Billions of rupees were erroneously credited to the bank accounts of persons who were not farmers under Sri Lanka’s cash transfer scheme for fertiliser and paid out towards untilled paddy lands instead of cultivated ones, the Auditor General’s Department has found. The national auditor also investigated the procurement fiasco that led to severe delays in [...]


Billions in fertiliser subsidy go to wrong pockets


Billions of rupees were erroneously credited to the bank accounts of persons who were not farmers under Sri Lanka’s cash transfer scheme for fertiliser and paid out towards untilled paddy lands instead of cultivated ones, the Auditor General’s Department has found.

The national auditor also investigated the procurement fiasco that led to severe delays in fertiliser supply in 2017 and 2018. To avert a full-blown crisis, Cabinet authorised an emergency purchase of urea at a price much higher than world market rates. The loss to the Government — from paying US$ 46.20 more than the prevailing price for a metric tonne — was Rs 516mn.

The subsidy was introduced in 2006 under the Mahinda Chinthana to provide a hundredweight of paddy fertiliser at Rs 350 with the Treasury absorbing the difference. The objective was to raise production, to encourage more paddy cultivation by cutting input cost and to improve the living standards of the farmer community.

By 2016, more than Rs 2.3bn—or one percent of total Government expenditure—had been spent on the fertiliser subsidy. But increase in harvest, expansion of the acreage under cultivation, minimisation of rice imports and improvement of living standards “remained at a minimal level”, the Auditor General states in a special report. The same year, the subsidy scheme was changed to a cash transfer system, ostensibly to make it more efficient. Farmers were instructed to provide bank account numbers into which money would be credited for fertiliser purchases.

But a failure to use accurate information on paddy acreage and on the number of eligible farmers in preparing financial estimates led to “uneconomic expenditure”. The paddy land registers of divisional Agrarian Services Centres were not updated, making it impossible to obtain the correct number of beneficiaries. Nevertheless, estimates were prepared on outdated statistics.

This defeated the anticipated outcome of minimising Government expenditure through the new scheme. The Auditor General carried out sample surveys in several districts. It found multiple instances of money credited to the accounts of non-farming beneficiaries during the 2016 Yala and 2017 Maha season.

In the Bulathsinhala division, for instance, Rs 2.2mn was credited to 441 persons who were not the farmers. In Kalutara, Rs 6mn was paid to 1,170 ineligible persons. In Anuradhapura, 1,684 non-farmers received Rs 18mn. Similar instances were found in Galle and Badulla.

During a sample test in 16 districts, the Auditor General also identified disbursements towards uncultivated paddy lands instead of cultivated ones. The amount thus squandered was Rs 1.1bn.

A circular pertaining to the 2017 Yala set the maximum payment receivable by a farmer for a single season at Rs 25,000. But sample tests found many cases of overpayment. That money could not be recovered.

There are examples of financial assistance not being granted on time, severely inconveniencing farmers who must apply fertiliser during a specific window. A total of Rs 5.4bn was paid after the required period of the 2016 Yala and Maha and the 2017 Yala seasons.

Replacing the manual process for the first time, a computerised system was used for the disbursement of cash assistance before the 2017/2018 Maha season. Even under this programme, Rs 4.8mn was overpaid to 985 farmers from the Alugolla Agrarian Services Centre which was sample tested. There are deficiencies even after the Rs 375mn facelift.

Meanwhile, a failure to buy the stocks under an acceptable procurement scheme resulted in a severe fertiliser shortage during the 2017 Maha season, the Auditor General says. Cabinet decisions were changed from time to time, aggravating the situation. President Maithripala Sirisena also played a role in this process.

On the initiative of the Chairmen of the two State-owned fertiliser companies—Lanka Fertiliser Ltd and Colombo Commercial Fertiliser Company Ltd—the procurement method followed over three decades was unexpectedly shelved in favour of a new format which precluded equal participation by all suppliers.

In the end, fertiliser supply was declared an emergency and high-priced stocks were imported outside procurement procedure in quantities exceeding requirement. The delay which started during the 2017 Yala season dragged on till the 2017/2018 Maha season. Lapses in decision-making and procurement caused “colossal” expenditure to the Government, the Auditor General states.

It was initially planned to import 18,000 metric tonnes of urea for the 2017 Yala season under accepted procurement procedure. However, instead of calling for bids from prequalified registered suppliers, the two company heads decided to import fertiliser through open international bidding on ‘documents against acceptance’ (DA) terms.

No reasonable explanation was given for the deviation, says the Auditor General. When bids were called in November 2017, only Jat Holdings qualified for the contract to import 72,000 metric tonnes of prilled urea at US$ 327.40 per metric tonne. (Prilled urea is made up of smaller particles and is softer than the alternative, granular).

But the lab reports presented by Jat Holdings proved forged, resulting in the contract being cancelled and the crisis emerged as time was running out. The company’s bid security of US$ 240,000 (Rs 42mn) has still not been confiscated.

On December 11, 2017, the then Agriculture Minister, Duminda Dissanayake, presented a Cabinet memorandum to deviate from procurement procedure and order 36,000 metric tonnes of prilled urea within seven days and without an appeals procedure; and to grant Treasury backing to the State-owned fertiliser companies to open Letters of Credit (LoCs) for the import. It also proposed that the Treasury reimburses the two enterprises in the case of a deficit caused by price fluctuations.

Cabinet approved the proposal and Agri Commodities & Finance FZE got the contract to supply the specified quantity of fertiliser before January 15, 2018 at US$ 316.20 a metric tonne.

On the same day, however, a special Cabinet procurement committee annulled the decision. On December 12, another Cabinet memorandum was submitted. It said that President Sirisena had ordered Ceylon Fertiliser to find a supplier.

The paper also sought to import 72,000 metric tonnes of granular urea—and not the required prilled urea—outside accepted procurement procedure through Agri Commodities and Finance FZE from a port in the Middle East before December 28, 2017 at US$ 316.20 a metric tonne.

Cabinet approved the proposal subject to Treasury concurrence. This was never obtained, a query by the Auditor General revealed. And while the Cabinet memorandum had said Ceylon Fertiliser was told to find a suitable supplier, there was no evidence of such instructions. This amounts to misleading of Cabinet.

It is not known on what basis Agri Commodities was selected. And no reason was given for why 76,000 metric tonnes of low-priced granular urea was ordered at US$ 316.20 despite 36,000 metric tonnes of prilled urea having been earlier ordered for an identical price.

The fertiliser requirement for the “rest of the months of the Maha Season 2017/2018 was stated in writing to be 36,000 metric tonnes. But 72,000 metric tonnes were ordered. This, too, did not come within the mandated time period.

Only 40,500 metric tonnes were received on January 08, 2018 while 32,000 metric tonnes came on January 15. The delay was around 10 days but seemed longer as the cultivation season had already begun, the Auditor General says.

There are two types of urea: prilled and granular. The import price of prilled urea is higher. World market reports show that the free on board (FOB) price of granular urea ranged between US$ 206 and 240 a metric tonne at the time. As at December 14, 2017, the maximum price was US$ 240. Freight and other expenses amounted to US$30 a metric tonne. So, at the most, it should have cost the Government US$ 270 a metric tonne of granular urea.

It remains questionable how Sri Lanka imported these stocks at US$ 316.20 a metric tonne, the Auditor General states, calling it an “overpayment”. The difference in price was US$ 46.20. And 54,000 metric tonnes were bought. It was more than the requirement. This amounts to a further “uneconomical expenditure” of US$ 17,074,800 at US$ 316.20.

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