The
People’s Alliance government looks set to toast the 50th anniversary of
Independence by sealing one of the biggest, yet controversial, foreign
investment deals struck in post-colonial Sri Lanka.
The $425mn Eppawala phosphate mining and Trincomalee fertiliser production joint venture contract, touted by government officials as a showpiece for the country’s manufacturing sector, will be signed in the run-up to golden jubilee celebrations on Feb. 4, unless legal snags spoil the party, according to the government’s top investment officer.
“We have already initialed the Mineral Investment Agreement,” says Board of Investment chief Thilan Wijesinghe. “Now we are trying to fix a date to sign the agreement.”
The 30-year deal, cleared by the Cabinet in August, but since opposed by environmental conservationists and food security scientists, among others, guarantees two foreign investors, American and Japanese companies IMC Agrico and Tomen Corporation, a virtual monopoly over Sri Lanka’s phosphate reserves at Eppawala. Officially, the site is said to contain a combined 60 million metric tons of appatite in proven and inferred reserves.
Under the deal, IMC and Tomen will respectively control 65 and 25 percent of equity in the joint venture, with the balance, ten percent, going freely to state-run Lanka Phosphate Ltd.
They will be allowed to mine and export up to 3.6 mn metric tons of phosphate — in rock form — for the first 12 years, after 18-months and 15-months of exploration and feasibility study. Mining industry officials note that, given the increasing international demand for phosphate, the mineral needed to fuel an ever-expanding international fertiliser market as world populations soar, these foreign investors should turn enough profits on rock export sales to repay bank loans and recover the bulk of their outlay — under the present arrangement, 35 percent of the $425mn.
The deal also allows them to explore over an area of 56km sq, and scour a “buffer zone” extending to 10 kms from the Eppawala deposit boundary. According to a report made by a five-man Cabinet-appointed negotiating team on the final round of talks conducted with the investors, the “Mining Area” is loosely defined as “the land within the exploration area which is covered by the mining licenses issued to the company by the Geological Survey and Mines Bureau.”
Names of team members, whose signatures appear on this document that has been circulating in Colombo unofficially, comprise: Thilan Wijesinghe, Treasury Secretary B.C. Perera, Former Industrial Development Secretary K. Austin Perera, Senior BOI adviser Vincent Pandita, and Attorney-General Sarath N. Silva.
Observers add that the so-called buffer zone equals a surface area of at least 750km sq [see inset on map] .
“Now they (foreign investors) have asked for and have been given a buffer zone of ten kilometres in radius around it,” says a mining industry analyst. “That works out to more than 700 square kilometres. This is really madness.”
Since Eppawala has a proven appatite deposit of 25 million metric tons, mining analysts say, it’s not as if the foreign companies will be prospecting in unexplored territory, especially where there are settled communities. In other words, they probably have a fair idea of what’s down there.
But, according to officials of the Geological Survey and Mines Bureau (GSMB), a wide window for exploration is the norm in ore prospecting. No company would be willing to foot the costs of mining over such a vast surface area, they say.
“You have to take a larger window to identify a possible mining site within a smaller area,” says Nimal S. Ranasinghe, the Bureau’s additional director. “To hold onto excess land would be unec/onomical.
The
deal also calls for the construction of a processing plant and deep water dock
at Trincomalee, to be linked to Eppawala via a specially-built railway line.
After the plant is built in an estimated three years on 450 acres of land, with
an extra 300 acres of beach front kept in reserve, it will produce up to 600,000
metric tons of hi-grade Di-Ammonium Phosphate (DAP).
By the terms of the agreement, the DAP will be exported with the government being paid 5.5 percent of the phosphate’s estimated market value. The fertiliser will also be sold domestically at a reduced price of five percent off FOB.
Government officials are justifying the Eppawala/Trinco project on the grounds that the country lacks the know-how, the capital, and machinery to tap into this motherlode on its own and undertake such a high-risk industry as large-scale mining, a Sunday Times investigation has revealed.
Officials add that the appatite found at Eppawala is non-soluble. It is therefore not suitable for the purposes of a local farming population that relies largely on paddy cultivation, unless state-of-the-art techniques are brought in to break the phosphate down into DAP.
And, according to the official version, local farmers, who also rely heavily on expensive fertiliser imports, will benefit from the discounted price of the DAP to be churned out at Trincomalee.
“In view of the chemical composition of this rock, such as high chlorides and high oxides of iron and aluminum causing serious corrosion of plant and equipment, as well as a reduction in filtration rate, foreign collaboration had to be sought to get over the these technological difficulties and this deposit for the manufacture of fertiliser for export, while satisfying the local needs as well,” says Industrial Development Minister C.V. Gooneratne.
“It is after very careful consideration that the Government decided to go ahead with this project in view of the benefits it would bring and also the fact that this deposit has been lying for 25 years after discovery, without any effective use.”
According
to BOI Chief Wijesinghe, the government is giving the foreign partners in this
joint venture a package of concessions that has considered the finiteness of
such a vital national resource as Eppawala appatite. Among other adjusted
concessions, the BOI has, for example, waived the normal 20-year tax holiday for
investors, replacing it with a five percent corporate income tax that will
increase to 15 percent after 12 years of operations.
“Looking at it from an overall economic return, the gains to the country are very significant,” says Mr. Wijesinghe.
Government officials add that IMC Agrico and Tomen will have to respect environmental safeguards by complying with the findings of an Environmental Impact Assessment, and compensate those settlers in-and-around the affected areas who may have to be displaced to accommodate mining operations.
“If the study proves that there will be serious adverse impact on the environment, the Government has the option of not proceeding with the project...,” says Minister Gooneratne. “As a further safeguard, the Agreement empowers the GSMB to secure a bond from the project company up to US $500,000, or may be increased if necessary to cover foreseeable environmental damage.”
Even if President Chandrika Bandaranaike Kumaratunga and her advisers do clinch the deal officially come January, they may have to overcome number of hurdles before getting it off the ground. Chief among them, the Sunday Times has learned, are environmentalists, scientists, grassroots activists, and other critics who are gearing themselves to make a political issue out of this. So before the Kumaratunga administration can finally go through with the deal, they will likely need to appease their critics who voice a range of opinions on the subject.
At one end of the spectrum are the people of Eppawala. They fear that the mining project is an overly ambitious one that could lead to 12,000 families in the area being forced off their land and re-settled in other crowded pockets of the island.
“We
will not go. We will not leave from our village lands and homes even if we were
to be forcibly chased out,” says Venerable Mahamankadawala Sri Piyaratana
Thera, the North-central Province’s Deputy Sanghanayaka, and President of
the Committee for the Protection of Phosphate Deposits at Eppawala.
Next in line come the food security scientists and environmental conservationists. They warn that the project will bring untold environmental and infrastructural degradation to Zone-H of the multi-billion rupee Mahaveli Development Scheme.
“If mining takes place as proposed, up to a depth of about 100 metres, within 20 years, it is most likely that this area will become uninhabitable,” says the Environmental Foundation Ltd. “Due to the possibility of irrigation and other water resources getting affected, people of this area will face a problem regarding their daily requirements of water, both for drinking and other purposes.”
Scientists, in particular, argue that the government, in striking the deal with IMC and Tomen, have given foreigners this potentially important source of fertiliser on a platter.
With the right mix of home-grown appropriate technology (research by Peradeniya scientists has shown that Eppawala appatite crystals can be made soluble by submerging these in peat moss) and sustainable exploitation of the appatite deposit, it could go a long way — up to 2000 years based on scientific estimates of domestic usage — to supply the agricultural needs of the country, scientists say.
“By world standards Eppawala is not a big deposit, but for the use as fertilizer raw material for the farmers of Sri Lanka, it is a resource which should be managed with great care and utilised wisely,” says Dr. Peter Van Straaten, a Canadian agro-scientist from the University of Guelph in Ontario. “Fertiliser and nutrient inputs for crops are vital for food security of a nation, and the possession of a strategic mineral deposit like Eppawala requires wise resource management strategies in line with the long-term interests of the nation.”
Mining Industry observers, who occupy the middle ground of the debate on Eppawala/Trinco, are taking a slightly different line. They say that Sri Lanka lacks the technology to exploit the Eppawala deposit to its international market potential by itself and make money from it. Foreign investment, in their view, is crucial to this.
But, in the case of the deal cut with IMC and Tomen, they say the government has played a weak hand, failing to maximise on possible financial benefits to the country.
By playing the Eppawala card in this manner, the government has virtually dealt IMC and Tomen a monopoly over Sri Lanka’s important phosphate reserves, locking out other potential foreign investors, mining industry officials say.
“Due mainly to the lack of technical depth and apparent bias in favour of the overseas partners, this deal has a good potential to turn sour sooner than we think,” says a London-based mining engineer. “It could generate bitterness among partners — the investors, the government and thirdly the partner many of us seem to overlook, the people who have been using that land.”
In his opinion, given that the proven appatite deposit means that Eppawala is a relatively low-risk venture, the government should have pressed for at least 20 percent free equity to LPL at the bargaining table. And, according to a source close to these negotiations since March 1995, LPL, on the basis of the 65:35 debt-equity ration woven into the deal, will get just ten percent of $149mn.
“Is this sufficient?,” he asks.
The source, who has requested anonymity, also notes that recommendations made to a Cabinet-Appointed Negotiating Committee by an Australian mining industry consultant, Richard Tinsley, have apparently been left out of the concluded deal.
Tinsley has advised negotiators to insist on LPL being paid $12.5mn for the 25mn metric tons of confirmed reserves. On the issue of rock exports during the first twelve years of running, he has advised that profits from sales abroad be split 50-50. This would have guaranteed Sri Lanka an extra $13mn in revenue, says the anonymous source.
Also under Tinsley’s formula, during the first decade of operations, two percent of profits from sales should also be placed in a trust fund to compensate those who may have to be uprooted, and to guard against possible environmental degradation.
“The investors did not agree to this and are only giving a $500,000 bond for the first ten years,” adds the source close to negotiations.
News of the recently concluded deal has sparked strong feelings among Sri Lankans. Nowadays no story about controversies would be complete without an element of conspiracy to it.
One of the more extreme views to be expressed is embodied by a staunch Sinhala nationalist who, lately, has been mobilising popular resistance to Eppawala/Trinco.
Colonel Anil Amarasekera, an ex-Army Officer working with the Thawalama Foundation, a group spearheading popular resistance to the devolution package, is warning Sri Lankans that they need to be aware of alleged human rights abuses committed by Freeport-McMoran — the U.S.-based multi-national corporation that has been mainly steering the American side of negotiations with the government — at its gold and silver mining operations in the Indonesian-occupied West Papua (Irian Jaya).
The veteran of Sri Lanka’s wars, who talks in detail about how — if his compatriots don’t watch out — the government’s proposed constitutional reforms will surely bring about “the extermination of the Sinhala race” at the hands of “foreign invaders”.
Regarding Eppawala/Trinco, the Colonel suspects that Freeport-McMoran may be playing at shadow theatre in Sri Lanka, masking more sinister motives by coming in behind the cover of a “front” company, IMC Agrico in this case.
“The events in Sri Lanka are a carbon copy of what happened in Indonesia,” he says, referring to the bloody 1965 coup, when Sukarno fell from power, and Suharto rose to grace, staying there for over 30 years with a tacit blessing from the United States.
For its part Freeport, which has stayed in Indonesia for most of the duration, and stands accused of playing a hand in mass-disappearances, torture, and murder of Irian Jayanese highlanders, among a litany of alleged abuses committed by the Indonesian Army, has sent a 23-page response to questions from The Sunday Times.
“In the area where we do operate, we strive to be a model of economic development that minimises negative impacts, maximises positive social impacts and respects the rights of the local indigenous peoples,” writes Thomas J. Egan, Senior Vice President of Freeport-McMoran Cooper and Gold (FCX).
He goes on to say that FCX is an “unrelated and separate corporation from FTX [Freeport-McMoran Inc.]”, IMC Global’s (IGL) partner in the IMC Agrico joint venture. Now, with a merger between FTX and IGL having been made official on Dec. 22, Egan adds that “IGL will have the sole U.S. interest in the proposed Sri Lanka phosphate project.”
In the final analysis, should the Eppawala/Trinco deal go through, it could serve to boost the image and future electoral chances of President Kumaratunga and her Cabinet. Widely seen as failing to deliver so far on her 1994 platform pledges, with this clinched, she could be credited for injecting badly needed dollars into the nation’s coffers. And, while pitching the package to the public, she could also sell Eppawala/Trinco as a vote of confidence by the West in the Northeastern port becoming a safe hub for investment here over the long-run.
“Once the perceived risk situation in Trincomalee is acceptable to lending banks, then Trinco would become a potentially attractive destination for U.S. investment,” adds Thilan Wijesinghe.
But it remains to be seen just how the government proposes to secure future international trade and investment ties from the still unstable Northeast. With a full-blown conflict in the area showing no signs of letting up, the sole superpower left, by its admission, has no wish to have to safeguard those interests by playing as policeman.
Despite recent speculation about the United States military, taking a keener interest in Sri Lanka, through a series of training missions conducted here by Special Forces — Green Berets and Navy Seals — and the Pentagon coveting Trincomalee as a possible replacement for its naval bases at Subic Bay, the Philippines, or Diego Garcia in the Indian Ocean, American diplomats in Colombo have consistently brushed aside such suggestions.
“The Green Berets do not have a responsibility for protecting US government facilities or US businesses in Sri Lanka,” according to the US Embassy’s spokesperson. “That responsibility lies with the host country security services.”
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