Even in the best of circumstances, government contracts are easily fixed to suit a favoured bidder. Open bidding, technical evaluations, tender boards and negotiating committees
are overcome by introducing technical specs to suit a favoured bidder, disqualifying other bids over marginal issues and giving a favoured bidder an early heads- up and allowing a short bidding window for the rest.
Contractors offering to build unsolicited infrastructure are the state’s most mollycoddled lot. ‘Cost plus’ contacts guaran- teeing margins are common for firms awarded projects on their unsolicited proposals. Even for an inexperienced contractor facing cost overruns – which they are required to absorb – margins on unsolicited projects secured through a non-competitive process are still adequate for profitability.
Because none would admit to corruption or rigging contracts it is often difficult to prove. To overcome this problem anti-cor- ruption watchdog Transparency International (TI) relied on three criteria when it recently evalu- ated global corporations about their commitment to prevent- ing corruption. Firstly it checks if firms have internal rules and procedures against corruption. Secondly they check the transparency of the organisation structure; if there are related parties carrying out corrupt activity like offer- ing kickbacks to win contracts. Thirdly they check if firms publish detailed financial information.
The Hyatt-branded hotel being constructed along Colombo’s main Galle Road thoroughfare is one of the largest building projects undertaken in Sri Lanka. The government controlled firm funding and managing construction lacks rules and procedures to prevent corruption. An audit has found some related party transactions and there are no publicly available records of the firm’s financial performance despite its government ownership.
The accounting firm hired to investigate Canwill Holdings and two fully owned subsidiaries were tasked with uncovering lapses in management and fraud. Its scope did not include a full audit of financial accounts
Transparency results in responsibility and ethics, which in turn inspires trust.
At 1.17 million square feet and cost- ing Rs27 billion ($208 million), the public financed Hyatt project is the grandest building undertaking of Sri Lanka’s Mahinda Rajapaksa led government of 2005 to January 2016.
For comparison, an extension of the Colombo Airport’s passenger terminal with split-level access to arrivals and departures, a new pier and boarding gates and new vehicle approach lanes to the building, to handle twice as many passengers, is funded by a $260 million Japanese Government loan.
Public infrastructure, like a better airport, will boost Sri Lanka’s regional air hub ambitions and improve business and tourism. However a luxury hotel and serviced apartments – costing almost as much as the airport’s expansion – is not a public infrastructure project. One must also consider the hotel and residential apartment complexes private developers suspended construction in 2009 when they ran out of money. Sri Lanka’s economic prospects appeared bleak and the original promoters weren’t able to presell as many residential apartments as they had hoped. In 2011 the govern- ment introduced legislation allowing the takeover of assets vested with the private sector on long-term lease agree- ments (the Revival of Underperforming Enterprises and Underutilized Assets Act of 2011).
An investigative audit of Canwill Holdings, the government firm set up to continue construction of the hotel and apartment project, has uncovered ‘lapses, corruption and irregularities’ which the accounting firm carrying out the audit says led to, “corporate funds being vulnerable to fraud and waste as a result of poor oversight, negligence and violation of good governance.”
Canwill’s government-appointed board included representatives from its main shareholders Sri Lanka Iinsur- ance and Litro Gas, state owned firms in insurance and liquefied gas retail, and the EPF, a Central Bank’s mon- etary board managed pension fund of private sector workers.
The accounting firm hired to investigate Canwill Holdings, submitted a draft report to the firm’s current Managing Director D R P Abeyasinghe on June 16th, 2015 for comments, a copy of which Echelon has seen. It’s unclear if a final report has been submitted since. The source that made a copy of the draft report available to Echelon requested that the identity of the ac- counting firm carrying out the investi- gative audit not be revealed.
The accounting firm hired to inves- tigate the Canwill Holdings and two fully owned subsidiaries, was tasked with uncovering lapses in management and fraud. Its scope did not include a full audit of financial accounts. It highlights wrongdoings and lapses in corporate governance and procedure, serious issues around procurement, contracts and their mismanagement, its lack of acceptable financial planning and administration, and issues related to project management like the lack of comprehensive and detailed implementation plans.
The audit recommends the company seek legal advice and take appropriate action against any director, manager and other employees responsible for irregularities, corruption and frauds, it says in the recommendations. The investigative audits scope did not include a full financial audit of ac- counts. However it highlights alarming developments.
When the rules around transparency are unclear or are inconsistently ap- plied they don’t require much creativity to dodge. Opaqueness is widespread in major contracts inHyatt’s construction: from the main contractor MAGA which was also the structural consultant to Design Consortium Limited (DCL) who were the MEP (mechanical, electrical and plumbing) consultants in addition to being structural architects, project engineers and quantity surveyors.
When the rules around transparency are unclear or are inconsistently applied they don’t require much creativity to dodge. Opaqueness is widespread in major contracts in Hyatt’s construction
The audit discovered many executive decisions lacked clarity or the underly- ing logic was questionable. It uncovered email correspondence suggesting a supplier for steel had been pre-selected resulting in the material costing Rs16 million more. Ceylon Steel Corporation had offered steel rods at Rs114,897 per tonne and was selected overlooking Melwire Rolling’s bid of Rs110,160, Bids were not opened in the presence of bidders either.
There is also confusion over the con- tract for the building contractor MAGA Engineering. The total contract value is Rs9.75 billion of which Rs6 billion is a ‘provisional’ sum without a break- down of expenses which the auditors claim may be the result of Canwill not having done enough preparatory work and deliberation on the BOQ and the agreement. MAGA offered an explana- tion to the auditors that the delays by the project’s design consultants were responsible for the higher costs. The report claims the company failed to engage designers and consultants to review MAGA’s performance.
Design, architectural, structural en- gineering, MEP services and quantity surveying was contracted to Design Consortium Limited (DCL) for Rs98 million. The audit report says an ad- ditional cost of Rs73 million was added to the original contract by an amend- ment and not discussed at a board meeting but approved by the board.
In mid 2014, facing further project delays, Archetype Group was hired as Project Manager. Two months later Ar- chetype replaced DCL as project engi- neers. “The deployment of Archetype … amounts to a self admission of the fact that the project has been badly handled by the board and management since the inception. The efficacy of deploying Archetype is yet to be seen. The project completion date seems to be put off to mid-2017,” the report observes.
Directors of Canwill up to January 2015 – who seem to have wielded significant influence on the company’s operations then – had not responded to requests for interviews by the investigative audit team. However Canwill’s staff including those in account, site engineering, its main contractor, architects, internal and external auditors had all granted interviews to the investigative audit team. Hiran De Silva identified variously as Project Consultant and Principal Consultant was Chief Executive of Ceylinco Shriram, a firm that promoted the Hyatt proj- ect prior to its government takeover. De Silva had granted an interview to the investigative audit team.
Architectural firm Dharmadasa and Wijeyaratne As- sociates, was employed for Rs90 million. The investigative audit report says a relative of Hiran De Silva controls this firm and Rs16.8 million has been paid so far to that firm which is also claiming Rs8 million in demurrages owing to delays. Poor oversight, weak governance and negligence, the investigative auditors have observed, leave corporate funds vulnerable to waste. “The action and inaction on the part of directors and staff have resulted in tremendous losses to the company. The precise amount of loss on ac- count of negligence and irregularities cannot be ascer- tained but it would be significant,” it observes.
The investigative audit report says the board did not have the necessary expertise and competence to manage a massive hotel project, nor did they have any knowledge about the leisure industry.
An influential former Canwill director cried foul against findings of the investigative audit in an interview with Echelon. He had not granted an interview to the ac- counting firm carrying out the audit and was interviewed by Echelon. He requested anonymity as a condition for granting the interview.
For all its apparent grandeur, – there is more than a touch of tragedy about the new Hyatt hotel. It’s been tragic for the project’s original promoters, buyers of planned residential apartments in the building and lenders, and – since the project’s acquisition by the government, ostensibly for Sri Lankan citizens. The timing for Sri Lanka’s most ambitious private sector building project couldn’t have been worse. Launched in 2006 as Celestial and includ- ing a Hyatt hotel the building was to be Sri Lanka’s tallest and was promoted by a couple of now defunct Ceylinco group controlled firms.
Fuelled by record low interest rates, real estate appeared set for a long boom in 2003 when Ceylinco-led firms acquired a 99 year lease on the government owned land facing Galle Road on one side and the ocean on the other. However once construction com- menced in 2006 the boom expectations were being shattered. In the three years to 2007 Treasury bill interest rates rose 12% to 20% as the Central Bank tried to rein in inflation caused by weak public finances.
“Fraudulent activities including bribery, kick-backs, theft, inflated invoices, delivery of insufficient or inferior goods, bid-rigging, and embezzlement of state property were easy to commit in the absence of procurement and approval procedures”
Demand for real estate and residen- tial apartments tanked in those three years and developers Ceylinco Homes International and Ceylinco Shriram suspended construction in 2009 when 14 of the building’s planned 45 storeys had been completed.The firms were eventually paid Rs4.8 billion for the incomplete structure which the govern- ment acquired in 2011.
According to the investigative audit, Ceylinco Homes International had pre-sold apartments worth Rs3 billion in the building and, has a Rs3 billion outstanding loan on the project from Seylan Bank, which used to be under Ceylinco control. Both parties have not been settled.
Career public servant Gamini Senarath was chairman up to Janu- ary 2015 and served the firm since its inception. He was also chairman of Sri Lanka Insurance Corporation (SLI), which held a 46% equity stake in Can- will Holdings and another 27% stake through the insurer’s wholly owned subsidiary Litro Gas Lanka Limited. Senarath was also the chief-of-staff of former President Mahinda Rajapaksa when he headed the Canwill board. Chartered Accountant Piyadasa Kuda- balage was Managing Director & Chief Executive and held the same positions at SLI too. He was also a director at People’s Bank, Colombo Dockyard PLC and People’s Leasing and Finance PLC. C M D N K Seneviratne was appointed to the board as the Central Bank’s nominee, she replaced Canwill’s founder director Mohan De Alwis who resigned in June 2014. Another career public servant R Semasinghe was the nominee from the Treasury. Neil Hapuhinne completed the board. He was a former additional secretary to the Ministry of Defence.
The investigative audit report says the board did not have the necessary expertise and competence to manage a massive hotel project nor did they have any knowledge about the leisure in- dustry. It also says the board members were heavily engaged in other positions in the public sector and had little time to devote to the project. Major financial decisions were taken via email or the circulation of board papers.
“They had too many things on their plate and they also seemed to have been in a mighty hurry when it came to decision making,” a member of government set up after Maithripala Sirisena was elected president in Janu- ary 2015, remarked. The board member did not want to be identified. Neither was he willing to provide a copy of the investigative audit report or discuss its contents. “I am not sure how much of this was fraud, but one thing is clear, nothing they did made business sense,” he said.
“Fraudulent activities including bribery, kick-backs, theft, inflated invoices, delivery of insufficient or inferior goods, bid-rigging and embezzlement of state property were easy to commit in the absence of procurement and approval procedures,” the investigative audit report says.
In 2012 the government established Canwill Holdings Private Limited with Rs18.5 billion in capital; 73% of this capital came from state-controlled Sri Lanka Insurance Corporation (SLI), the largest insurer in the country with 40% of the industry sector assets in 2012; and 27% from the trillion-rupee superannuation fund for private sector workers, the Employees’ Provident Fund (EPF) managed by the central bank. Canwill Holdings incorporated two companies with this capital: Rs14.5 billion on Sinolanka Hotels and Spa to continue construction of the 47-sto- reyed luxury hotel in Colombo. It was agreed with Hyatt Hotels Corporation of the US to manage this property under the Hyatt Grand brand.
Hyatt manages more than 580 properties around the world under 11 distinctive brands determined by func- tionality (resort, leisure or business), sophistication and luxury. The Hyatt Grand is one of its top brands and Hy- att Regency occupies the mid- range.
The Hyatt Grand in Colombo is 47-storeyed with 458 rooms and 76 residential suites. It will also house 12 restaurants, eight meetings and event venues, two swimming pools and one
spa and fitness centre. It will also have a 1,500-capacity banquet hall, the largest in Colombo. The built-up area is 1.17 million square-feet up from the earlier planned one million square-feet before the planned Colombo hotels brand was upgraded from midmarket Hyatt Regency to a Grand.
Deciding to upgrade escalated the Hyatt Grand Colombo’s costs by Rs7 billion to Rs27 billion. This was a reason for delays in the project, which restarted construction from the 14th storey of the superstructure in 2011. Accounting for the change in plans does not however fully explain why the project, which has teams of consultants to help the management keep it on track should take seven more years to complete. When construction restarted, the project was first due to be com- pleted by 2014.
The new board of SLI appointed by the interim government in January 2015 with former Singer Sri Lanka PLC Chairman Hemaka Amarasuriya as Chairman, are skeptical the hotel will even be ready in 2017.
The second Canwill owned firm Hel- anco Hotels and Spa with Rs4 billion in capital to build another Hyatt Regency brand hotel in Hambantota was also established. Hambantota is not a popu- lar tourist or conference location where the weather is harsh and unforgiving and only sustains the salt industry.
Helanco, which also shares the same board with its parent Canwill, had incurred around Rs300 million on the Hambantota project but no construc- tion has taken place. Nearly Rs250 million of this amount had been on acquiring land and other assets like a Land Rover for Rs13 million. Work-in- progress is Rs70 million.
The investigative audit claims the limited time it had made it difficult to pursue in detail all of Canwill’s and its subsidiaries’ contracts and observe that action and inaction on the part of directors and staff of the company have resulted in tremendous loss to the firm. “The precise amount of loss on account of negligence and irregularities cannot be ascertained but it would be signifi- cant,” it says.
A Canwill board member emphatically refused Echelon’s request for the firm’s audited financial statements saying, “No, it is a private company and they won’t be made public”
“We did everything by the book,” counters Canwill’s former director. He claims all the documentation is available at Canwill’s offices and the new board should peruse them without making baseless allegations. “My name is ruined because of this bloody thing. I will never join the public sector again,” he added.
Canwill Holdings had also acquired three plots of land surrounding the Hy- att Grand site on Galle Road, paying as much as Rs40 million over the valuated price. The land had been purchased at between Rs8 to Rs8.9 million a perch totalling nearly Rs1.1 billion. Pay- ments were made to Ranmuthu Hotels, Ceylinco Insurance and JC Ramanyaka even before vouchers were raised and board approval was obtained, although the prices don’t seem inflated.
As to making the payments before board approval or internal audit check, “We need to pay first, then close the deeds. Besides, the board knew what was happening. But I am not sure we made it a habit to pay first and then raise vouchers and hold pre-audits later. Things did not happen this way to my knowledge,” the former board member said. But the investigative audit disagrees.
However the auditors who examined the firm’s operations say the internal auditor was also constrained with nothing to suggest internal audits had ever taken place. His role was limited to carrying out pre-audits, or checking payments before releasing funds. But here too the investigative audit found that several large payments had been made before pre-audits.
Payments above Rs25 million needed the approval of just one director based on the recommendations of a procure- ment committee which was headed by the pervious Managing Director/Chief Executive who is also a member of the board. The investigative audit uncovered several suspect transactions.
Large building projects like the Hyatt are complex to manage and would usually involve myriad suppliers, contractors, quantity surveyors and consultants. Transparency in large contracts is the only guard against corruption that opaque deals can oth- erwise breed. Transparency can also help keep the project on track.
Under government control the building was to have been completed in 2015 but now the investigative auditors claim it will be 2017 when it is ready. “The project has a poor record with cost and time overruns,” the in- vestigative audit report says. “The lack of basic project management skills provide an answer to why the project has not been completed on time, on scope and on budget.”
The report also observes that in the absence of a proper Project Implementation Plan, work and engagement of consultants has been done in a haphazard manner resulting in disarray, with serious risks and unnecessary costs.
A former Canwill director, who de- nies the previous board was negligent, incompetent or corrupt, maintains the firm’s Project Implementation Plans were complete. The director resigned from Canwill holdings and its subsidiary firms in January 2015 and was unable to provide any evidence that detailed project implementation plans existed. He however did provide Ech- elon with copies of Sinolanka’s & Hel- anco’s income statement and balance sheet for the year ending December 2014. The financial statements didn’t include the notes to the accounts.
Sinolanka, which has Sino or Chinese connections as its name implies, and Helanco are both profitable because their unused equity is in interest bearing instruments. Sinolanka received a Rs2.5 billion new equity injection in the 2014 financial year and held Rs2.8 billion in cash and cash equivalents. Helanco had Rs3.7 billion of the Rs4 billion in equity it received in cash at December 2014.
Current Canwell Chairman Hemaka Amarasuriya (Chairman of Sri Lanka Insurance which holds a majority stake) convened a press conference in June 2015 to share some preliminary findings of the investigative audit. However, none of the audited finan- cial statements or the investigative audit report was made available to the media because Canwill Holdings is a private company, he maintained. As a result details about Rs18.5 billion in public money and retirement savings of private sector workers invested are unknown.
Once the investigative audit report is finalized it would be handed over to the Financial Crimes Investiga- tions Division of the police to uncover fraud, corruption and misappropria- tion. Hemaka Amarasuriya, said the public was “losing out due to the lack of good governance and transparen- cy”, but the transparency of Canwill’s new board is also being questioned.
A Canwill board member emphati- cally refused Echelon’s request for the firm’s audited financial statements saying, “no, it is a private company and they won’t be made public”.
Opinion is growing that the government’s practice of secretly operating private companies away from parliament’s (as representative body of the people) oversight should be taken on at courts. The EPF, which is not public money but the retirement sav- ings of private sector workers, hasn’t had a return on its Rs5 billion invest- ment in the firm in 2011. Usually its members receive a 10% or so return on their EPF annually. If the proj- ect is fully operational by 2018 EPF members should at least be expecting a near 10% premium on the govern- ment’s risk free treasury rates.
Sri Lanka’s companies’ law does not require private firms to publish their financial statements. But experts argue those that use public equity should publish detailed financial statements.