News Features


Ceylon Electricity Board drifting to the dark side

Ministry of Power and Energy has made a huge and expensive mistake by handing over the construction of the Kerawalapitiya Power Plant to an inexperienced local company. The Ministry’s blunder will cost the CEB losses that run into billions of rupees every year…

Building a massive Power Plant is a task requiring skills honed by years of hands- on experience. Hence any Company which undertakes this mammoth task must have the expertise in a wide ranging number of skills not only in constructing the plant, but in the kind of fuel it will use keeping in mind the environmentally friendly aspect and its cost. By handing over the construction to an inexperienced company, and disregarding the cost factor as well as the viability of the type of fuel to be used, it is no surprise that the Kerawalapitiya Power Plant is expected to incur an annual loss of over 17 billion rupees annually.

By Rathindra Kuruwita
The Ceylon Electricity Board which currently has accumulated a colossal loss of over Rs 90 billion, is well on the way to add to that mind blowing figure, thanks to some drastic decisions taken by the Ministry of Power and Energy and a few officials. This has seen one of the key power projects envisioned by the energy sector, the Kerawalapitiya duel fuel combined cycle power plant, poised to make a massive loss even before it is built.

It has now been reliably learned that Ministry of Power and Energy had recommended to the cabinet of ministers to go ahead with the worst offer from among four offers made, to build the Kerawalapitiya power plant.

The Ministry has made two monumental blunders when granting the multi million dollar bid to this particular company, to build the plant. First, a local company which does not have experience in building power plants in the magnitude envisioned at Keravalapitiya, has been given the contract for the project. Secondly, the worse fuel option has been chosen to generate the electricity. By selecting a Heavy Fuel Option (HFO) as the power source of the plant, the country is set to lose a whopping Rs 16.8 billion annually.

On the drawing boards
The Kerawalapitiya duel fuel combined cycle power plant has been on the drawing boards for nearly a decade. A proposal to build the plant on a Build Own Operate basis failed in 2002 with the government and the private partners not agreeing to the terms of the Power Purchase Agreement. The project was re-proposed in 2005 as a Design Build Transfer offer. However due to the lackluster attitude of the committee which was tasked to carry this project forward, that initiative also failed

Cabinet paper says Lakdavani only
In December 2005 Ministry of Power and Energy, John Seneviratne presented a cabinet paper, which deviated from the normal norms and practices when selecting a bidder for a massive project like the Keravalapitiya power plant. It proposed that only a single company be considered when granting the US $ 300 million project. It recommended that a Cabinet Approved Negotiating Committee be appointed to look into this single proposal. Citing the serious power crisis the country would face in the years 2007 and 2008, The Ministry impressed upon the Cabinet of Ministers to urgently look into the proposals submitted by Lakdavani Ltd, a company which has had limited expertise in building a 300 MW power plants.

In the Cabinet proposal, it has been stated, “ to obtain a detailed project proposal only from Lakdavani Limited for the establishment of a 300 MW duel fuel combined cycle power plant at Kerawalapitiya on a Design Build and Transfer basis”. A Cabinet appointed project committee was appointed to look into the technical feasibility of the venture, and a Cabinet appointed negotiation committee to look into the commercial viability of the project, and to make an overall assessment of the proposals.

While the Cabinet approval was granted to analyze the Lakdavani proposal, the Chinese government through its Ambassador in Sri Lanka, also expressed that country’s interest to be involved in this project. Due to various pressure put on it , Ministry deviated from its original stance of recommending only Lakdavani for consideration, and was forced in April 2006 to recommend to the Cabinet of Ministers to consider the proposals made by the Chinese firms. The CANC was to make the final recommendations after considering all proposals.

The Chinese package
The China National Aero Technology Import and Export Corporation (CATIC) and the China Aviation Gas Turbine Limited (CAGT) which are both state owned companies, offered a package to build the Kerawalapitiya power plant. The Chinese Ambassador in Sri Lanka assured that this project will be undertaken on a government to government basis, and stressed that the Chinese will offer an attractive credit package to fund the project.

A three member CANC, chaired by H.M.C Kapilaratne with Secretary of the Power and Energy Ministry, M.M.C Fernando and C.Maliyadde as members, was appointed to assess the proposals of Lakdavani and the Chinese firms. An 11 member project committee, tasked with technical evaluation was also appointed.

Four proposals were presented for evaluation. Three were from Lakdavani with the other from the combined Chinese firms. Lakdavani along with General Electric submitted two proposals, one was for a Light Fuel Option (LFO) while the other was for a Heavy Fuel Option (HFO). The same company also recommended a third proposal jointly with Mitsubishi Corporation of Japan for a light fuel, auto diesel option. The Chinese companies proposed a LFO.
After evaluating the four options for their technical suitability the Project Committee recommended the Lakdavani – General Electric HFO as the best option. Once this report reached the CANC, the majority of its members rejected the recommendations of the Project Committee.

The CANC after considering several reports, including the feasibility study done Japanese International Corporation Agency(JICA), on the Kerawalapitiya power plant, concluded that Auto Diesel (light fuel) was the best option out of the choices available for a thermal power plant. It was both economical and environmentally friendly. The Heavy Fuel that was recommended by the project committee was emitting twice as much Sulphar in to the air compared to the Light Fuel. Also by opting for a Heavy Fuel, the maintenance cost of the plant would also be increased many fold. The availability of the heavy fuels in the long term has also been doubted by experts.

Meanwhile the CANC noted that Lakdavani was in no way qualified to carry out a massive project of this magnitude, due to its lack of experience and resources. The financing of the project through Lakdavani was also not attractive when compared to the Chinese option which was guaranteed as a government to government transfer.

Disregarding the recommendations of majority members of the CANC the Cabinet of Ministers, on the recommendation of the Ministry, in September 2006, it was decided to grant the lucrative bid to build the Kerawalapitiya power plant to Lakdavani Limited. The company was also granted BOI concessions with tax holidays and duty waivers. This was done even though this local company was not bringing in money for investment. The project was to be funded by a loan obtained in the international financial market with high interest rates. Therefore it was the government bringing in the money and not the investor.
The only member of the CANC to agree with the project committee in recommending Lakdavani as the successful bidder, was M.M.C Fernando, the Secretary to the Ministry of Power and Energy.

A staggering loss
It was also decided for the CEB to enter into a Purchase Agreement. At current oil prices the CEB would purchase a unit of electricity from the company at Rs 17 while it sold a unit at Rs. 10.50. Therefore CEB will lose Rs 6.50 per Kilowatt hour of electricity purchased according to this agreement. When the annual loss to the CEB is calculated, considering a 300MW power plant, the value comes to nearly Rs 17 billion. While the CEB is currently in debt in the tune of Rs 90 billion, it would further incur an annual loss of Rs 17 billion by this new power plant alone.