Unsolicited project proposals open highway to corruption
The Government of Sri Lanka has taken a very late and impetuous policy decision in August 2018 just almost ahead of elections, to accommodate unsolicited proposals (USP) through and a fast-track approval procedure in order to encourage private sector participation in economic development.
File picture of the Katunayake expressway, one of Sri Lanka's largest infrastructure projects.
According to the policy decision, a Standing Cabinet Appointed Negotiating Committee (SCANC) has given high powers to finalise any unsolicited proposal within three months as an investment gap recovery adjustment solution. The last regime also did the same mistake during 2013 to 2014 and ultimately created a generations-long public sector debt-burden-trap. Even the present Government couldn’t solve the public debt puzzle after three years.
The Sunday Times Insight reported (March 9, 2014) that the “country hears of multimillion dollar contracts only after Cabinet has approved the projects.” New USP accommodation policy may aggravate the debt-trap-driven vicious cycle and amplify prevailing fundamental economy weaknesses.
Eventually the debt-trap virus may trickle down destabilizing the economy in terms of inflation or stagflation, rising cost of living, unemployment, financial crisis, poverty and civil unrest; ultimately ending up with an economic downturn or depression. Some countries consider the prevailing situation as an emergency, economic downturn and even the opposition parties working together with the government until such time the economic downturn is over. However, this article is concentrating only on USP which is the root cause of prevailing debt-trap and utilisation of unsolicited proposals wisely, especially bringing USP under open competitive procurement procedure like Public Private Partnership (PPP) guidelines as the solution.
In spite of camouflaged future-generations-earning- based-development by the last regime, in the 2015 election the majority supported a government change, due to the absence of good governance, transparency, accountability and overall loss of social justice. The objectives of this article is to discuss implication of the new USP policy change in August and to emphasise the application of economic fundamentals; basically “making the best choice, based on opportunity cost and bringing all procurements under the open competitive transparent processes as the way-out solutions for existing economic dilemmas.”
Development through future generations’ earnings
The previous Government learnt a lesson by introducing “Late-Late-Late policy implementation of debt-based unsolicited investment proposals -led infrastructure before 2014 period.” The Sunday Times “Insight” published two lists of unsolicited projects; Firstly, 14 projects costing US$4,263.4 million on March 9, 2014 under the headline “Competitive bidding turned on head – Country hears of multi-million dollars contracts only after Cabinet has approved the projects” and secondly, 15 projects costing $766.16 million on March 16, 2014 under the headline “Unsolicited projects open highway to corruptions – Mega development at astronomical costs- Commission agents in corridors of power.” The total cost was $5.029.56.million which ultimately has added to the foreign debt balance. None of these debt-based events was brought under the solicited procurement process.
According to the rough estimates, if the procurement procedure had been followed, actual cost of the projects may have gone down by 30 per cent to 40 per cent and also could have avoided at least half of 29 projects. Furthermore it’s doubtful whether majority of projects implemented are economically and socially justifiable as national priorities or indispensable prerequisites for the economy to do them on borrowed funds.
Very same argument, yesterday and today
The arguments (Sunday Times on March 9, 2014) by the Treasury Head was that “such large scale investments whether private or public, cannot be handled through normal tender procedure” and “routine PCs have no capacity to handle those” which is an insult to public service. The very same arguments were brought forward when making the new USP policy change in August 2018. Ultimately there are unfinished work-in-progress projects in 2019/20; together with a huge addition to government debts and a worsening situation because of the new USP policy .
Exhausted further debt-capacity
As soon as the new Minister of Finance assumed duties in 2015, he noted that there was huge unsustainable debt burden together with deteriorating economic fundamentals. Since then unfortunately the government is at loggerheads with opposition parties and there is no time for implementing sensible public financial management policies. Unfortunately the Treasury Bond issue has boomeranged on the government, opposition parties taking mean advantage for a counter attack. The critical nature of the present exhausted debt-capacity is denoted by the total debts increasing from Rs. 8503 billion to Rs.12800 billion as forecasted in 2018 while debt repayments has aggravated from 192 per cent of Government total revenue of 2015 to at least 350 per cent in 2018. It is a miracle as to how the government would pay back its debts in the years 2019 and 2020.
Contradictory USP policy
According to past experience, a “USP” investment proposal is a bid, or an offer made by an individual, company or group with funding to the government that was not requested or even not included in the government investment programmes. The USPs are un-invited volunteers with exorbitant price, accompanied by funding proposals.
The USP cost is always included with bribes, commissions and also backed by powerful politicians. Such a high political authority is capable of obtaining Cabinet approval bypassing usual competitive procurement procedures. Finally, the massive debt obligation adds to the public debt. In addition to high cost and risk, it is a well- known fact that unsolicited proposals are an “open highway to corruption, and commission agents, racketeers are in the corridors of political power.” The ultimate result is jeopardising the operational fiscal policy as well as altering and upsetting macro-economic outcomes. It is worth mentioning that the root cause of all economic miseries is ignorance of economic fundamentals.
Ignorance of economic fundamentals and USP
It is unfortunate to note that the track records of both present and previous governments indicated their ignorance of economic fundamentals, particularly implementation of borrowed funds based on massive unsolicited infrastructure projects. Politicians always used to disregard the value and operational beauty of economic fundamentals; often they forget that the economic resources are scarce and limited. Therefore, it is essential to make a rational “choice” among the number of available alternative uses. Similar to individuals, the governments too will face a problem of choosing the best alternative with competitive cost and benefits. This particular cost is called the “opportunity cost” which will be the benefits lost from choosing the next best alternative because a sacrifice has to be made when making a best choice out of the alternatives. The best choice and the opportunity cost, in the case of a procurement is the rational process for determining the lowest evaluated substantially responsive-least-best cost; value or price that generates highest beneficial outcomes than the next best alternative. The best choice and the best cost-price of a USP, could be determined only after following procurement procedures together with market testing; which is the “value for money” with highest beneficial “Opportunity cost.”
Surviving economic downturn
With the change of political power in 2015, a majority expected elephantine outcomes with economic solutions, because the economy was on the doorstep of a debt-trap with disappointing economic indicators together with huge gaps in fiscal consolidation, trade balance and balance of payment, savings and investments and declining foreign resources, related exchange rate depreciation. After three years, the government is still living with the problem of a vicious cycle of multiplying debt-burden puzzle. Within the next two years the Sri Lankan economy is moving towards a dangerous zone. What is needed is supply side policy measures and pragmatic programmes. Once the situation becomes worse short-sighted, hasty, unpredictable, illusive policies like the fast-track USP approval policy would worsen the economy further ending up with an economic downturn.
Concerns and consequences of USP under PPP
Basically, Sri Lanka is an import-export trade dependent small economy; highly vulnerable to external shocks and crisis that are translating into an economic downturn soon. The prevailing debt-trap-driven vicious cycle is a virus which has already cascaded outwards enlarging instability that has surged into all other sectors of the economy. The main concern would be to get the country out of the debt trap through supply-side policy measures particularly; such as export production including tourism, worker remittances promotion project, etc which are the best choice with opportunity cost. Consequences of the sudden USP policy change is the very same last regime approach entertaining USP that will add to total debt that would become suicidal while upsetting both fiscal policy and monetary policy tools taken in responding to the ongoing financial crisis. The most effective sensible solution is to limit USPs only under the PPP and selection of USP through open competitive PPP methodology that will be the pragmatically effective supply-side approach even for mitigating the ongoing exchange rate-led financial crisis.
(The writer is an Economist with Treasury-level experience on the subject. He could be reached at palithaeka@yahoo.com)