulatory system. Its loopholes have been cynically exploited by interested parties to the detriment of the economy. says Truth.
Unsolicited Proposals; No competition Bid
Sri Lanka has also found it convenient to receive Unsolicited Proposals (USPs). USPs are proposals put forward by an external entity of its own volition, that is, without the government requesting such proposals. Huge amount of money has entered Sri Lanka through USP to execute gigantic projects.
Chinese State-Owned Enterprises (SOEs) have created USPs with support from the Exim Bank of China. According to Verite, between 2005 and August 2010, six publicly funded infrastructure projects worth $1,558 million originated from USPs. These were implemented without going through a tendering process. Of these six projects, three were financed by the EXIM Bank of China. Mattala International Airport and Hambantota Port were among them Chinese projects. These three projects represented 88% of the value of the six projects. They were also implemented “without going through a tendering process” which was the rule in the previous system.
To regulate and assess USPs, a Cabinet-Appointed Standing Review Committee (SCARC) was appointed in June 2010. The SCARC was required to independently assess the proposal, if necessary, with the assistance of a technical evaluation committee/project committee.
However, the weakness of the SCARC was in the list of reasons that could be invoked to justify a departure from the normal procurement process. “The reasons listed were much less strict compared to the general framework and were only vaguely defined. Additionally, the decision-making process was made much more lenient by stating that deviations could be justified even if the USP only met one of the listed reasons, and leaving discretion to SCARC to decide. whether the USP should be evaluated by an independent project. /technical evaluation committee.
“These weaknesses allowed managers to exercise a high level of discretion in decision-making, reducing the rigor of the decision-making process and making it prone to abuse/misuse,” says Verite.
Several of the listed reasons for the discrepancy were vaguely defined, the report points out. “For example, to proceed with a USP without going through the bidding process, the ministry/department’s initial assessment need only establish that the project “appears to be of exceptional benefit to the country in terms of funding or otherwise” .
Unlike the Procurement Guidelines 2006 (PG 2006), which describe “extraordinary circumstances”, the new rules do not provide any examples or illustrations of what would constitute “justifiable” circumstances to deviate from the call for tender. offers. “Therefore, these criteria were open to subjective interpretation, which could lead to arbitrary and capricious recommendations by SCARC,” says Verite.
Additionally, to determine if the financing is appropriate/favorable, “the only factors that need to be considered are the years of repayment (minimum 15 years) and the grace period (minimum 3 years). There is no reference to the interest rate to be paid or the grant element of the loan.
According to the IMF, a loan to be considered a concessional loan must have a grant element of at least 35%.
Verite points out that under the 2006 GP, when a deviation from a tender is requested, it is mandatory to appoint a Standing Cabinet Appointed Contracts Committee (SCAPC) to assess the proposal, which will be supported by a technical evaluation committee appointed by the Ministry of Public Finance. Thus, within the general framework applicable to public sector infrastructure projects, in the event of waiver of competitive bidding, the technical evaluation is carried out by a designated independent commission. The procurement guidelines set out the specific qualifications that members of a technical evaluation committee must possess.
In contrast, under SCARC, independent technical evaluation of an unsolicited/stand-alone proposal is not mandatory. For example, SCARC can make a recommendation on its own or with the help of a technical review panel, says Verite.
Water supply project
Verite’s report uses the China-funded and executed Gampaha, Attanagalla, Minuwangoda Integrated Water Supply Scheme (GAMWSS) to illustrate flaws in the SCARC system. The contract to implement the project was awarded in 2013 to China Machinery Engineering Corporation (CMEC), which submitted a USP without going through a bidding process but with SCARC recommendation and Cabinet approval ministers.
Despite concerns such as higher costs and a lack of experience and expertise identified early on by committees appointed to evaluate proposals, these were overlooked in the approval process, Verite says.
“Elements of corruption” were suspected in the decision-making process. As a result, the government failed to obtain the expected concessional loan from the EXIM Bank of China. The expected rigor of the assessment process was compromised by the Ministry and the SCARC, which completely ignored essential factors such as the completion of the feasibility study, the environmental impact study, the terms of financing, as well as than the experience and expertise of the company.”
Moreover, the project had been delayed for more than seven years, depriving 400,000 people of the promised water connections, points out Verite.
“Although the special framework has managed to tap into China’s vast pool of funding, in the process of securing these funds, the country has incurred many additional costs. The lack of visibility of these costs can lead to an overestimation of the benefits of such financing and an underestimation of the real costs,” warns the study.
Further, “although oversight institutions such as the Auditor General’s Department frequently report financial and other irregularities related to the project, there is no evidence of legal action being taken against those involved. This is a key factor contributing to the recurrence of these problems,” the report points out.