SL’s ‘special’ framework experiment to fund infrastructure projects poorly executed: Verité

• A Verité Research study finds how SL mishandled alternative funding that came from emerging economies such as China and how such credit became massive burden on people 

The so-called‘special’ framework introduced by the government in 2010 to facilitate access to export credit provided by emerging economies such as China has not benefitted Sri Lanka’s economy as expected, largely due to flaws in implementation procedures. 

The framework was set up with laudable intention, however, several weaknesses in the design of the special framework created loopholes that could be exploited or misused by the parties involved in the decision-making process, a study carried out by Colombo-based economic think-tank Verité Research revealed. 
In the 2010 - 2016 period, Sri Lanka rolled out an ‘experiment’ with a special framework. In the context of declining access to concessional funding from traditional multilateral and bilateral sources, this alternative funding was intended to finance the government’s ambitious infrastructure development programme.

During this period, 26 public sector projects were approved by the Standing Cabinet Appointed Review Committee (SCARC) using the provisions of the special framework. Among these were 12 projects funded by China, which accounted for 92 percent of the total value of all publicly-funded projects approved by SCARC.
Alternative funding sources such as these were essential and important means of bridging the financing gap created by the gradual decrease in concessional financing from other traditional multilateral and bilateral sources, due to Sri Lanka’s transition to lower middle-income country status in 2004, highlighted Verité.

The study pointed out the negative implications brought about by this special framework, which requires such procedures to be re-looked and re-conceptualised so the same mistakes do not repeat again and again.

 ​According to the think-tank, first among these weaknesses of the special framework was the inclusion of a vaguely defined list of reasons to justify deviations from the established procurement process. 
The second was the complete disregard for the cost of the funding and the grant element, which is crucial to assessing the concessionality of the loan, in determining the suitability of funding. 

The third was the lenient decision-making process which allowed authorities to proceed with the USP, even if only one of the loosely defined reasons listed was met. 
“The rigo​ur​ of the evaluation process was further compromised by the discretion provided to SCARC to decide whether the unsolicited proposals needed to be evaluated by an independent project and technical evaluation committee. 

Overall, the high level of discretion vested with the officials involved in the decision-making process made the weaknesses in the framework highly vulnerable to abuse and misuse,” the study revealed.
Between 2010-2016, Sri Lanka secured loans to the value of US$ 5,895 million from China to finance its infrastructure. China was the leading provider of foreign loans for infrastructure development in Sri Lanka during this period accounting for 37 percent of the total. 

Over half of these funds (53 percent) were realised through projects that originated as unsolicited proposals (USPs), which were approved by SCARC. The analysis reveals that although the special framework succeeded in tapping into the large pool of financing from China, in the process of securing these funds, the country incurred numerous additional costs. 
“The lack of visibility of these costs can lead to an over-estimation of the benefits of such funding and an under-estimation of the actual costs,” Verité said. 

The case study also sheds light on the ineffectiveness of the oversight processes in place. Despite the oversight institutions such as the Auditor General’s Department frequently reporting on financial and other irregularities related to the project, there was no evidence of any legal 
action been taken against the individuals involved. 
“This is a key factor that contributes to the recurrence of these problems. Weak and ineffective oversight makes the rewards of bypassing the processes far higher than the risk of getting caught,” asserted the think-tank.