“An excellent plumber is infinitely more admirable than an incompetent philosopher. Society which scorns excellence in plumbing because plumbing is a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy. Neither its pipes nor its theories will hold water.”
– John Gardner
We recently heard about yet another attempt to build “yet” another cricket stadium. Our celebrity cricketers, without whom we would have still been unknown, and who necessarily therefore have a “proprietary” interest in our cricket, whether in the game or the infrastructure, aired their views publicly. There was an aftermath. It was a reputation-damaging bloodbath. It was ugly. We endured that saga, many weeped for Mahela and Sanga, and hopefully, better sense has now prevailed.
The Singhalese Sports Club and the Deep South
All this, while fully recognising that the Singhalese (that is the way it is spelled) Sports Club (SSC), where I drop in every now and then for a chilled beer, a bite, light-hearted banter, and warm fellowship on the weekend, is only part utilised – that too only during the day. All it needs are floodlights and cricket fixtures to justify that incremental cost (I repeat, incremental), but it is indeed an international venue with potential for expansion of seating capacity – again at an incremental cost.
Thus, it is not a “green field” project (with a pun on the green) in terms of cost or time for completion. As for cricketing venues, the stadium in Sooriyawewa is also not fully utilised, while the Hambantota Harbour and Mattala International Airport are yet to bring in debt serviceable returns, and hence we converted debt to equity in one. My mind thus went back to 2005.
Presidential election 2005 and platform speeches
During the presidential election in late 2005, manifestos and platform speeches of a candidate proposed heavy government ownership and intervention in the economy. I was concerned with this policy and its implications. There was a considerable anti-market economy, anti-public sector reform, anti-privatisation, anti-multinational, anti-World Bank, anti-IMF (International Monetary Fund) sentiment that was being aroused. Selected professionals vocally, visibly, and surprisingly endorsed this arousal. These professionals spoke publicly, on TV and at public gatherings, in support of the pronouncements that were now gathering momentum. This was in their self-interest.
A CPD seminar at CA Sri Lanka
On the suggestion of several professional, businesses, and civil society representatives who called and emailed me persistently, I organised a Continuing Professional Development (CPD) seminar at the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) to focus apolitically on the practical reality. I titled the seminar “Privatisation: Myths, Realities, Risks, and Safeguards”. There was considerable interest in this seminar which was to be provided on a pro bono basis by me. However, to my absolute shock and surprise, just the day before the scheduled event, the Institute of Chartered Accountants, alleging intimidation by the then Ministry of Commerce, cancelled the event.
Launch of thought leadership articles
Rather than being deterred in November 2005 itself, I began a regular column in a leading business daily in memory of my father who was an attorney who practised in the District Court of Tangalle and whose independence of thought and deed was well established. I contributed a series of articles on market economy and privatisation and profiled selected case studies including the following case study on the Urea Fertiliser Project.
I learned about this project in the early 90s while at John Keells when I was requested to evaluate our role as a possible developer of the abandoned former Urea Fertiliser Project site – today’s Sapugaskanda Industrial Park to which I made recommendations against. DFCC developed it into LINDEL (Lanka Industrial Estates Ltd.), with low-cost funding which we at John Keells did not have access to. The following address by Minister Ronnie de Mel has learning outcomes for us all.
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Then Minister of Finance and Planning Ronnie de Mel’s address made in Parliament on 21 December 1977[/caption]
Ronnie de Mel’s address on the Urea Fertiliser Project
The following are extracts of the address made by then Minister of Finance and Planning Ronnie de Mel in Parliament on 21 December 1977:
“We propose to introduce legislation very soon to make chairmen and directors of corporations personally liable for their actions in those corporations. They will make it a point to study their projects a little more carefully when they know that they will be personally held liable and that they will be charged and surcharged for any losses or lapses on their part.
“Every worthwhile financial and technical consultant advised them not to go ahead with this project. Several countries, to which the Government applied for aid, including Iraq, advised them not to touch this project even with a barge pole. But the last Government went ahead. The World Bank told them not to go ahead with this project. Several aid group countries refused to give them aid because the project could never be made worthwhile.
“The original proposal to start a fertiliser factory would have cost Rs. 90 million. Due to a tug of war between several ministers, that project was shelved. The project was revived during (the) late Dudley Senanayake’s Government from 1965-70. Then Minister of Industries Philip Gunawardena was to complete the project at a total cost of Rs. 346 million.
“That Government fell and the United Front Government, which took office in 1970, abandoned the project after what they called a detailed inquiry by a committee which was headed by then Minister of Posts and Telecommunications C. Kumarasuriar. The reason given was that the cost was too high, viz. Rs. 346 million.
“However they revived the project and called for tenders again. By that time, it was only the SLFP (Sri Lanka Freedom Party) that formed the Government because the other partners of the United Front had left the Government. They accepted a tender at a total cost of Rs. 1,168 million. They entered into a contract with a successful tenderer. With inflation, the costs had been revised to Rs.2,000 million. What was Rs. 90 million in my time, what became Rs. 340 million and was considered too expensive in Phillip Gunawardena’s time in (the) Dudley Senanayake Government, has now become Rs. 2,000 million.
“Now, we will go into the project itself. That is the most shocking story of all. The project is based on naphtha as the feedstock, not on natural gas which is the normal feedstock for any worthwhile fertiliser project. We have no natural gas here. So actually, we should never have started this type of (a) project. Naphtha is a byproduct of the (Ceylon) Petroleum Corporation based on crude oil – something that is imported. Being an oil byproduct, the cost of naphtha has been increasing steeply from Rs. 797 per MT in 1975 to Rs. 1,600 at pre-budget prices. It will be nearly double at post-budget prices.
“At the same time, the international price of urea fertiliser has dropped considerably because all over the world, the oil-producing countries are having their own fertiliser factories fed with their own natural gas or naphtha as a byproduct of their own oil.
[caption id="attachment_91788" align="alignright" width="300"]
Sri Lanka's Finance Minister 'Ronald' De Mel meets US President Ronal Reagan[/caption]
“Fertiliser factories are springing up all over – Pakistan, Saudi Arabia, Qatar, Kuwait, the United Arab Emirates (UAE), and Bahrain – because they have their own oil and their own natural gas. The price of urea fertiliser, which stood at $ 330 in 1974, steadily dropped and now stands at $ 110 dollars CIF, Colombo. So you will see that the raw material has gone up four times in price. The finished product has gone down by 70% – it has become one-third of its previous price.
“The installed capacity of our so-called Urea Plant is 310,000 MT. What is the total annual requirement of urea in this country? Only 100,000 MT. In other words, the plant is geared to produce three times the annual requirement of this country. Where were they going to sell this urea? Were they going to eat this urea? I understand the commission was in the region of Rs. 50 million.
“As I said, the entire capacity of the plant is 310,000 MT while the domestic consumption is only 100,000 MT. Even the projected consumption in 1985 is supposed to be 150,000 tonnes. Thus, this plant will not work at more than (a) 50% capacity even if it supplies all the requirements of Sri Lanka.
“I will now give you the projected figures on this factory prepared by my Ministry of Finance and Planning. The annual loss is going to be Rs. 400 million in the first year. It will rise to Rs. 500 million in three years’ time. It will go up to Rs. 600 million in…if you commit yourselves to this factory...What a tragic waste of money; what a reckless way to spend hard-earned foreign exchange resources of this land!
“I would request the Minister of Industries and Scientific Affairs to immediately go into the question of cancelling the contract, because even if you pay a penalty of Rs. 100 million, it is still worthwhile. Pay a penalty of Rs. 100 million and cancel this contract because you will be saddled with a loss of Rs. 500 million every year, if you do not do so. I wish that my friend, the Minister of Industries and Scientific Affairs, would go into this matter very carefully – I am prepared to give him all assistance – and get out of this contract which is a dead loss to this country. A dead loss for all time.”
End of extracts from the Hansard.
Project feasibility evaluation and due diligence
The above is a classic example of inadequate project concept evaluation, feasibility preparation including sensitivity analyses and risk assessment, project structuring, and much more, which were weak even among private enterprises – even at large and well-established PLC’s at that time. We can well imagine what would happen in the public sector, even today, if the necessary safeguards and governance structures are not built.
