The main allegations of corruption against the government by the opposition lists 14 deals including Mihinair, CPC hedging deal, Kerawalapitiya power plant and the VAT scam supposed to have caused a total loss of Rs.430bn. In an interview with The Sunday Island of January 16, 2010, Central bank Governor Nivard Cabraal clarified the actual positions on the allegations:

Kerawalapitiya

Inflation of the Kerawalapitiya Power Plant cost from USD 200m to USD 400m

A. The original estimate in 2002 was USD 390m. Due to careful planning and execution, the cost is now estimated to be only around USD 295m for this power plant of 300 Mw when fully completed, working out to roughly around USD1m per Mw. That is close to the current industry norm of about USD 1m per Mw for petroleum based thermal power plants.

The agreed price per unit of electricity from this plant said to be Rs. 18, but is power now being purchased at Rs. 40, incurring loss of Rs. 22 per unit?

A. The pricing of electricity is done on pre-determined formula which includes the price of furnace oil. No one can set out a specific price for future due to regular change in the price of furnace oil. At current prices, the unit cost, although higher when only the first phase of the plant is operational, will decline to around Rs. 14 to 16 per unit, when the Phase 2 of this plant is in operation.

Uma Oya

Did the estimated cost of Uma Oya project increase from USD 265m to USD 539m?

A. The structure of a project can change from time to time. The original estimate amounted to USD 265m based on 1999 input prices. This project was then meant to produce 50 Mw of hydropower and irrigate around 5,000 acres of paddy land. Later, its scope expanded to 120 Mw and 12,500 acres of paddy land. Consequently, the project cost has been re-estimated at USD 545m at 2009 prices.

Was contract for Uma Oya project awarded to an Iranian company without calling for tenders?

A. The financing for the Uma Oya project comes from the Export Development Bank of Iran. It is usual in such cases for the contract to be given to a company from the country providing the financing. This general practice under bi-lateral loan agreements has been followed here, too. Having identified the contractor, the Government has taken the necessary measures to ensure the project is cost effective. The contract entered to is at a lower price than the estimated value. Any unexpected costs and adverse movement in prices will have to be borne by the contractor and not the Government.

Port of Colombo

The allegation concerning the purchase of thirty five SZPMC CRANES for the Colombo Port at USD1.2m each when cost of each crane is supposed to be USD 600,000.

A. Thirty transfer cranes with a capacity of 50 tonnes each were purchased by the Ports Authority at USD 1.507,000 each. Twenty five years ago, in 1985, they purchased 35 tonne transfer cranes at USD 1,570,000 each. A quarter of a century later, they have bought transfer cranes at USD 63,000 less, and that too with an increased capacity of 15 tonnes. Where is the inflated price?

VAT Scam

The allegation that during the period when President Rajapaksa functioned as the Minister of Finance, there was a Value Added Tax fraud amounting to Rs35b.

A. The amount involved is not Rs.35b but Rs.3.5b. The audit report shows, this fraud occurred during November 2002 to December 2004, before Mr Mahinda Rajapaksa became the President and Finance Minister; and was unearthed after President Rajapaksa became the President and Finance Minister and now action has been filed against those involved.

The Hedging Deal

THE HEDGING DEAL of the Ceylon Petroleum Corporation is said to have caused the biggest loss, amounting to more than half of the grand total of Rs.430b, approximating a loss of Rs.230b.

A. The total amount the five banks have claimed from the Ceylon Petroleum Corporation is USD418m working out to about Rs.47b. In hedging transactions, there are certain guidelines and norms to ensure they are properly structured. In many countries including China, India and Korea, it has been found that certain hedging deals have been improperly structured and therefore, the banks had no legal claim. In Sri Lanka too, the Central Bank investigation into transactions between the CPC and the banks, have determined that they have not been properly structured, and should therefore not be given effect to.

From the point of view of the country, there is no money due to be paid by the CPC. But, that is not to say that the banks cannot make claims. If an accident occurs, claims can be made from the insurance company, but the insurance company may find that something is not right, in which case, they are not obliged to make the payment.

SRI LANKAN AIRLINES

SRI LANKAN AIRLINES suffering a loss of Rs.10b 2008/9.

A. The global airline industry went through one of the toughest periods in its history in 2008/9. A profitable airline was accepted. Leading carriers - Japan Airlines, Cathay Pacific, Singapore Airlines, British Airways, all made losses. Japan Airlines is now on the brink of failure, with its share price dropping from 356 Yen last week, to just 8 Yen on Thursday. There were less travelers, so flights had to be cut back. Flights had lower loads. There were massive increases in fuel charges. The entire expenditure on fuel could not be recovered from customers.

With Sri Lankan, there was a decline in tourist arrivals due to travel advisories issued by certain countries. All these matters put together, made the airline suffer a loss. However, when the global situation eases, the profitability of Sri Lankan Airlines should improve. Already, we are seeing some signs of improvement.

MIHINAIR

The budget airline, MIHINAIR allegedly causing a loss of Rs.4b to the country

A. The budget allocation for MIHINAIR was Rs.3,300m, since its inception to date - a very modest capital for an airline. Mihinair has a certain service element too, giving less affluent Sri Lankans the opportunity for pilgrimage to Buddhist places of worship in India such as Buddhagaya and Muslim pilgrim to Mecca, as well as for Sri Lankan migrant workers travelling to and from the Middle East.

Budget airlines make money on volume, which takes some time to build up. Over the past few months, there has been a reasonable turn around of the financial performance of Mihinair leading to losses decreasing substantially. If conditions continue in the same vein, Mihinair will turn the corner soon.

WEERAVILA AIRPORT

Feasibility study for the WEERAVILA AIRPORT costing Rs.500m

A. The Airport and Aviation Services spent just Rs.9m (not Rs.500m) for the initial work relating to the Weerawila airport. This includes the environmental impact assessment. Once the EIA found the location to be unsuitable, this project was shifted to Mattala. There is nothing unusual in this. A location has to be studied to determine its suitability for such a project.

MIG Deal

Allegations that a sum of Rs.400m was overpaid in the purchase of four MIG combat air craft

A. The Secretary Defence has filed action against a newspaper which has alleged that there was corruption in this deal, and the matter is in Court.

Hambantota Safari Park

The allegation of Rs.1.6b is being spent on setting up a SAFARI PARK in Hambantota when the Yala wildlife sanctuary is close by.

A. This capital expenditure is for a theme park which will feature animals such as lions and zebras which are not found in the wild here. There are theme parks like this in several other countries too. Investments of this nature are quite common in many countries trying to develop tourism.

A9 ROAD

Handing over of the reconstruction of the Anuradhapura-Jaffna A9 ROAD to a Chinese firm at the rate of Rs.125m per km, and this Chinese company sub-contracting the same work to two Sri Lankan companies at the rate of Rs.60m per km. The same allegation relates to the reconstruction of the Point Pedro - Kankesanturei Road, the Mannar - Pooneryn road, and the Nandikulam - Mannar road.

A. The contractor for the project has agreed to finalize this 153 Km project at a cost of Rs.15,300m.

It must also be noted that resources such as skilled labour were not easily available in this area after 30 years of hostilities. Further, infrastructure like electricity, water, facilities for engineers etc. have to be supplied by the contractor at a high cost. Such costs naturally have to be borne by the project. The cost incurred on the Kandy-Mahiyangana Road was Rs. 117.65 million per Km for the Nuwara Eliya- Badulla project. Costs differ from one area to another based on the availability of construction material, terrain, etc.

Collective Fraud of Rs 430 billion

A sum of Rs.430b is said to be the cost of all this corruption and waste that has taken place. The hope held out is that by recovering this amount, wages could be increased, pensions could be increased, Golden Key depositors repaid, and various other things done with this money.

A. Such calculations amount to a scam. For example, the figure of 230 billon rupees that you mentioned in relation to the hedging deal, does not exist anywhere. No such amount of 230 billion has been paid or is due to be paid or has even been claimed by any party. So it cannot be 'recovered' to pay wage increases or any other expenditure.