Indian steel billionaire’s company offers concessionary terms to win  contract to build 65,000 houses for IDPs Lankan companies hold talks with ADB to obtain financial guarantees for the project as the bidding war intensifies Cabinet has approved a proposal to build 65,000 houses for war-affected families in the North and East but stopped short of [...]


Who will win the battle of the builders — Mittal or locals?


By Namini Wijedasa

  • Indian steel billionaire’s company offers concessionary terms to win  contract to build 65,000 houses for IDPs
  • Lankan companies hold talks with ADB to obtain financial guarantees for the project as the bidding war intensifies

Cabinet has approved a proposal to build 65,000 houses for war-affected families in the North and East but stopped short of awarding the contract to ArcelorMittal, an international company run by Indian steel magnate Lakshmi Mittal. Further negotiations are to be conducted before a decision is made on the lucrative deal.

ArcelorMittal, the world’s largest steelmaker, was recommended for the project by a Cabinet Appointed Negotiation Committee (CANC) earlier this year. But there has been growing controversy over the estimated cost of each house — Rs 2.1 million each — amid concerns over the suitability of the construction materials the company intends to use.

The houses will have steel structures with prefabricated panels and polyurethane layers.  The company’s quoted prices will cost the Government a total of US$1 billion for the houses, not counting interest payments on the loans to be obtained for implementation. Civil society groups and housing experts insist that double a number of regular dwellings could be built for that amount.

They also argue that impoverished, internally displaced (IDP) families are getting a raw deal by not being offered other options. The intended recipients have been shown models only of the prefabricated houses ArcelorMittal proposes to erect.
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Neither the IDPs nor local or provincial authorities were consulted before the Resettlement and Rehabilitation Ministry barged ahead with the tender.

Meanwhile, construction industry sources allege that tender conditions — there was a bidding process –were “tailor-made to suit ArcelorMittal”. Other companies found it impossible to meet prequalification criteria such as a minimum single job of Rs. 25 billion completed in the past five years; a bid bond of Rs. 650 million; and a contractor funding letter of more than US$ 1 billion.

Only ArcelorMittal’s technical and financial proposals were deemed acceptable by the CANC. Some powerful ministers, publicly fronted by Resettlement and Rehabilitation Minister D.M. Swaminathan, are still lobbying heavily for the firm whose Sri Lanka agent is Ravi Wettasinghe. A company called Kumarca has been set up at Dutugemunu Street in Kohuwala to handle local operations.

However, the Cabinet has called for further negotiations with ArcelorMittal before the contract can be awarded. Among other things, the CANC has been asked to examine afresh the environmental suitability of the prefabricated houses. The committee has also been instructed to negotiate a fully concessionary loan. Under the financial package currently offered by ArcelorMittal, the terms of the loan are 85 percent concessionary and 15 percent commercial. The possibility of the company setting up a factory in Sri Lanka is also being explored. And it has been decided that the beneficiaries must find the houses acceptable.

“The proposal is still under evaluation,” confirmed a senior Treasury official who did not wish to be named. “The CANC has to negotiate with the relevant parties.” Cabinet sources said that Ministers had only approved the construction of houses “in principle” but there was no decision yet to grant the contract to ArcelorMittal.

“There could be some changes in the final stages of the tender process,” said V. Sivagnanasothy, Secretary to the Ministry of Resettlement and Rehabilitation and CANC member. “Since I’m a public official, I do not want to divulge details,” he said, however, adding that he would be able to provide more information after a few weeks.

Meanwhile, local construction companies — earlier excluded from the tender process due to prequalification criteria that they found impossible to meet — are now drawing up their own technical and financial proposals. This was after being informed via a letter from the Department of National Planning that the project “could be implemented absorbing local contractors and local materials to give more benefits to the local construction industry and to reduce the construction cost”.

At a subsequent meeting with relevant officials, the possibility of dividing the entire project into ten packages of 6,500 houses each was discussed. This would enable the country’s largest construction companies to participate. A spokesman for the industry called it “a little window of opportunity”.

On Tuesday, the Major Constructors of Sri Lanka (MCSL) met with Asian Development Bank officials in Colombo to discuss funding options. A participant at the meeting said the ADB had been willing to consider providing a guarantee for the project. “If the Government could give us a back-to-back guarantee, we would have sufficient tools to raise money at concessionary rates,” he said.

A conceptual paper will be ready on Monday for presentation to the ADB. If it receives a positive response, the MCSL will submit a fully-fledged proposal to the Government. Companies are likely to suggest four housing types using different construction materials and methods. “We will offer the same house at a lesser price,” said another industry source. “We are competitive. We are locals. We are not going for massive profits as we know it’s a national commitment.”

In February, ArcelorMittal declared a net loss of US$ 8 billion for 2015. Bloomberg said the company had been hit by declining prices of steel as China pushes the material onto the world market at record levels to counter its slowing economy. Shares in ArcelorMittal have also fallen 60 percent in New York over the last year, Bloomberg wrote. The firm has scrapped its dividend, cut expansion plans and shut plants as it seeks to pay down net debt of US$ 15.7 billion, the agency reported.

Sri Lankan backers of the ArcelorMittal bid argue that the company’s technique of setting up dwellings –each unit takes less than a week to install — will ensure that the project will be completed and the IDPs housed within a few years. A project that depends on traditional methods will take much longer, they contend. They say the initiative will introduce new technology into Sri Lanka. As the construction materials are predominantly prefabricated and imported, it will reduce the exploitation of precious natural resources such as sand and timber.

These parties also strongly argue that there is insufficient labour in the North and East to meet the demand of building 65,000 traditional houses. They say ArcelorMittal’s financial terms were beneficial to the Government. And they assert that if the IDPs are happy with the ArcelorMittal houses, other groups have no prerogative to oppose the project.

However, housing experts — including those who have been working in the North and East for more than a decade — say that the answer does not lie in showcasing one model house to desperate IDPs without showing them what alternatives exist. They point to several successful owner-driven (as opposed to contractor-driven, like the ArcelorMittal initiative) construction projects conducted around former conflict zones that cost much less, were speedily completed and had used innovative construction methods and materials.

Economist Muttukrishna Sarvananthan, who analysed the terms of ArcelorMittal’s financial package, said they were generally favourable. The company, through HSBC, has offered two options: a six months EU currency-based facility at EURIBOR+1.34 percent; and a six months US$-based facility at LIBOR+1.74. The grace period is one year and the repayment period ten years. This applies to 85 percent of the loan. The remaining 15 percent is on commercial terms but this is under negotiation.
ArcelorMittal would profit from the contract because it finds a ready dumping ground for its products that are likely to be idling in a warehouse. “If the Government wanted to build brick houses, ArcelorMittal would not have offered a similar financial package,” Dr Sarvananthan said.

Concern over social foundation of the project 
Civil society representatives and local officials in Jaffna this week expressed strong concern about the Resettlement and Rehabilitation Ministry’s proposed ArcelorMittal project. A majority of those interviewed have been closely involved with resettlement and rehabilitation and did not wish to divulge their identities for fear of antagonizing the Government.
One observer who saw the construction of the ArcelorMittal house said the foundation was not solid (“only one layer of concrete”); the windows had no iron grills; there was no verandah; no steps at the front door as present in traditional houses; no kitchen with chimney or hearth; no gutters; no ventilation; etc. If the recipient wished to extend the house, he or she would have to hire the same company at a fee.

The model house is fully equipped with, among other things, furniture and a gas cooker. Most IDPs cannot afford gas. No priority has been given to cultural practices such as astrological consultations, a vital component of most house-building in those areas.
“This housing programme is a huge investment,” said another senior official who worked in the North. “If we get it wrong it could be a huge disincentive to reconciliation. It is plain silly that, if you are investing so much money, you don’t do it in a way that will create local employment, boost local activity, especially in small and medium-scale industries, and that you instead ask a foreign company to deliver prefabricated houses without using that money for a multiplier effect.”

“It’s like a stroke patient,” he said. “You can either recover or die using this money to create more problems. Members of the local community, most central Government officials and provincial officials feel this is not the right way to set about.”
“You are creating fertile ground for discrimination again,” he continued. “You have groups of people who are given different standards and types of housing that cost various amounts within certain geographical areas. This will create dissent and discrimination, not only among communities, but within communities.”

Economist Muttukrishna Sarvananthan questioned the Government’s decision to leave it solely to beneficiaries to deliver a verdict on the ArcelorMittal model house. ”Although the consent of the beneficiaries should be taken as a matter of principle, in the case of the potential recipients of the proposed pre-fabricated steel houses in the North and East, any responsible Government, let alone a ‘maithri’ or compassionate one, should not leave the decision-making to the potential recipients,” he said. “Most of them are likely to be severely traumatised, destitute people due to the protracted civil war with very low level of education and knowledge about the pros and cons of pre-fabricated steel houses in climatically arid, dry zones of the country.”

“The potential recipients of the proposed pre-fabricated steel houses may harbor an intuition that ‘beggars have no choice’ but no human being, let along people’s representatives, should take advantage of such fatalism among those hapless, destitute citizens,” he added. “Besides, a ‘maithri’ or compassionate Government should endeavour to build homes rather than houses. Homes cannot be built on concrete or steel alone.”

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