CMEC Attanagalla water project : AG points to ‘colossal’ squander of public funds | Sunday Observer

CMEC Attanagalla water project : AG points to ‘colossal’ squander of public funds

The Attorney General has raised grave concerns about a controversial multi-million dollar water supply project in the Gampaha District awarded to a Chinese company in 2013, pointing to ‘colossal amounts’ of public funds being squandered.

The Attorney General has pointed to the culpability of officials at the National Water Supply and Drainage Board (NWSDB) and the Ministry of Water Supply and has recommended an inquiry into the transaction and disciplinary proceedings against officials, Sunday Observer learns.

In a letter dated May 17, 2018 to the Secretary of the Treasury, Dr. R.H.S. Samaratunge, the Attorney General also recommends a complaint be filed at the Commission to Investigate Allegations of Bribery and Corruption (CIABOC) since it appeared that the project was mired in graft.

The US$ 229.5mn contract for the Gampaha, Attanagalla and Minuwangoda Integrated Water Supply Scheme was granted China Machinery Engineering Corporation (CMEC), despite serious concerns raised by the Auditor General’s (AG) Department on various aspects including questions over the qualification of the Chinese contractor to undertake such a major project.

Known as the Basnagoda-Attanagalu Oya water supply project, once complete, the scheme was to provide pipe-borne water supply to three electorates and half of two other electorates in the Gampaha District.

Once completed, the project will provide tap water to around 150,000 households benefiting around 600,000 people in the Attanagalla, Gampaha, Minuwangoda areas and parts of Mahara and Mirigama.

Under the contract, CMEC was to build a conventional water treatment plant with a transmission length of 100 kilometres and a distribution network of 630 kilometres.

The project is 85 percent funded by the China Development Bank, while the 15 percent of the total cost of the project will be borrowed locally. The Bank of Ceylon will provide the Government with credit for 15 percent of the estimated cost or USD 34 million (Rs 5.3 billion).

The Attorney General’s opinion on the dubious transaction was provided after the Ministry of Finance referred the project for a legal opinion, being alerted to serious issues with the water supply project by former President Chandrika Kumaratunga. The Attorney General also recommends that the contract be cancelled, or at least its terms be renegotiated more favourably. Sunday Observer learns that the Ministry of Water Supply is vehemently opposed to renegotiation of the contract with CMEC.

Between 2016 and 2018, the Auditor General has queried the transaction five times, finding among other things that the estimated cost of the project finally awarded to the Chinese company far exceeded the original estimate put forward by NWSB Engineers, and serious breaches of Government financial regulations and tender procedures over payments made to the foreign company before work on the mega water supply project began.

Sources from the Auditor General’s Department told the Sunday Observer that the department had in 2016 alone raised similar queries on three occasions dated January 6, December 22 and December 31 because there were serious doubts about the suitability of CMEC to undertake the project.

CMEC is the company that constructed the Norochcholai coal power plant known as Lakvijaya, which has seen constant breakdowns since it was first commissioned in 2011. CMEC is a subsidiary of China National Machinery Industry Corporation, with a specialisation in the construction, transmission and distribution of power projects. CMEC has constructed power related projects in Nigeria, Turkey and Argentina, all using loan facilities through the China Development Bank.

The company’s portfolio shows no specialization in water supply projects, a fact noted by the Auditor General repeatedly in his reports. In fact, the Auditor General notes in his January 24, 2018 report that in its experience section of CMEC’s project proposal for the Gampaha water project, the Chinese company lists the experience of several other companies – National Machinery Import and Export Cooperation and Tiagin Water Industry Engineering and Equipment Co. Ltd. If so, the contract should have been signed between CMEC and collaborating companies and not just CMEC alone, which does not have the technical expertise to undertake the project on its own, the Auditor General’s report noted.

The report in January 2018 also noted that the Strategic Enterprise Management Agency (SEMA) in 2012 had also recommended reconsidering the decision to hand over the project to CMEC given that the Norochcholai coal power plant had broken down about 35 times since being commissioned.

Based on an unsolicited proposal, the decision to grant the USD 229.5 million (Rs 32 billion) contract to the China Machinery Engineering Corporation (CMEC) was made in 2012, when Basil Rajapaksa was Minister of Economic Development and Dinesh Gunewardane served as Minister of Water Supply in former President Mahinda Rajapaksa’s Government.

Even while the Rajapaksa administration was still in power, the Cabinet appointed procurement committee noticed a major difference between the cost estimated by the NWSDB engineers for pipe laying and other activities and the higher prices estimated by CMEC.

The agreement with CMEC was signed in May 2013, with the Chinese company expected to start work by 2014. A review committee set up after the 2015 change of Government, recommended continuation of the CMEC project.

In February 2016, Cabinet granted approval for a loan agreement between NWSDB and CDB to finance 85 percent of project cost and with the Bank of Ceylon for the remainder. The Cabinet in August 2016 authorised the Treasury to issue a letter of undertaking to CDB for US$ 146.3 mn, which is 75 percent of the loan amount, in addition to a letter of guarantee.

As previously reported in the Sunday Observer, the Auditor General’s report also highlighted that even though Government procurement guidelines state that only a maximum of 20 percent can be paid as an advance to a contractor, an advance payment of 34 percent was made to CMEC.

A further 50 percent advance was made to sub-contractor NWSDB, in complete violation of the guidelines. Government guidelines are explicit that no advances may be paid to any contractor, until credit agreements are in place for the project. Payments to CMEC also breached those guidelines.

In fact in a bizarre turn of events, NWSDB obtained a loan of USD 34.3 million from the Bank of Ceylon on May 19, 2017. This money was immediately transferred into a Fixed Deposit held by CMEC for a seven month period, since no work was being undertaken.

During this same period, NWSDB paid interest of Rs. 454.4 million for the loan to the BOC, while the contractor, CMEC, profited from interest for money lying in the bank, the Auditor General highlights in his report.

The Sunday Observer can also reveal that payments to CMEC for the project continued despite three verbal directives from the Secretary to the Treasury to NWSDB officials to halt payment until the issue was resolved. To date, over 40% of the payments due to CMEC have been paid by the NWSDB while about 20% of the work has progressed on the project.

Former President Kumaratunga has demanded the project be suspended due to massive irregularities, and what she claims on the basis of the Auditor General’s findings, are violations of Government fiscal regulations, tender procedures and even the country’s money laundering laws.

Subsequent to the Attorney General’s unreserved opinion on the project being conveyed to the Treasury Secretary, the Ministry of Finance presented a Cabinet paper, seeking the approval of Cabinet to renegotiate the terms of the contract.

However, Sunday Observer learns that this cabinet paper did not include references to the five reports and queries by the Auditor General, pointing to serious financial irregularities connected with the project, or the Attorney General’s studied opinion that it appeared public monies had been squandered and officials should be held responsible.