Borrowing from China to finance infrastructure  

New report highlights the perils of deviating from competitive bidding

“The Lure of Chinese Loans”: long dragged project of Colombo Port City

Sri Lanka’s debt to China is making headlines in international and local media once again. Media reports partly blame China and its lending practices for Sri Lanka’s debt crisis. 
The publication titled “The Lure of Chinese Loans: Sri Lanka’s experiment with a special framework to finance its infrastructure” sheds light on the perils of creating frameworks to facilitate deviations from competitive bidding to tap into concessional export credit from emerging economies such as China.  

The report reveals that the root causes of problems associated with loans taken to finance infrastructure are weak regulatory frameworks in the country and the excessive discretion exercised by both politicians and public officials in making decisions. The report findings highlight that fixing the country’s procurement regulatory framework and improving independent oversight of the procurement process is essential to prevent irresponsible borrowing, cost overruns, and poor project selection.  

"Lack of accountability is a key factor that contributes to the recurrence of such problems. The report finds that weak and ineffective oversight makes the rewards of bypassing due process far higher than the risks of getting caught"

Sri Lanka does not have a procurement law enacted by Parliament, and the procurement guidelines that govern procurement can be modified with Cabinet approval. In 2010, Sri Lanka introduced a framework that allowed the Cabinet of Ministers to approve the processing of projects that originated as Unsolicited Proposals (USPs) outside the normal competitive bidding process. Cabinet approval is given based on the recommendation of a Standing Cabinet Appointed Review Committee (SCARC).  This framework was in operation till 2016. The objective was to tap into concessional loans from export credit agencies of emerging economies such as China to finance the government’s ambitious infrastructure development plan.  

The period 2010-2016 can be considered the golden era for financing from China, with Sri Lanka receiving US$5,895 million in loans from China. Over half of the value of these loans (53%) was realized through projects that were approved by SCARC. The report analyses the design and execution of the special framework and finds that the lack of rigour in the evaluation process, coupled with the ability of decision-makers to exercise excessive discretion made the framework highly prone to abuse and misuse.  

"Auditor General’s Department frequently reported on financial and other irregularities related to the project, there was no evidence of any legal action being taken against the individuals involved as a result"

The analysis of the Gampaha, Attanagalla, Minuwangoda Water Supply Project (GAMWS), approved by SCARC demonstrated the weaknesses of the special framework in practice. The project originated as a USP from China Machinery Engineering Corporation (CMEC) and was awarded to the same company despite it having little experience and expertise in similar water projects. The contract was awarded without going through the normal competitive bidding process and without carrying out the minimum due diligence required. For example, the feasibility study and environmental impact assessments for the project were completed after the contract was signed. The contract price was 33.4% higher than the cost estimate of US$172 million.  Despite rushing to award the contract in the hope of securing a concessional loan from the China EXIM Bank, the government failed to secure the concessional export credit facility. Three years after signing the contract, it had to settle for a less concessional loan from the China Development Bank. Delays in securing funding coupled with investigations into alleged malpractices delayed project completion by more than seven years. The report’s analysis reveals inadequacies in the oversight processes in place to detect and prevent malpractices. While the Auditor General’s Department frequently reported on financial and other irregularities related to the project, there was no evidence of any legal action being taken against the individuals involved as a result. This lack of accountability is a key factor that contributes to the recurrence of such problems.  The report finds that weak and ineffective oversight makes the rewards of bypassing due process far higher than the risks of getting caught.  

"The period 2010-2016 can be considered the golden era for financing from China, with Sri Lanka receiving US$5,895 million in loans from China. Over half of the value of these loans (53%) was realized through projects that were approved by Standing Cabinet Appointed Review Committee (SCARC)"

The findings of the report thus highlight the importance of limiting the Cabinet of Ministers’ discretionary power to create lax regulatory frameworks that allow contracts for publicly funded projects to be awarded outside the normal competitive procurement process. Further, it demonstrates the importance of strengthening independent oversight in the procurement process to prevent such malpractices and of having systems in place to penalize individuals and companies that circumvent due process.  
The complete report can be accessed via: https://www.veriteresearch.org/publication/the-lure-of-chinese-loans/