Sri Lanka’s Coal War

Alleged tender process anomalies and an entrenched coal mafia have polluted Norochcholai’s coal procurement from the very start of operations. Cleaning up this act won't be easy

Coal imports became a multi-million dollar matter in Sri Lanka in 2009 when Lanka Coal Company and the Ceylon Electricity Board first called for bids to supply the Lakvijaya Power Plant in Norochcholai, Puttalam. Hong Kong-based raw materials company Noble Resources won the tender for the plant’s first supply of 2.2 million tonnes which, at the price of- fered per tonne, was worth over $150 million.

Noble then proceeded to monopolize Norochcholai’s coal supplying through- out the former administration, in spite of several tenders being called, and in spite of the evaluation and tender committees recommending other companies.

cThese recommendations were unfailingly rejected by the appeals board or the Cabinet of Ministers, which provides the final approval for government procurement decisions. The tender awarding was then consistently delayed, and President Mahinda Rajapakse, in his capacity as the Minister of Finance – who provides the final recommendation for awarding tenders – recommended the extension of Noble’s contract, wilfully ignoring the commit- tees’ selection. Between 2010 and 2015, the Ceylon Electricity Board(CEB) spent Rs64 billion on Norochcholai’s coal requirement, or almost half a bil- lion US dollars (Figure 1). At the time, Noble’s local agent was Ravi Wijeratne, the owner of the Stardust and Marina Colombo casinos, and the would-be co-owner of the now-abandoned Crown Casino in Colombo.

Prompt decisions are crucial when awarding coal tenders, as a supply disruption translates into a massive loss for the CEB, which has to shut down the coal-powered plant and purchase power at higher rates from diesel-generated plants to ensure an undisrupted electricity supply. In 2013, the CEB’s average cost of generation at thermal plants was almost three times its cost at the coal plant (Figure 2). In September 2014, when a tender was again cancelled, a senior official told media that, with only one month’s required coal stock remaining, the CEB was sustaining considerable losses by periodically shutting down the Norochcholai plant to conserve coal stocks. In 2014, coal-generated power accounted for a quarter of Sri Lanka’s electricity supply (Figure 3).

Between 2010 and 2015, the Ceylon Electricity Board (CEB) spent Rs64 billion on Norochcholai’s coal requirement, or almost half a billion dollars

Given an uninterrupted coal supply’s importance, extending the in- cumbent supplier’s contract is imperative each time a tender decision is delayed. Riding on this factor, Noble won contracts to supply a total 4.4 million tonnes between 2010 and 2015, the period during which the CEB spent almost half a billion dollars on coal for Norochcholai.

The current Secretary of the Ministry of Power & Energy, Dr. Suren Batagoda, took up the position after last  January’s government change and inherited this messy coal tender process.“The tender board decision was never followed,” he says. “This was the case for the past five years, with all five tenders, for whatever reason. Newspa- pers wrote about it then,but after they were cancelled, no one talked about them.”

Prompt decisions are crucial when awarding coal tenders, as a supply disruption translates into a massive loss for the CEB, which has to shut down the coal-powered plant and purchase power at higher rates from diesel-generated plants to ensure an undisrupted electricity supply

Noble wasn’t the evaluation and tender committees’ first choice even when it was first awarded the tender in 2010. And even after the company defaulted on supplies or broke  contract terms, it was allowed to continuously supply coal to Norochcholai at the President’s recommendation. Former Minister of Power & Energy Champika Ranawaka– who held the position from 2010 to 2012 in the former administration and again during the interim government – has alleged that Lanka Coal Company (Lanka Coal) had imported coal without adhering to proper tender procedures since 2012 and that there was an entrenched mafia in the power industry, with a powerful group of white-collar criminals behind it. Will the new government follow up on these allegations? Has consistently extending Noble’s contract, instead of taking on new suppli- ers with the lowest price offers, resulted in a loss of state funds?

The average price paid per tonne of Norochcholai coal in the past five years has ranged from a high of $143 in 2010/11 to a low of $90 in 2014/15. During these years, the Newcastle Index ranged between the low nineties in late 2010 and the mid-forties currently. Even after taking into  account additions such as shipping, barging and insurance costs, the average price paid for Norochcholai’s coal is substantially inflated compared with world prices [Figure 4]. Questioned whether the alleged non-adherence to proper tender procedures will be investigated and prosecuted in a court of law, Dr. Batagoda says that it will be difficult, as there is no paper trail.

c2After the interim govern- ment came to power in January,Lanka Coal and the CEB announced a Rs50 billion tender to supply 6.75 million tonnes of coal over three years. “This time we wanted it done properly. This time we didn’t want any mistakes,” says Dr. Batagoda.

Lanka Coal had been incorporated in 2008 for the sole purpose of purchas- ing Norochcholai’s coal. The CEB pays Lanka Coal for the coal it procures from suppliers. The supplier ships the coal to the Norochcholai dock, where it is loaded onto national shipping line Sri Lanka Shipping Corporation barges, which transport it to the plant.

Dr. Batagoda wanted to break the trend of extending the incumbent supplier’s contract at the expense of a new tender to the lowest-priced vendor recommended by the evaluation and tender committees. Lanka Coal and the CEB called for bids from the six companies that had participated in the previous year’s tender. The tender com- mittee decided to identify the lowest opening price, as well as the price to be negotiated with the bidder who offers the highest quality coal that would provide maximum boiler efficiency.To do this, the tender committee obtained technical advice from the CEB about the parameters that decide boiler efficiency and found these to be calorific value, total moisture, volatile matter, ash content and sulphur content.

After a competitive bidding process in which seven companies partici- pated, in June, the committee recommended that the tender be awarded to Noble. By this point, Ravi Wijeratne was no longer its local agent, and the company had come directly to the tender process.

However, another bidder, Swiss Singapore wrote to the tender com- mittee calling for a re-evaluation of its bid, though the code prescribed to bidders prohibits direct communication between them and the evaluation committees. The company complained about the size criteria considered in the evaluation, pointing out that, though the tender documents asked  for “size”, the answer they actually wanted was weight.

c3

The tender was opened on 10th August and, in a matter of a few hours, the tender committee awarded it to Liberty Commodities, which offered $69 per tonne

Some bidders had previously expressed discontent about penalties imposed regarding grain size. The committee requested the CEB to investigate which parameters were used by utilities around the world, and learned that grain size was considered only in Sri Lanka and at one Indian company. The tender committee decided to remove this param- eter, because imposing unrealistic penalties on grain size could lead to bidders taking advantage of it by manipulating the figures on grain size to make an expensive offer look cheap. Moreover, since Sri Lanka Shipping Corporation handles coal freight, Lanka Coal wouldn’t be able to impose this penalty anyway due  to multiple handling of the coal. Grain size also doesn’t affect boiler efficiency, and the tender documents don’t define a standard to measure grain size.

The tender committee ordered Lanka Coal to ask the evaluation committee to reevaluate the bids, but to disregard two criteria previously considered with regards to size. Following the reevaluation, Swiss Singapore was selected  in July to be awarded the tender. The other bidders went to the appeals board, which conducted investigations and was to present its report in the first week of August. But the members refused to sit for this meeting following what they perceived as allegations against them in the media by Dr. Batagoda. This meant that finalization of the tender required the President appointing a new appeals board, while continuing delays raised the threat of the power plant running out of coal.

c4Dr. Batagoda says that he never made any allegations against the board to the media. He says that a newspaper report about alleged irregularities in the awarding of tenders in the past several years was based on a confidential letter he sent to the Senior Assistant Secretary to the President, which was not meant to be shared in public, but had been leaked. He also says there is nothing wrong in Swiss Singapore contacting the tender committee.

With the current coal supply ex- pected to run out by mid-September, it looked like the usual appeals and counter-appeals following a tender awarding would once again delay a decision, forcing Lanka Coal to extend the incumbent’s contract. To avoid this, Dr. Batagoda got the Attorney General’s and the Cabinet’s approval for a spot tender. “The only option again would have been to buy from the existing supplier,” says Dr. Batagoda. “I didn’t want to do this as Secretary. So as soon as this tender ran into problems, I got approval for a spot tender.”

anka Coal called for bids for a month’s supply of coal from the 17 companies that had bid in the past five years. As per past standard procedure, bidders would provide their coal’s specifications, as well as their asking price, and the committees would adjust the price against how far the respective specifications differed from Lanka Coal’s requirements. But for this spot tender, Lanka Coal provided bidders the specifications that it required and told them to name their price for coal supplied to those specifications. Size was not among the specifications provided to the bid- ders.

The tender was opened on 10th August and, in a few hours, the tender committee awarded it to Liberty Commodities, which offered $69 per tonne. In the tender that ran into problems, Swiss Singapore’s offer had been$82, while Noble’s offer had been $83. The entire spot tender pro- cess was completed within two weeks. Sena Vithanage, the Secretary of the Ministry of Foreign Employment, currently leads the tender commit- tee, while Dr. Batagoda is a member of it.

If the spot tender hadn’t been finalized, Lanka Coal would have continued to purchase coal from Noble. “It would’ve been the easy thing to do, but we took the difficult path,” says Dr. Batagoda. He says that similar spot contracts will be awarded in the future. Lanka Coal has advertised for coal suppliers to send in their details by the end of August to be added to a registered supplier list. The listed suppliers will be called to place bids every three to four months, and spot tenders will be awarded to the lowest offers.

c5“There won’t be all this fighting, and everyone will get their turn,” says Dr. Batagoda. “From now on, it’ll be a fully clean sheet. This new system will minimize the human factor. We have removed the technical and fi- nancial evaluations so there won’t be appeals; they’ll just have to provide to our required specifications. The only factor considered will be the price.”

Although Noble monopolized Norochcholai’s coal supplying from the very start, it wasn’t even the first choice of the two commit- tees that matter – or, at least, are supposed to matter – in the tender selection process: the evaluation and tender committees.

Lanka Coal and the CEB announced the first coal tender in January 2009. The plant’s first phase was to come online only in 2011, but Lanka Coal needed to procure coal early for testing. Only two compa- nies bid for the tender and just one offered a price. This was deemed too high, and the tender was cancelled. In the subsequent second tender, nine companies – including Noble – offered bids, and four passed the evaluation and qualified for the price  bid opening. The evaluation committee recommended the lowest offer from Holcim Trading, Singapore, and the tender committee ac- cepted this recommendation.

However, Noble appealed the decision, stating that it should be awarded the tender instead, as its coal was of higher quality than Holcim’s. The appeals board agreed and rejected the evalu- ation and tender committees’ recommendations of Holcim’s low- est offer. The then Secretary of the Ministry of Power and Energy, M.M.C.Ferdinando notified the Cabinet that he had no problem accepting the appeal board’s recommendation, but requested Noble to lower its price from $70.81 to $70.45 in order to be less than Holcim’s price.

c6In March 2010,the President recommended the 2.2 million tonne tender’s awarding to Noble, the Cabinet accepted the recommenda- tion and Noble became Norochcholai’s first supplier, although not the first choice. At the price offered per tonne, the tender was worth over $150 million.

Noble began supplying this coal in October 2010. The coal supply for the whole year is generally shipped to Norochcholai between October and April, before the monsoon starts on the west coast. As it would transpire, the appeals board overriding the tender committee’s decision would eventually translate into Noble providing coal worth not just $150 million, but almost half a billion dollars.

When Lanka Coal and the CEB announced a third tender in May 2011, 11 companies offered bids, with six qualify- ing for the price bid opening. Indian company Taurian Iron and Steel Company made the lowest offer, but the Attorney General rejected it, as the company had not registered its bid. The evaluation committee then recommended the offer from a joint venture between Liberty Commodities and Uttam Galva Steel, and the tender committee accepted this.

c7But the appeals board again rejected the two committees’ recommen- dations and instead proposed awarding the tender to Taurian. Subse- quently, the Cabinet cancelled the tender, and the President recom- mended negotiating prices with the current supplier. Accordingly, Lanka Coal extended Noble’s initial 2.2 million tonne contract for a further one million tonnes after obtaining Cabinet approval.

In September 2012, when two ships carrying part of Noble’s coal supply arrived at Norochcholai, the cargo couldn’t be unloaded due to rough weather. The CEB had already paid Lanka Coal for this coal and Lanka Coal, in turn, had paid Noble. But the coal company and Sri Lanka Shipping Corporation asked the supplier to remove the coal and bring it back once the weather improved. Noble refused to do so. With a risk of the coal catching fire, it couldn’t be allowed to remain in the ships. The national shipping line called for offers from other suppliers to undertake the removal and subsequent replacement of the coal. Taurian agreed to do so and signed an agreement with the national shipping line to remove and sell this remainder, and later supply Sri Lanka an equal quantity of the same quality and price. The agreement also awarded Taurian an urgent tender for a total five coal shipments on the same terms and pricing as Noble’s contract to recover its incurred loss.

Lanka Coal is the only legally ap- proved company to import coal to Sri Lanka, while the national shipping
line supplies just the transportation. Champika Ranawaka, who was the Minister of Power & Energy at the time, alleges that, while Lanka Coal had consistently imported coal from Noble, Sri Lanka Shipping Corporation had imported the coal from Taurian without the knowledge of the CEB or the Ministry. He further alleges that the coal was below the required standards. When the incident occurred, Minister  Ranawaka had called an immediate meeting with the relevant official and urged him to reject the coal consign- ment. But on the instructions of the Attorney General, the coal had been unloaded. Minister Ranawaka had also removed the then Chairman of Lanka Coal, T.M. Herath but he had subse- quently been appointed as the CEB Vice Chairman after Pavithra Wanniarachchi replaced Minister Ranawaka later that year.

The complaint alleged that this coal had been imported violating legal procedures, causing a loss to the CEB and hence, the State

After the interim government took over in January and Ranawaka returned to the ministry, Dr. Batagoda submitted a police complaint about the two coal shipments purchased from Taurian at a Rs528 million cost without Cabinet approval. The complaint al- leged that this coal had been imported violating legal procedures, causing a loss to the CEB and, hence, the State.

A special police unit then arrested four state officials on charges of crimi- nal breach of trust regarding these coal shipments: Kanchana Ratwatte, the former Chairman of Sri Lanka Ship- ping Corporation; M.C. Delgoda of the Ministry of Power and Energy, R.M.K. Ranatunga of the Treasury and Ravi Jayawickrama of the Ports Authority. Their passports were impounded. All four, along with current CEB Chairman Wijepala and then CEB Chairman, Prof. W. Abeywickrama, had been on the Lanka Coal board.

The police also recorded a statement  from Minister Ranawaka, in which he said that the transaction had been done by straying from the standard operating procedure and without Cabinet approval. Ranawaka also told media that suspicious deals that had occurred in the Power & Energy sector over the past decade would have to be investigated and that he intended to penalize those who misap- propriated funds.

Consequently, in late April, Ratwatte filed a claim for Rs2 million in damages alleging an unlawful arrest in violation of his fundamental rights, naming Minister Ranawaka, CEB Chairman V.D.A.S. Wijepala, Dr. Batagoda and several police officers. Ratwatte stated that all of Lanka Coal’s actions had been carried out with the knowledge of the Minister of Power and Energy and his Secretary and not at the sole discretion of the company’s Directors. Dr. Batagoda says that they’re currently trying to take this case for an international arbitration.

Lanka Coal and the CEB floated a fourth tender in May 2013. At this point, coal was urgently required, and Lanka Coal and the CEB requested the Cabinet’s approval to call for restricted international bidding from the 19 suppliers who had responded to previous procurement calls. But the Cabinet rejected this proposal, and the President recommended that Noble’s contract be extended for a further six months. Accordingly, it was extended for another 200,000 tonnes.

c8Following this, in May 2014, newspaper ads called for bids per the gov- ernment’s procurement procedure to supply 2.25 million tonnes of coal per year. This was the fifth tender.

Six companies submitted bids, but five were disqualified. The evalua- tion committee considered three of the bids – including that of Noble – as non-responsive and didn’t consider them for detailed technical evalua- tions. Of the other three bidders, the evaluation committee found that two had major deviations from the committee’s requirements, while the third, Swiss Singapore, had only minor technical deviations. The evaluation committee recommended Swiss Singapore and, following price negotiations and a reduction to the offer made, the tender committee recommended that the company be awarded half the quantity of coal needed, or 1.125 million tonnes, and fresh bids be called for a second company to supply the remaining 50%.

Soon after this, the President, the then Minister of Power & Energy Wanniarachchi and several other parties received anonymous letters that two senior officials at the ministry and the CEB had violated the tender procedure. The letter claimed that two senior CEB officials receive $6 commission per tonne of coal supplied.

In August 2014, four rejected companies went to the appeals board on varied grounds. Based on the hearings, the board observed that there had been serious lapses and deviations in the tender process on the part  of the evaluation committee, which adversely impacted the legality and propriety of the committee’s and the tender committee’s recommendations to award the tender to Swiss Singapore. The board recommended cancellation of the tender and a call for fresh bids. It also recommended that the incumbent supplier, Noble, be asked to continue the supply of coal at the current contracted price until the new tender was finalized. Some media reported that the tender was cancelled due to claims that the evaluation and tender committees had disqualified the five bidders on the directive of some officials.

Then Secretary Ferdinando wrote to the Cabinet that the appeals board had no mandate to recommend how coal is procured outside the ongoing tender process, especially since Noble had defaulted in supplying one million tonnes by providing only a fifth of the amount and then refusing to supply the remainder unless the price was raised from the contracted $64.80 to $74.42per ton. The Secretary stated that Noble was then not the “incumbent supplier” but a defaulter supplier. The Ministry requested the Cabinet’s approval for the evaluation and tender committees to open the bids from Swiss Singapore, who had been initially recommended, as well as the Liberty and Uttam Galva Steel JV, who had been the next most suitable.

President Rajapakse rejected this proposal and told the Lanka Coal Chairman to invite a price proposal from Noble, and the Cabinet accepted this decision. Lanka Coal, in agree- ment with the CEB, then extended Noble’s contract to supply 1.97 million tonnes for 12 months starting October 2014 at $78.30 for Indonesian coal, $77.25 for Russian and $75.50 for South African.

This was to be the last tender called under the Rajapakse administration.