Saturday, November 7, 2015

The Sunday Times Sri Lanka

Railway Projects: Way forward for Yahap#alanaya averting derailment

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Opening the Indian built Kilinochchi railway.
The main allegation levelled against the previous Government at the last Presidential election was mismanagement of public funds, particularly in mega projects in the infrastructure development sectors including ports, airports, highways and railways. The accusation was that those projects were implemented through foreign bilateral loans where there was no room for competitive bidding and for maximisation of domestic value added, because the contracts had to be awarded to companies of those countries, thus paving the way for corruption, economic losses and debts. Even an Advanced Level student in Economics or Commerce would understand the advantages competitive procurement offers to buyers, whereby they could compare among different sources, and opt for the best buy. Unfortunately, that simple logic, let alone deep and complex principles of economic good governance, was not adopted in planning and implementation of such mega projects. This was in contradiction with pledges in the Mahinda Chinthana – 2005 thus alienating many professionals who expected much from that Government towards national economic development. In fact, that was one of the strategic errors committed by that Government, which not only acted as a catalyst for self-destruction of that regime in January 2015, but also caused severe foreign indebtedness to the economy, the gravest repercussions of which are yet to be experienced.
Dullas wanted local engineers
Railway projects could be identified as one such domain of blunders committed by that regime. The policy makers went against professional advice and the political will at the Ministry level to construct the Southern railway extension beyond Matara and to reconstruct the Northern railway lines to Jaffna and Talaimannar through domestic effort and Sri Lankan engineering strength. Plans were prepared by transport experts under the Uthuru Mithuru project led by the Minister Dullas Alahapperuma to construct the Northern railway tracks through local effort in 2009. His confidence in the ability of Sri Lanka Railway (SLR) engineers and local entrepreneurship to effectively undertake the Northern railway rehabilitation would possibly have been inspired by Sri Lanka Railway’s exceptional reconstruction of the Tsunami devastated coastal railway in 56 days at a cost of less than Rs. 450 million in 2005. The policy stance taken by the Minister was further demonstrated when he politely declined the bilateral loan facility offered by the Iranian Government for an Iranian company to undertake the task, and instead, requested for credit assistance to procure material such as rails which could not be turned out in Sri Lanka for the SLR to undertake the construction work. Mr. Alahapperuma also appealed to patriotic Sri Lankans to make “per sleeper based” contributions for the Northern railway reconstruction, for which many Sri Lankans living in the country and abroad, positively responded with enthusiasm. Unfortunately, all these initiatives and motivation were ignored, ending up with handing over of the project to Indian contractors, and subsequently scrapping of the Uthuru Mithuru project together with the Transport Ministry portfolio held by Mr. Alahapperuma.
Another effort was made in 2010 to convince the policy makers to locally construct railway track and signalling infrastructure, both in the South and the North. SLR, in effect, constructed the track up to Omanthai in the North and once again demonstrated its capability. Plans were prepared to reconstruct the Palai-Kankesanthurai section by the SLR at an estimated cost of less than US$1 million a kilometre, and even a Joint Communiqué was issued on 13th June 2010 by the then President of Sri Lanka and the Prime Minister of India to the effect that the SLR would undertake the project with Indian credit assistance for material imports. However, this initiative was aborted; the project was handed over to an Indian company for designing and construction, when even the rails ordered by the SLR for indigenous construction of this section were already being shipped.
Needless to say that the outcome of this foreign undertaking of Sri Lanka rail infrastructure construction was detrimental towards the country’s technological advancement and national added value multiplication. The Northern railway construction projects, undertaken by Indian contractors, had an average cost of over $2 million a km and the Sri Lankan engineers, entrepreneurs and workmanship lost both employment and a rare opportunity to develop their skills and competence. Based on the rates worked out in 2010 by the SLR for indigenous reconstruction of Palai-Kankesanthurai section, the economy has had to spend in excess of $250 million (or over Rs. 30 billion) more as capital expenditure for nearly 250 km of track from Medawachchiya to Talaimannar and from Omanthai to Kankesanthurai, and any such excessive capital costs paid also amounts to unnecessarily heavy foreign debt. This “economic loss” would be even more if compared at the rate of SLR’s reconstruction of 10 km section between Thandikulam and Omanthai in 2010 at an average cost of little over one-third of a million dollars a km but the trains could still achieve 100 kmph speed on that section even though lighter section rails were used for the purpose with no continuously welded joints.
The Southern railway extension contract, awarded to Chinese contractors without competitive tenders, also appears to be associated with excessive capital costs averaging to almost $10 million per km, even though one might argue that the imperatives therein, including tunnels, viaducts, marshy terrains, cuttings and fillings, could not be compared against those associated with the Northern line reconstruction work. It might also be worthwhile appraising whether any intended and actually realised benefits sufficiently compensated for the high capital cost of $89 million incurred to rehabilitate nearly 130 km of coastal railway track from Kalutara to Matara on bilateral loans, again with no competitive tenders being called.
Fraction of the cost
This is because any rehabilitation of that line could have easily been undertaken at a fraction of that cost by the Sri Lanka Railway employees, demonstrated beyond any doubt by their exemplary accomplishment of track rehabilitation after the Tsunami devastation. Unfortunately, no such vigilance in capital spending appears to have prevailed, and the economy was made to get into foreign debts of unnecessary scale, which our future generations will have to pay back with interest.
The story does not end there. Absence of competition among suppliers is a clear recipe for quality lapses, because the buyer is deprived of “competitive choice”. Any deficiencies in quality, in return, would result in poor performance of the asset procured or created. One may wonder whether that was the procedural gap which lent to various quality concerns raised by stakeholders including trade unions with regard to recently imported diesel multiple units, compelling the then Secretary to the Ministry of Transport to call for an independent examination of quality by a team of experts in view of rectifying any such defects prior to completing payment on those procurements. Similarly, the Ministry of Internal Transport had to appoint an expert committee chaired by the former General Manager Railways (GMR), Engineer Priyal de Silva, to examine the concerns raised pertaining to track and signaling infrastructure development projects recently implemented on bilateral credit with no competitive bidding. The Committee has produced a report highlighting quality issues, inappropriate technologies procured, procedural flaws, excessive costs, and resultant operating constraints. Most strikingly, the report has highlighted how absence of competitive procurement could lead to the dual disadvantage of excessive costs and inadequate quality. For instance, it has viewed the Northern line’s new signalling system as “out-of-date” and costly, and has pointed out that several stations had been sub-contracted at about 10 per cent of the average contract price. A competitive tender would have attracted even such sub-contractors to directly bid, possibly enabling much lesser capital requirement for a given technology.
Sleepers were cracked
The report has also found newly laid imported concrete sleepers being cracked at several locations, subsidence at bridge approaches, and several bridges being rejected by the Consultants. Inappropriate yard designs at stations, particularly at Kankesanthurai where trains longer than 16 or 17 coaches could not be accommodated, is reported to be constraining train operations. The possibility of capital saving and value multiplication realisable through assigning of at least some civil work to local companies is reported to have been ignored. This report, containing many such important observations and recommendations, was submitted to the relevant authorities for corrective action, for finding out responsibility; but most importantly for taking precautions to avert such flaws in the future, which also is the sole purpose of this article.
One very clear recommendation of the Priyal de Silva Committee is to call for competitive tenders on all future requirements of railway procurement and infrastructure development when such cannot be executed by the department itself. This was completely missing in “negotiated” projects implemented in the past on bilateral loans, may those be of Indian, Chinese or other origin. Given that these were loans, and not “grants”, Sri Lanka being the borrower Government, acting in her national interest, should have had the freedom to decide how such credit would be ustilised for Sri Lanka’ s betterment, and her policymakers should have had the backbone to say “no” to any unfair conditions if laid down by any lending agency. At the minimum, the borrower Government and its agencies should have been able to call for competitive bids among the potential suppliers in the lender country. The Indian Government, for instance, has issued very clear guidelines in respect of Government supported Exim Bank Lines of Credit (Reference: F.No.21/6/2008-CIE-II, July 2010, Government of India, Ministry of Finance;, where the necessity of transparency in procurement, and opening the procurement for competitive bidding is emphasised.
By passing
Therefore, Sri Lankan policymakers and officials cannot justify any procurement bypassing the competitive bidding process, covering behind the banner that those procurements were on Government-to-Government loans and thereby could not be considered “unsolicited”. In fact, they should act with Sri Lanka’s national interest, and implement projects locally wherever feasible so that maximum economic multiplier effects would be accrued to the nation, and go for competitive tendering whenever local procurement is not possible, in view of obtaining maximum technical and operational benefits on least possible capital deployment. After all, these are credit accorded by friendly nations, presumably with the interest of seeing the development of borrower friends, and thus, should not be on self-interest of exploiting the friends in resource shortage for selling their own products and services at uncompetitive costs. Besides, if the lender countries are so confident of the cost competitiveness of their suppliers and contractors, there is no reason for them to worry, and they should not object for the borrowing countries calling for international competitive bids, which, if required, could also be coupled with offers for financing through lines of credit from bidder’s own country.
This is precisely the guiding framework the Ministry of Internal Transport, during the 100 day Government, established vis-à-vis railway and transport sector related development work. The Ministry, under the guidance of the Minister Ranjith Maddumabandara, adopted the three-tiered strategic framework, namely (a) seeking maximum national value added through design and implementation of projects by local engineers and enterprises to the maximum possible extent, (b) imperatively resorting to international competitive bidding whenever procurement from abroad becomes unavoidable (c) call bids together with that of supplier country bilateral credit terms whenever the Government of Sri Lanka finds shortage in capital funds and when multilateral soft loans are not available. The proposals to locally develop the Maho-Vavuniya railway section at an average estimated cost of approximately $0.4 million per km and procurement of new rolling-stock for railways were submitted for the Government approval on those principles, and the intention of these initiatives was to pursue “good governance” to avoid mistakes made during the past few years. In fact, this policy conforms to the procurement procedural norms promoted by the multilateral credit agencies such as the World Bank and the Asian Development Bank, which have also expressed renewed interest in supporting Sri Lanka’s railway development projects through concessionary credit.
Competitive procurement
There is no better alternative to this strategy of competitive procurement and maximisation of national value added in project implementation if the present Government is to succeed in its Yahap#alana agenda from an economic point of view. It should not slip back into “negotiated projects” on bilateral credit without calling for competitive bids. If it gets deceived by the “government-to-government” slogan and go without bidding, such would not only be falling during the day into the same economic and political pit the former Government fell in the night, but also would amount to violating the very principles standing on which the present administration, being in the opposition then, launched corruption allegations against the previous regime.(The writer is also a former GMR (2007-2009) and Transport Ministry Secretary (twice in 2010 and again in 2015). He could be reached at