Five of Sri Lanka’s largest construction companies have urged President Anura Kumara Dissanayake to cancel a 2015-16 direct contract granted to the Metallurgical Corporation of China (Ltd) (MCC) for the much-delayed Section 1 of the Central Expressway Project (CEP) and to call for fresh tenders under an open, transparent bidding process.
The Lanka Infrastructure Development Consortium (LIDC)—comprising Access Engineering PLC,
Maga Engineering (Pvt) Ltd, International Construction Consortium (Pvt) Ltd (ICC), KDA Weerasinghe & Co. (KDAW), and
NEM Construction—maintains that not only was the MCC contract too expensive, but also that the local industry could complete the project cheaper and faster.
There would be a significant cost reduction if the balance work of Section 1 was awarded to domestic contractors, LIDC asserts, pointing out that, under the existing deal, the per-kilometre price was around US$ 33mn. However, Section 2 was built by local companies for around US$ 18mn per km.
LIDC’s letter to the President comes against the backdrop of the Cabinet approving the advancement of nearly Rs. 7.5bn in local funds to MCC to complete “critical remaining works” of Section 1 after years of delayed, then suspended, construction (owing to the non-disbursement of the China EXIM Bank loan for the project), causing some partially built construction works to collapse.
The new administration’s decision was taken on December 18 last year but was not made public. It was the confirmation of an earlier (also unannounced) decision taken by the Ranil Wickremesinghe government just days before the September 2024 presidential election to pay this sum to MCC.
The vital 37 km Kadawatha–Mirigama leg was the first section of the CEP to be awarded but is nowhere near completion, nine years later. Section 2 from Mirigama to Kurunegala was opened in January 2022.
The loan agreement for Section 1 was signed in March 2019 between the China EXIM Bank and Sri Lanka: US$ 989 million (nearly US$ 1 billion) to cover 85 percent of the contract price. It was the single largest loan passed by China EXIM for Sri Lanka. But the construction agreements were signed between MCC and the Road Development Authority (RDA) as early as 2015 and 2016.
While the original 2015 Cabinet decision was to obtain a 100 percent concessional loan from China EXIM, the final deal was that the RDA would pay 15 percent of the contract value via borrowings from the state-run Bank of Ceylon and People’s Bank.
An amount of around US$ 241 million has already been certified for payment to MCC in view of partially completed work, a Cabinet paper shows. The Government has advanced US$ 175 million of this despite China EXIM having paid only US$ 51.5 million of the total pledged loan. (After Sri Lanka declared bankruptcy on April 22, China EXIM suspended all loan disbursements.).
“The EXIM Bank of China has not disbursed any payments to the contractor after April 2022 and has failed to provide reasonable evidence to establish financial arrangements [sic] and to be maintained to pay [sic] contract price as requested by the contractor in accordance with the provisions of the contract,” the Cabinet paper says.
Even by November last year, project completion was at a mere 36 percent, another official report states. MCC suspended activities in 2023. Since then, a 30-metre-long concrete beam installed in November 2021 has collapsed, raising fears of further degradation. It is to complete certain constructions in areas where such beams were erected that Rs. 7.5 billion was approved to be paid, the documents indicate.
But LIDC has proposed to President Dissanayake that cancelling the MCC contract will be most beneficial to the country. It points to the Japan International Cooperation Agency-funded Bandaranaike International Airport expansion project, formerly awarded to Taisei Corporation: the contract was terminated and fresh tenders called, to be closed in March this year.
The government could reach a consensus on cancelling the MCC contract “based on the unwarranted delays causing substantial public inconvenience and economic losses, and within the backdrop of resolving the economic crisis of our country.” If this fails, LIDC says, the government could justify a termination because it was “in the best interest of the public”.
LIDC claims that funding the work—to be carried out by local contractors—via domestic banks would lead to a significant cost reduction of (it estimates) US$ 300 million. This will also create direct economic benefits and have multiplier effects on the Sri Lankan economy, with nearly all monies remaining within the domestic financial and banking systems. LIDC also predicts that local contractors could finish Section 1 within 24 months.