“If there are necessary recommendations given by the Committee on Public Enterprises (COPE), then we will definitely initiate action. If we have to go to the Bribery Commission or the Criminal Investigation Department (CID), or take internal steps, we will do so in compliance with the recommendations of COPE,” stated Minister of Industry and Entrepreneurship Development Sunil Handunnetti.
This commitment comes as a recent audit report from the National Audit Office (NAO) has cast a critical eye on Lanka Mineral Sands Ltd. (LMSL), highlighting significant inefficiencies and compliance issues, particularly concerning its long-delayed Kokilai project.
The report, which covers the financial year ended 31 December 2023, reveals a series of unaddressed concerns that have hampered the company’s operations and financial performance.
Kokilai project complexities
Offering insights into the complexities surrounding the so-called Kokilai project, former Chairman of LMSL Asoka Peiris clarified that while there was a 47-acre land parcel in Kokilai with a constructed wall and a generator, there had never been a formal “real project called the Kokilai project”. He noted: “The phrase ‘Kokilai project’ is used for numerous purposes.”
Regarding equipment mentioned in the audit, Peiris stated that two mobile plants had been acquired over four years ago at a cost of Rs. 56 million, with one intended for Kokilai. He explained that a mobile plant could easily be moved and set up at various locations. However, both plants have been brought to Pulmoddai.
Peiris shared: “After about two years, one was affixed in Pulmoddai, but it had no production.” The second plant remained idle, with parts removed and only used when needed for other machinery. He said that he had appointed a committee to investigate this matter, although the report had yet to be finalised.
Peiris also discussed a separate initiative during his tenure to upgrade the ilmenite produced in Pulmoddai by increasing its titanium dioxide (TiO2) percentage. He explained that a higher TiO2 content directly correlated with a higher price for ilmenite.
“We were able to increase the percentage of TiO2 up to 54%,” he stated, noting that prices increased significantly when the percentage exceeded 53%. Following this success, Peiris had envisioned a Public-Private Partnership (PPP) for a new plant, which would have involved publishing a project proposal, inviting bids through a Request for Proposal (RFP) process, and then selecting the best proposal.
However, transporting sand to Pulmoddai presents a significant challenge due to a broken bridge and a bird sanctuary, necessitating an 80 km detour. Peiris explained that the proposed solution was to set up a mobile plant in the Kokilai locale to process the sand there before transporting the refined product to Pulmoddai.
He emphasised the importance of adhering to proper procurement procedures, stating: “Investors brought their own proposals requesting us to accept them. We cannot function that way because that is not the procedure. Had we done something of that nature, I would have been arrested. So we generally call for an RFP and advertise it. After receiving proposals, we appoint a team and choose the best one.”
Peiris also alleged that there were issues in relation to the recruitment of personnel in the name of the Kokilai project. He stated that while approximately 80 individuals recruited for the project were stationed in Pulmoddai at present, they did not engage in work as they were unconfirmed. He added that 17 casual labourers “neither come nor do any work, but they simply get paid”.
Additionally, 14 individuals whose employment was discontinued are currently involved in a labour tribunal case, while 80 others simply sign in for work without performing any duties, according to him. Peiris revealed that 11 other persons, allegedly hired for election-related work, had not appeared at work either.
The former Chairman of LMSL had attempted to address the labour shortage at the company during his tenure by proposing the integration of over 100 of these individuals into the workforce, particularly those who were poor. He expressed regret that this initiative had not materialised by the time of his departure.
Peiris asserted that the Kokilai project was often used for political gain. His tenure as Chairman ended on 30 May, with Gayan Wellala being appointed as the Acting Chairman.
Sector-wide challenges and future reforms
Meanwhile, Minister Handunnetti acknowledged the general challenges within Sri Lanka’s mineral sector. While stating his lack of specific information on the Kokilai project, he confirmed that the Geological Survey and Mines Bureau (GSMB) and the Central Environmental Authority (CEA), along with other related organisations, had been tasked with mapping all mineral sites within two months to determine available reserves.
The Minister emphasised the urgent need for clear guidelines for obtaining exploration, mining, and trading licences for new projects, citing numerous problems caused by their absence.
He added: “Some have exploration licences and need trading licences, while others have trading licences and engage in mining. Some have nothing, but they engage in mining without any documentation.” Handunnetti also pointed to the issue of “brokers who misfeed information to investors and accumulate bribes”.
In order to rectify this, the Ministry of Industry is collaborating with the Board of Investment (BOI), the Ministry of Environment, and other relevant ministries to formulate and gazette comprehensive guidelines as soon as possible.
“If an investor comes to Sri Lanka, they should be aware of the policy, procedure, required licences, and what is legal and what is not legal. That way it becomes the standard, the law of the country, and you cannot bypass the guidelines and claim that you had no prior knowledge,” he asserted.
Furthermore, the Minister revealed that the Finance Ministry had been requested to provide recommendations on how to proceed with approximately 20 companies that held exploration licences at present and had either submitted proposals or already invested.
Handunnetti also said that the combination of proper mapping, clear guidelines, and financial recommendations would resolve many existing problems in the mining sector. He reiterated that while there was no distinct “special project called Kokilai,” there were projects for which private sector participation had been invited.
Regarding the NAO report, Handunnetti stated he would need to review it before responding to specific questions about the Kokilai project. He acknowledged the possibility of corruption in past projects but refrained from making direct claims without full knowledge.
The Minister further stressed that if the NAO report contained allegations, COPE would observe the findings, conduct a study, and issue recommendations. “Very soon, Lanka Mineral Sands will also be summoned for a COPE meeting,” he added.
Acting Chairman of LMSL Wellala, who recently took over the position, said: “I have only recently taken over as Chairman and I have looked into the matter of the Kokilai project. We are holding discussions to kickstart the project which is long overdue, but I cannot provide specific information because our discussions are still evolving. We are working on the project to ensure there is value addition in Sri Lanka, but there are many things to arrange.”
Project inaction and financial impact
The audit report has identified that the project’s inaction has contributed to LMSL’s financial decline, which saw a profit deterioration of over Rs. 2.1 billion. This decline was primarily attributed to decreased income and increased distribution and administrative costs.
A spiral machine purchased in 2013 for Rs. 39,339,472 for the Kokilai plant remains idle at the Pulmoddai plant. While the management has attributed this to anticipated mining licences and current machine errors, the audit has noted its inactivity points to broader issues in project execution. Similarly, a dryer machine imported in 2016 for Rs. 45,120,142 to save fuel costs by 50% has not been made usable or active.
The audit has also revealed that 117 workers recruited in 2015 specifically for the Kokilai plant had been redirected to the Pulmoddai plant due to the project’s stagnation. While the management has stated that these employees have since retired, resigned, or been re-deployed, the initial misallocation of human resources underscores the project’s troubled history. Furthermore, LMSL’s 2023-2026 action plan to establish the Kokilai project and produce 100,000 MT of ilmenite has seen no progress during the year under review.
Lapses in obtaining and utilising mining licences have also been highlighted. Applications for seven new exploration licences for the Kokilai area were rejected in May 2023 due to the absence of a required 20-year mining plan. A permit for mineral sand mining from Kokilai to Kokkuthoduvai, obtained at a cost of Rs. 18,395,247, had seen no mining activity until the audit date.
Concerns were also raised about unauthorised excavations carried out outside licensed boundaries and continued mining operations after permit expiry in areas including the Kokilai Lagoon. The audit has reported that the company illegally excavated the estuarine reserve area from the lagoon to the Ranweli Naval Base, identified as ecologically sensitive.
The report has detailed non-compliance with laws and management decisions, such as unauthorised CSR payments (Rs. 10.6 million) and unapproved increases in attendance and food allowances totalling over Rs. 269 million. Financial shortcomings included an overdraft interest of Rs. 4.3 million, unsettled advances (Rs. 0.7 million) and retention balances (Rs. 3.8 million), and failure to provision for tax (Rs. 24.8 million) and unsettled VAT refunds (Rs. 102 million since 2006).
Operational inefficiencies have also extended to resource management: wheel loaders (Rs. 53.6 million) and a lorry (Rs. 0.8 million) had been idle for over five years, with many loaders damaged and 21 operators still paid wages (Rs. 20.3 million).
A controversial purchase of sand from private parties (Rs. 102.5 million) had been made despite LMSL’s own licences. Only 30% of mineral sand produced had been sold, leading to a massive stock (187,951 MT worth Rs. 1.8 billion) and a halt in production, with the audit suggesting an incentive system may have led to “unusual production”.
Asset management had also been deficient, with no annual fixed asset survey conducted, and a repaired Chairman’s quarters (Rs. 9.3 million) remaining unused. Salary discrepancies and a failure to submit annual action plan performance reports for audit further underscored the company’s internal control weaknesses.