Financial Times

Another CPC scam exposed

US$1.7 bln Sapugaskanda Refinery Expansion Project

By Natasha Gunaratne

Hard on the heels of the oil hedging disaster follows another scandalous project where the Ceylon Petroleum Corporation (CPC) entered into a US$1.7 billion refinery expansion with an Iranian company for 50,000 barrels capacity at a cost that is more than twice that of a previous proposal.

The contract between the CPC and Iran's Oil Design and Construction Company (ODCC) was signed in August 2008. However, details have emerged that the other bid from an American company called Global Energy & Industrial Operations Inc. was for US$800 million for 100,000 barrels capacity. The signature of agreements was suspended in October 2005 on the instructions of the Ministry of Petroleum and Petroleum Resources Development.

Secretary to the Ministry of Petroleum and Petroleum Resources Development W.B. Ganegala confirmed that the agreement between the CPC and ODCC of Iran had been signed in August 2008 but could not provide any details regarding the previous bid as he was not at the Ministry during those years. The Minister of Petroleum and Petroleum Resources Development A.H.M. Fowzie was unavailable for comment despite numerous attempts to reach the Ministry by telephone. Former CPC Chairman, Daham Wimalasena said Sri Lanka has lost an opportunity to increase its refining capacity due to the American proposal being rejected by the Minister. "Now we will be saddled with a refinery at a highly inflated cost and with doubtful technology."

According to a letter dated September 19 2008 by Global Energy CEO Dr. Lakdasa Wijetilleke addressed to the Petroleum Minister Mr. A.H.M. Fowzie and copied to the Commercial Attache at the US Embassy, the project with Global Energy was approved by the cabinet of ministers in 2003 and an MOU was subsequently signed by the CPC with the company. This was followed by the preparation of 'Build-Own-Operate-Transfer' (BOOT) agreements by an international law firm on the request of the Cabinet Appointed Negotiating Committee (CANC) at a substantial cost. BOOT agreements were negotiated to the point of signature and the Minister of Finance sought and obtained cabinet approval to sign the agreements, The Sunday Times FT learns from documentary evidence.

Well informed sources said after the signing of the agreements were cancelled with Global Energy, Mr. Fowzie had talked down the deal and told the trade unions that it amounted to privatization. Dr. Wijetilleke's letter also states that Mr. Fowzie said the project would have 'used old machinery and landed these on the government' once the contractor had made the best use of it. This prompted a meeting between Global Energy and the trade unions in June 2006 at the Colombo Hilton in which the company responded to the concerns of the unions.

CPC sources said the Central Bank (CB) was alarmed when Mr. Fowzie submitted a Cabinet Memorandum on August 19, 2008 for the expansion of the refinery by 50,000 barrels per day at the US$1.7 billion cost by ODCC. In fact, an Internet search of Iran's oil refinery capabilities shows that the country is suffering from refinery shortages and is forced to import most of its gasoline and diesel. A Reuters report said Iran which is OPEC's second largest crude producer imports around 40% of its gasoline needs which it then heavily subsidizes. Also due to sanctions, Iran does not have design capabilities and their refineries are out of date.

The sources said when CB concerns were raised, word was spread that the Cabinet Memorandum was only for the appointment of a CANC and a Project Evaluation Committee (PEC). The Cabinet, by its decision of September 10, 2008 granted approval for the appointment of members of the two committees. On November 18, 2008, Mr. Fowzie submitted yet another Cabinet Memorandum referring to the cabinet decision and has now sought approval for the Terms of Reference for the CANC and the PEC to 'Study the contract entered into between the CPC and the ODCC of Iran etc…' The Cabinet decision dated September 19th was for the appointment of two committees but the request now is to study a contract entered into by the CPC with ODCC. Sources said the decision took a weird turn and changed into approval of a contract to expand the refinery.

The questions that need to be answered are the following: Since a contract has been signed between the CPC and ODCC for the expansion of the CPC refinery, what is the purpose of evaluating the contract after the fact? Moreover, did the Minister and the CPC obtain Cabinet approval before signing the US$1.7 billion contract albeit with an inexplicable US$900 million add on?

The metamorphosis of an approval to appoint two committees to an approval for signing a contract for a US$1.7 billion project is similar to the sleight of hand of interpreting Cabinet approval granted in principle to hedge oil for a carte blanche approval to sign eight contracts worth over US$600 million sans CANC oversight or further cabinet approval of the terms, conditions, benefits, risks and costs. The sources said neither the CPC board of directors nor the Cabinet of Ministers had approved the Refinery Expansion Contract between the CPC and the ODCC of Iran. If there is a contract as claimed by the Minister, it has to be a deal done by the now former CPC Chairman Mr. Asantha De Mel and the Minister, hatched secretly and privately, the sources said.

They said is perplexing how a commitment could be made when the project had not been subject to mandatory due diligence studies such as conceptual designs and feasibility studies and due diligence to assess funding options and feasibility amongst others. It would serve little purpose when foolish commitments are discovered after being cast in concrete as happened with the hedging debacles where approvals in principle have been used to inveigle eight contracts without even informing the cabinet of the terms, conditions, risk and degree of potential risks against price volatility.

Required procurement procedures mandate the following steps:

- Cabinet approval in principle
- Appointment of the CANC thereafter
- The CANC to nominate a technical evaluation committee (TEC)
- Preparation of a bankable feasibility study for the project and establishment of the design criteria and feasibility based on construction, project and financing costs
- The CANC and TEC jointly to appoint consultants if the CPC does not have the competence to develop the preparation of invitation to bid documents/project design specifications
- CPC to pre-qualify prospective bidders
- Solicit bids both technical and price proposals
- Evaluation of offers by the CANC and TEC
- Recommendation by the CANC of the technically acceptable and most competitive bid to the Cabinet
- Cabinet approval
- Signature of contract

The sources said the above are necessary checks and balances to ensure the integrity of the process and the project and to safeguard the public's interests. "These steps cannot be short-circuited to serve the convenience and whims and fancies of either the Minister or the CPC," a source said. "The Minister's request for approval of the TOR and to evaluate and make recommendations for the EPC contract after a contract has already been signed is self-serving and may be to cover sins of omission and commission already committed and others that may be in the planning stages. This mode of approvals and seeking TOR after the fact is similar to the request of the Minister to appoint a Risk Management Committee after the hedging contracts were signed and the damage inflicted. These are clear examples of securing the stables after the horses have bolted and are gross violations of procurement procedures."

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