ISSUES

Unbridled spending by government

By R. Wijewardene 

Ambitious new development projects are rapidly changing the face of this country.

A series of spectacular schemes – the port at Hambantota, the power plants at Norochcholai and Sampur, the Southern Expressway will, it is envisaged, establish the infrastructural base on which the country’s future economic growth will be built.

 However while rapid infrastructure development and such large scale investment in the country’s future is an encouraging and welcome sign — the finances behind these schemes — precisely how a fundamentally bankrupt government is raising the billions it needs to implement these projects is an open and troubling question.

For the most part these various mega project are government to government development aid schemes, i.e. they are being bankrolled by ‘friendly’ nations — China and Iran in particular and in some cases India, not as grants.

Loans not grants

However while foreign governments are providing the funds and expertise required to implement these projects it’s necessary to understand that the funds for the implantation of these schemes are being supplied not as grants but as loans.

Sri Lanka now owes the Chinese and Iranian governments billions for the assistance they have provided and interest will have to paid on these enormous sums of borrowed money.

 The money being spent by China and Iran today will have to be paid back by Sri Lanka — tax paying Sri Lankans — in the future and a confidential report in the possession of The Sunday Leader raises questions about the viability of the government’s current rash of spending.

 The report argues that far from bringing development many of these much vaunted new infrastructure projects will produce only impractical white elephants — expensive failures that the nation’s population will be paying for decades to come.

Misdirected and excessive spending

The report singles out the Kerawalapitiya power plant, the Uma Oya project and plans for the Iranian funded expansion of Sri Lanka’ oil refining capacity as examples of misdirected and excessive spending.

The US $ 430 million loan for the construction of the power plant was provided only on the basis of a government guarantee of the funds — and without any long term analysis of the viability of the plant project.

Initially it had been estimated the project would cost only $300 million.

However despite the enormous cost the plant generates only 200 megawatts of power, rather than 300 megawatts it was scheduled to deliver.

Further as the plant uses a high cost fuel, electricity generated by the plant is sold by the CEB at a massive loss amounting to Rs. 5000 million or $ 50 million a year — an astounding figure.

 These losses could have been avoided if the correct feasibility studies had been conducted. However the loans that financed the project were supplied before any such studies were completed.

Differed radically

Extraordinarily the cabinet initially approved the project on the basis that it would utilise a low cost fuel. However the ready availability of funding prompted contractors to embark on a project that differed radically from the one originally approved.

The end result of all this spending however was a white elephant, a power plant that was $120 million over budget, but generating less electricity than it is required to and which continues to incur enormous losses.

The argument encapsulated in the Kerawalapitiya case is that as these major development projects are funded not by any sort of commercial interest, but by government to government loans, very little thought has been given to the long term financial viability of the schemes.

When projects are funded by banks, or international lending agencies — ADB, World Bank etc., the money lent is contingent on the viability of the scheme. In order to secure funding from development banks the government must provide analyses that indicate the project is likely to be a success and generate the revenue needed to finance repayments.

No assessment of the viability

However where the government’s current mega projects are concerned very large amounts of money have been made available with almost no assessment of the viability of the projects concerned.

China and Iran both keen on winning allies and flushed with money from economic growth and oil booms are not careful about their lending and the government apparently unable to resist the vast amounts of cash on offer has been profligate with its spending.

With all the projects currently underway the government’s debt burden is now significant with over $ 3 billion for the Kerawalapitiya, Uma Oya and refinery expansion projects and precisely how this money will be repaid is now a pressing issue.

It is of course hoped that the revenue generated by these mega projects — irrigation schemes, refining projects etc., will allow them to pay for themselves. However in most cases the expenditure on these projects greatly exceeds independent estimates of the projects’ earning potential.

Government spending $340 more

In the case of the proposed Uma Oya hydro-power and irrigation scheme, Iran has undertaken to provide over $500 million to implement the project. However initial estimates by the CEB for constructing the relevant damn and channels placed the cost of the scheme at a mere $160 million.

By agreeing to accept $500 million of Iranian financing the government is spending $340 more that its own estimates suggested should be the real cost of the project.

 Whether the revenue generated from the Uma Oya will ever justify such massive expenditure is open to question.

 The project is notoriously fraught with environmental hazards. Leading environmentalists doubt that the watershed of the Uma Oya is large enough to support such a large scheme.

As the Uma Oya has already been diverted and tapped for irrigation at several points, environmentalist have suggested that instead of irrigating more land the project will precipitate droughts in areas further upstream.

No major studies appear to support the government’s claim that the scheme will irrigate 25,000 acres of land.

Frightening lack of analysis

Ultimately, despite a frightening lack of analysis — given the scale of the environmental and economic implications of the project — the Uma Oya scheme has already been approved. Again the government seems unable to resist the large sums of money proffered by its allies. However in every case it must be remembered that these funds are provided as loans rather than grants.

The Uma Oya scheme is potentially an ecological and financial disaster. Even more unviable appears to be, the ambitious and more expensive Iranian scheme to expand the country’s oil refining capacity by 50,000 barrels a day.

In this case Iran has undertaken to provide a $1.5 billion loan to install the relevant refining equipment tank facilities etc. Once again, no feasibility studies have been conducted to ascertain whether or not Sri Lanka requires such a large expansion of its refining capacity.

Also the CPC’s initial estimates for the cost of a 50,000-barrel increase in its refining capacity was $ 500 million. The government is currently borrowing $1.5 billion to implement the scheme.

The lure of easy money it seems has persuaded the government to spend over $1 billion over the odds for a project the country does not need. Interest payment on the $ 1.5 billion loan would amount to hundreds of millions of rupees per year and whether the country would genuinely earn significant revenue from this expansion in its refining capacity is open to question.

Enormousunnecessary debts

The nation therefore is being saddled with enormous unnecessary debts and the government appears to be knowingly entering into overvalued deals, which can only raise the spectre of massive corruption.

In every case the fundamental problem appears to be the absence of safeguards. With China and Iran eager to provide funds the relevant studies and procedures to ascertain the viability and necessity of the projects are not being carried out.

Cash flow analyses and environment impact assessments are being dismissed in the government’s eagerness to seize the cash on offer.

The end result however is that the government of a country whose entire foreign reserves consist of an IMF loan is now accruing billions of dollars of additional debt.

 How the interest and principle of these loans will eventually be paid back is a troubling question but what is certain is that the taxpayers of this country will bear the burden of these repayment well into the next decade.