• 2.5% fixed interest rates changed to variable interest capped at 3.5%
• Watchdog questions burden on taxpayer

The Central Expressway Project (CEP), one of Sri Lanka’s most ambitious infrastructure initiatives, is once again under scrutiny – not for construction delays, but for the controversial decision to proceed with increased loan interest. 

The Committee on Public Finance (COPF) has raised serious concerns over the rationale for agreeing to a shift from a fixed 2.5% interest rate to a variable rate capped at 3.5%, warning that this could further escalate the country’s borrowing costs at a time when the project is already over budget and behind schedule. 

With Rs. 21,964.69 million in interest costs yet to be recognised in the project’s financial statements and mounting questions over transparency, accountability, and financial prudence, critics are asking whether there is a solid justification for exposing public funds to additional risk before the project is even completed.

In such a backdrop, the National Audit Office (NAO), in its latest audit report on CEP Section I (CEP-1), revealed that loan interest incurred by the Road Development Authority (RDA) on behalf of CEP-1 amounted to Rs. 21,964.69 million. 

Shockingly, the project failed to recognise this interest cost in its financial statements as of 31 December 2023, violating paragraph 18 of Sri Lanka Public Sector Accounting Standards (SLPSAS) 4 – Borrowing Costs, thereby understating work in progress by the same amount.

RDA response

In a controversial response, the RDA management stated that it had signed a consultancy service loan agreement with the Bank of Ceylon (BOC) on behalf of CEP-1 but argued that CEP-1 was not obligated to repay loans or interest since it had not signed any loan agreements. 

The RDA further claimed that assets would be transferred to the authority only after project completion, and only then would interest costs be capitalised in the RDA’s books. 

This explanation raises serious questions about the grounds for allowing interest to accumulate on a project that has yet to assume formal financial obligations.

Construction contract concerns

The NAO also highlighted major concerns regarding the construction contracts. 

Package 1 had been awarded at Rs. 12,586 million, exceeding the engineer estimate of Rs. 9,834 million by 28%, while Package 2 had been awarded at Rs. 145,799 million versus an estimate of Rs. 118,977 million, a 23% excess. 

No actions had been taken to analyse rate variances as per Section 7.9.2 of the Government Procurement Guidelines. Moreover, both contracts had been awarded as unsolicited proposals, bypassing competitive bidding as per Section 3.1, raising serious questions about transparency and accountability. 

The RDA claimed it was “negotiating” with contractors to align costs with engineer estimates – a response that fails to clarify why initial contracts were awarded at such inflated rates.

Violations of payment conditions

Further, the NAO emphasised violations of contractual payment conditions. 

Sub-Clause 14.7(c) in the General Conditions of the contract mandates payment within 56 days of receiving the certificate, with delayed payments attracting monthly compounded financial charges. Yet, interim payments totalling Rs. 40,347.78 million and $ 189.5 million remained unpaid as of 31 December 2023. 

Corrected figures indicate that Package 1 alone has Rs. 3,742.94 million and $ 17.0 million outstanding, with financial charges of Rs. 681.34 million and $ 0.401 million under review, further inflating costs and raising questions about the financial management of the project.

Public funds utilised

The project had also paid Rs. 500 million as a special advance using Government funds to mitigate the risk of contractor termination, based on a National Operations Room meeting on 2 October 2023. 

While the RDA claims this was to support the contractor’s liquidity and ensure continuity, the rationale for using public funds in this way, especially amid rising interest costs, has been questioned at the COPF as potentially burdensome for taxpayers.

Repeated delays, uncertain funding

The Central Expressway, launched in 2016 to link Colombo, Kandy, and Kurunegala, has faced repeated delays, particularly in the Kadawatha–Mirigama section, halted in 2022 due to the economic crisis. Completion is now projected for April 2026. 

Funding has become increasingly uncertain: the China Export-Import (Exim) Bank loan was initially proposed at $ 1 billion but cut to $ 500 million, with shifting terms from a fixed 2.5% interest to a floating rate capped at 3.5%, raising serious concerns over the justification for agreeing to higher interest when project completion has already been delayed.

The RDA has borrowed over Rs. 310 billion locally, while Rs. 36 billion was requested in supplementary budget allocations to partially repay loans. An additional Rs. 175 billion is reportedly required to complete the Kadawatha–Mirigama section.

Authorities considered terminating the main contractor to hire local contractors but feared prohibitive termination fees, penalties, and at least six months of delays. Despite ongoing setbacks and financial losses, the project continues, crucial for regional connectivity.

However, debt management remains a critical weakness: Sri Lanka owes $ 37 billion in foreign loans and Rs. 19.6 trillion domestically, yet precise repayment schedules are unavailable, highlighting the urgent need for careful scrutiny before agreeing to higher interest commitments.

COPF stance

COPF Chairman Dr. Harsha de Silva has questioned the rationale behind the proposed changes to the interest rate structure for the Central Expressway, warning that it could further escalate Sri Lanka’s borrowing costs.

The Rs. 226 billion project, already delayed and financially stressed, faces unresolved contractual disputes with Metallurgical Corporation of China Ltd. (MCC) and uncertain terms with China Exim Bank.

The COPF emphasised that the Ministry of Highways’ shift from a 15-year fixed 2.5% rate to a variable rate with a 2.5% floor and 3.5% cap was particularly concerning, as it exposed the country to additional long-term financial risks. 

The committee has urged the ministry to provide clear justification for proceeding with higher interest obligations and to secure terms that genuinely protect public funds amid potential fluctuations in Chinese lending rates.

Treasury and RDA stances

Treasury Deputy Secretary Ajith Abeysekera said: “The process of finalising debt is overseen by the COPF according to standard procedures. While the Cabinet has approved moving the project forward, the ultimate decision must consider both the Cabinet’s direction and the COPF’s recommendations.” 

RDA Chairman T. Paskaran said: “The RDA does not handle negotiations on the loan terms; that responsibility belongs to the Treasury. Our role is limited to matters related to the civil and construction work of the road project, which have already been resolved. The Treasury alone manages all aspects of loan discussions.”