China Development Bank provides $195 million loan for Gampaha, Attanagalla, and Miniwangoda Integrated Water Supply Project

China Development Bank provides $195 million loan for Gampaha, Attanagalla, and Miniwangoda Integrated Water Supply Project The National Water Supply and Drainage Board of Sri Lanka (NWSDB) received an unsolicited conceptual proposal from China Machinery Engineering Corporation (CMEC) to implement the Gampaha, Attanagalla, Minuwangoda Integrated Water Supply Scheme (GAMWSS) in 2010, along with a letter of intent issued by China Development Bank (CDB) to grant a credit line for GAMWSS and an endorsement letter issued by the Chinese Embassy.

A Project Assessment Committee (PAC) subsequently reviewed the conceptual proposal submitted by CMEC in June 2010.

In its report, the PAC noted that CMEC had limited experience with water supply projects and the qualifications listed were that of an associate company, the Tianjin Water Industry Engineering & Equipment Co. Ltd (TWIEE). Hence, the PAC noted that the project should only be implemented jointly by both these companies.

The NWSDB submitted the project concept note for the approval of the Government of Sri Lanka’s National Planning Department (NPD) and Standing Cabinet Appointed Review Committee (SCARC) in July 2010.

The total cost of the project which was submitted for NPD approval in July 2010 was just LKR 10,675 million ($94 million), which amounted to just 32% of the final contracted value of the project (which was LKR 33,060 million or $229.5 million).

Based on the recommendation by SCARC, Sri Lanka’s Cabinet of Ministers approved the request for technical and financial proposals from CMEC on July 31, 2010.

Sri Lanka’s Ministry of Water Supply and Drainage (MOWSD) signed a Memorandum of Understanding (MOU) with the CMEC on November 15, 2010. According to the MOU, CMEC was to submit the technical and financial proposals by January 31, 2011.

The MOU does not refer to funding from CDB, and states instead that the parties will support each other to secure ‘preferably a concessional loan from EXIM Bank of China’, which suggests that the initial funding offer from the CDB had been rejected during the approval process and a request had been made to secure a loan from China Eximbank in its place.

It also indicates that at the time of signing the MOU, there was no firm commitment from China Eximbank to provide funding for the project.

Despite the lack of a firm commitment on funding, and without having seen technical and financial proposals from CMEC, the MOWSD agreed in the MOU not to ‘solicit or initiate any proposals or respond to any proposals from any other party’ for the implementation of the project.

According to the MOU, this commitment remains valid (unless both parties agree in writing to withdraw from the project) up to 77 days from the date of signing the MOU and can be further extended if there had been delays attributable to either party.

The Technical Evaluation Committee (TEC) that reviewed the technical and financial proposals received from CMEC submitted its report on July 31, 2012.

The initial price quoted by CMEC was $258 million, 50% higher than the total cost estimate (TCE) of the project prepared by NWSDB engineers of $172 million. This engineer’s estimate had factored in a 25% profit margin for the contractor as well.

The TEC noted that the CMEC had quoted very high prices for certain civil works and in order to reduce these costs, the NWSDB agreed to undertake the implementation of these civil work items including the Basnagoda reservoir as a sub-contractor.

The price quoted by the CMEC for this component was $72 million and NWSDB agreed to complete this work for $64 million, resulting in a saving of $8 million.

By the time the MOWSD submitted a memorandum to the Cabinet of Ministers on September 3, 2012, the contract price had been further reduced to $232.5 million.

This was still 35.2% higher than the TCE prepared by the NWSDB engineers which already had a 25% profit margin factored into it.

The Strategic Enterprise Management Agency (SEMA), an organization tasked with ensuring that SOEs and statutory boards such as the NWSDB are sustainably managed, requested the government to reconsider awarding the contract to CMEC.

SEMA noted in its observations that CMEC has already caused numerous problems for the Ceylon Electricity Board (CEB) as the primary contractor of the Norochcholai Coal Power Plant.

SCARC appears to have conducted a second round of negotiations with the contractor — in response to a request made by the Cabinet of Ministers on September 26, 2012 — to further reduce the gap between TCE and the contract price.

During the meeting SCARC held on October 10, 2012, the TCE was first increased from $172 million to $197 million considering the inflation due to the delay in the project start year from 2012 to 2014 (the original TCE had assumed that the project would commence in 2012).

The TCE was further increased from $197 million to $216.7 million considering the potential future appreciation of the Chinese yuan (RMB) against the US dollar (USD).

The SCARC, noting that the original TCE by the engineers had factored in a 25% profit margin, had requested that CMEC reduce its contract price from $232.5 million to $216.7 million.

However, CMEC refused to do so citing the rapid appreciation of the RMB and the price reduction already made from $258 million to $232.5 million. CMEC agreed to bring down the contract price to $229.5 million.

Following this meeting held on the October 10, 2012, the SCARC made a recommendation to the Cabinet of Ministers to award the contract to CMEC for $229.49 million.

On May 9, 2013, the Cabinet gave its approval to award the contract to CMEC based on the recommendation of the SCARC and instructed the Ministry and the External Resources Department (ERD) to work towards obtaining a preferential buyers’ credit (PBC) from China Eximbank to fund the project.

On May 15, 2013, the NWSDB signed the commercial contract with CMEC for the implementation of GAMWSS, agreeing to pay CMEC for the design, execution and completion of the works a sum of $229.49 million. CMEC signed a sub-contract with NWSDB for the Civil Works and the Basnagoda Reservoir on October 6, 2014.

Then, on August 29, 2016, China Development Bank (CDB) and the Government of Sri Lanka signed a $195,075,000 (approximately Rs. 28.4 billion) loan agreement for the Gampaha, Attanagalla, and Miniwangoda Integrated Water Supply Project.

The Government of Sri Lanka issued a sovereign guarantee on September 9, 2016 in support of the loan (that expires on March 20, 2032, the loan's final maturity date).

The borrower was to use the proceeds of the loan to finance approximately 85% of the cost of a $229.49 million commercial contract [ID#P&P/DB/CHINA EXIM/GAMIWS S/2013/01], which was signed with China Machinery Engineering Corporation (CMEC) on May 15, 2013.

The remaining 15 percent ($34.5 million) was borrowed from Bank of Ceylon, a state-owned commercial bank in Sri Lanka, on January 16, 2017.

The (principal) amount outstanding under the $195 million CDB loan was $43.61 million as of December 31, 2016, $48.77 million as of December 31, 2017, $48.77 million as of December 31, 2018, $48.77 million as of December 31, 2019, $48.77 million as of December 31, 2020, $157.58 million as of December 31, 2021 and $150.08 million as of December 31, 2022.

The purpose of the project is to provide safe and reliable drinking water to the areas of the Gampaha, Minuwangoda, and Attanagalla Divisional Secretariat (DS) divisions and part of Meerigama Divisional Secretariat (DS) division.

The project involves the construction of a Basnagoda 3.5 MCM capacity impounding reservoir at Karasnagala, the construction of a 85,000 m3/day capacity water intake facility at Karasnagala, the construction of a 54,000 m3/day capacity Water Treatment Plant (WTP) at Karasnagala, the construction of a wastewater and sludge treatment facility including all accessories and pumping equipment at the treatment plant premises, the construction of 10,000 m3 capacity High Level Reservoir (HLR) at Nikahetikanda, the construction of five 1,500 m3 capacity elevated water towers at Ranpokunugama, Belummahara, Naiwala, Minuwangoda and Pasyala, the supply and laying of 1,000 mm diameter Ductile Iron (DI) pipes for raw water pumping main of 1.75 km length approximately from the water intake to the WTP, the supply and laying of 1,000 mm dia.

DI pipes for treated water pumping main of 1.65 km length approximately from the WTP to the high-level reservoir (HLR), the supply and laying of 1,100 mm dia. to 150mm dia. range DI pipes for the gravity transmission main approximate length of 89.2 km from the HLR to existing and new water towers, supply and laying of 225 mm dia. to 90 mm dia. range uPVC pipes for the distribution network, approximate length of 600 km, supply and laying of 400 mm dia. to 300 mm dia. range DI pipes for balance part of the distribution network, approximate length of 30 km, and finally catchment protection.

In total, the project seeks to build a 720 km water pipe network.

Upon completion, the project is expected to provide about 600,000 residents in Gampaha, Attanagalla and Minuwangoda with clean drinking water.

Tianjin Municipal Engineering Design & Research Institute is responsible for project design and China Machinery Engineering Corporation (CMEC) is the contractor responsible for project implementation. A formal groundbreaking ceremony took place on December 5, 2014 (prior to loan approval). However, project implementation did not commence until February 2017.

As of January 31, 2018, the Sri Lankan Department of Project Management and Monitoring reported that the project had achieved a ‘physical progress’ rate of 20.27%. As of December 2018, the project has achieved a ‘physical progress’ rate of approximately 50%. As of early 2021, the project had achieved a ‘physical progress’ rate of 68.9%.

Although the project was originally scheduled to reach completion in February 2020, the scheduled project completion date was subsequently revised to February 2022 due to various implementation delays. On May 22, 2022, construction is completed. On April 23, 2023, the Sri Lankan government took over the factory, officially completing the project.

This project has been plagued by controversy.

In May 2018, former President Chandrika Bandaranaike Kumaratunga demanded that this project be suspended and investigated on the grounds that it was overpriced.

Even while the Rajapaksa administration was still in power, a 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. However, a review committee set up after the 2015 change of government recommended the continuation of the project.

The Auditor General’s (AG) Department also raised concerns about the qualifications of CMEC to undertake such a major project.

It noted that the company’s portfolio showed no specialization in water supply projects and that in the experience section of CMEC’s project proposal it listed the experience of several other companies (China National Machinery Import and Export Cooperation and Tianjin Water Industry Engineering and Equipment Co.

Ltd.).

The AG Department 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. Then, in a letter dated May 17, 2018, to the Secretary of the Treasury, Dr. R.H.S.

Samaratunge, the Attorney General recommended that 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. This project has also encountered debt repayment problems.

On April 12, 2022, the Government of Sri Lanka announced a ‘pre-emptive’ sovereign debt default, noting that it would suspend debt repayments to all external creditors other than multilateral institutions.

Its decision to suspend external debt service reportedly affected all China Development Bank loans with amounts outstanding at the time of the announcement. As of March 2023, the Government of Sri Lanka had accumulated $338 million in arrears to China Development Bank.