Are Window Dressing & Off Balance Sheet Financing Strategies To Manage External Debt Crisis?
By Chandra Jayaratne   This is an open letter for the attention, review and action by the Auditor General, Speaker of Parliament, Parliamentary Committees on Public Finance, COPA and COPE, Institute of Chartered Accountants, Economists, Professionals and the Media. Economy Next in November 2019[1] quoted that Sri Lanka is eyeing public private partnerships on a built own operate transfer (BOOT) mode with gap funding from the government to build a new highway as the country tries to avoid racking up new debt. This quote was in relation to a PPP project for an elevated highway from Orugodawatte to Rajagiriya. The Chairman, RDA was quoted as I think PPP is a viable model,-The number of years (concession period) for operations we can vary. ECONOMYNEXT, in January 2021[2] stated Sri Lankas will call investors for a fully foreign funded elevated highway in the capital Colombo to be built as a Build Operate Transfer (BOT) project. A media report in Sunday Morning 25th April 2021 titled[3] Proposed highways projects: Hit by delays quoted Likewise, there is no final decision on the proposed Elevated Highway Project from New Kelani Bridge to Athurugiriya, which saw vehement opposition from the residents in Battaramulla, as the proposed highway was to be constructed over the remaining areas of Colombos wetlands in Thalangama and Averihena. As claimed by some experts, the reason for the delay in attracting foreign investments is mainly due to the government policy  the debt-free build-operate-transfer (BOT) method adopted recently. According to them, when it comes to BOT projects, the investor expects considerable revenue and therefore, the applicability of the BOT method for Central Expressway Projects (CEP) was questionable, as the number of vehicles that would use the highway once completed would not be enough for the investor to cover expenses. It is learnt that the Government has suggested several other investments within the project, such as housing complexes to make the BOT viable. However, experts stressed that they doubt good investors would invest in such a huge project without any contribution from the Government. The BOT method was suggested by Secretary to President P.B. Jayasundara to Gotabaya Rajapaksa, when he issued fresh instructions to the Ministry of Highways and the RDA to call for fresh proposals for the Elevated Highway Project from New Kelani Bridge to Athurugiriya and also to accept bids for Sections III and IV of CEP. Prior to calling for new proposals, the Ministry of Highways had obtained cabinet approvals to receive technical proposals for the Elevated Highway Project and discussions were ongoing with the China Harbour Engineering Company (CHEC). In his letter, Dr. Jayasundara stated that the Government will not encourage debt-funded projects or annuity (a series of payments made at equal intervals) payments to meet revenue shortfalls or guaranteed traffic, as these options are not affordable. It is further stated that several parties have submitted letters of intent or interest to the Board of Investment of Sri Lanka (BOI) for the two initiatives on a BOT basis. Most of them were of an unsolicited nature. Sunday Morning of 6th June 2021[4] article titled Athurugiriya-Kelaniya Elevated Highway: Setting a new precedent? states The full ownership of the first-ever build-operate-transfer (BOT) model Elevated Highway Project (EHP), which is to be constructed from the New Kelani Bridge to Athurugiriya via Rajagiriya, will be handed over to Sri Lanka after 18 years from the completion of construction, according to the Road Development Authority (RDA).The project is to be constructed by M/s China Harbour Engineering Corporation (CHEC), which already has a large project portfolio in Sri Lanka on a BOT basis, and the awarding of the construction contract to CHEC was approved by the Cabinet in April, based on the recommendations made by the Cabinet-Appointed Negotiating Committee. Accordingly, the construction work is scheduled to be completed by 2025. RDA Chairman Chaminda Athuluwage told The Sunday Morning that the EHP was the first BOT project to be commenced in Sri Lanka and that the operation of the project, once completed, would be handled by the RDA staff, adding that the accounts of the roads, however, would be handled by the respective company. Explaining the nature of the BOT system, the RDA Chairman noted that the construction of the highway would be conducted by CHEC and the full ownership of the road would be handed over to Sri Lanka after 18 years. The road will be like all other roads in the country and there wont be any difference. RDA staff will operate the road, and once CHEC recovers the funds they have spent, they will hand over the road to RDA, he explained, adding that while the BOT method is being used in other countries, it helps reduce the burden on the Treasury as the contractors invest the entire funds. A well-informed source at the Road Development Authority (RDA) told The Sunday Morning that the proposal has been channeled through the Board of Investment (BOI) as an investment project by CHEC, for which the Highways Ministry will provide technical support. Ceylon Today of 26th May 2021[5] in an article titled Construction awarded to CHEC on BOT basis notes that the Cabinet meeting on 8 April approved the build, operation, and transfer of the highway on pillars that connects the Athurugiriya Interchange and the New Kelani Bridge on a Build, Operate, and Transfer (BOT) basis. It goes on to quote the Co-Cabinet Spokesperson Minister Gamanpila stating Cabinet has granted approval to award the construction of the expressway on pillars that connects the Athurugiriya Interchange and the New Kelani Bridge to the China Harbour Engineering Company Ltd (CHEC). CHEC will need at least 15 years to function and earn profit. Implying that construction will take at least three years to complete the CHEC has the right to occupy the expressway for another 15 years in order to recover costs and earn profit. Due to that, the ownership of the expressway would be passed to the Sri Lankan Government after 18 years. Cabinet paper has mentioned that cost is not the variable factor but the operating years. The Daily Ft of 8th June 2021[6] notes that Secretary to the President Dr. P.B. Jayasundera delivering the keynote on day three of the Sri Lanka Investment Forum as highlighting the  Governments landmark achievements which global investors should take confidence from. One was the finalization of the $ 700 million BOT deal on the Colombo West Port Terminal involving Indias Adani and Sri Lankas John Keells Holdings. This is apart from Sri Lanka Ports Authority developing the East Container Terminal, both of which will augment much needed capacity at South Asias hub Colombo Port. The other is drawing a $ 800 million investment from China Harbour for the elevated highway connecting Kelaniya and Athurugiriya. We have moved from expensive foreign loan funded project financing to project promoter-led financing. The much hailed of BOT investment in this elevated highway, has been referred to in different ways on different occasions, as highlighted before in this article. The government policy for funding of major capital projects has however been clearly stated as, private investments, especially Foreign Direct Investments or Public Private Partnerships, which do not involve debt-funded projects or annuity (a series of payments made at equal intervals) payments to meet revenue shortfalls or guaranteed traffic, as these options are not affordable. This ambiguity must be resolved with transparency and with the support of credible evidence of the funding structure, and attendant state commitments by the full disclosure of the relevant BOI and other agreements, including side letters and any letters of guarantee and warranties undertaken by the State and State Entities. The authorities must recognize that only way in which the true character of this investment can be assessed is by examining the relevant agreements and associated documentation. The classification and accounting treatment of this project will entirely depend on the legal and accounting interpretations of the agreements. The structure, framework, concessions and commitments can make this agreement to be classified and accounted some times as a BOT project; or as a project with attendant liabilities on the State and thus not an investment; or quasi debt creating project; a finance lease; hire purchase contact, or a contract which in substance involves annuitized payments which in effect take the character of a debt commitment; or a contract which in substance gives rise to significant contingent liabilities in terms of the concessions granted, guarantees and warranties given and cannot in substance be classified as an investment by the project partner. The above doubts arise as it is most likely that any investor, in the current economic conditions and credit ratings of Sri Lanka, will definitely take steps to safeguard their project outlay and returns reliant on the revenue streams expected by seeking sufficient and irrevocable assurances, guarantees, concessions and commitments. They will in addition build in to agreements other safeguards over pricing freedoms, inflationary adjustments, exchange rate guarantees along with operational freedoms and flexibility of operations. They will also assurances and possibly insurance against project, operational, pricing, repatriation restrictions and non expropriation etc. Basically any investor will wish to and will take risk mitigation steps to safeguard its investment as well as the net revenue streams that will provide it an assured expected minimum return on its outlay with the return adjusted to risk ratings on the country of investment. Their risk mitigation steps could most likely lead to an effective change in the character of the investment not being as prima facie disclosed. It is the citizens fervent wish that the Board of Investments, Ministry of Finance and associated line Ministries, will recognizing the public dilemma make necessary disclosures publicly and gain credibility, without citizens having to resort to time consuming Right to Information requests, with possible consequential appeal processes. It is also the citizens wish that the Auditor General and the Oversight Committees of Parliament will examine the relevant agreements to assess the true nature and character of the project investment and any risks that the Sate remains exposed to as a consequence of the agreement whilst assessing the economic and social value addition from the long term perspective of the country. It will be in the interest of the state and citizens, if the Institute of Chartered Accountants publishes a position paper on the types of accounting treatment of BOO, BOT and BOOT Projects and how any conditionality arising from associated agreements, concessions, guarantees and warranties will lead the accounting treatment being different. Here it is important to highlight, especially changes dealing with Reporting the Substance of Transactions as well as concessions, guarantees and commitments made by any public sector entity. CA Sri Lanka should also explain the accounting and disclosure implications arising from Sri Lanka Public Sector Accounting Standards[7], Best Practices related adoption of Sri Lanka Accounting Standards[8]; as well as in terms of the International Public Sector Accounting Standards (consultation paper) relating to Accounting and Financial Reporting for Service Concession Arrangements, dealing with public-private partnership (PPP). [9]  In the context of many recent arguable representations and possible misrepresentations given by responsible Ministers to SWAPs being investments and imports under credit lines not leading to any resource outflows or creating liabilities, and the need to understand Public Sector Accounting and Disclosure requirements, the types of PPPs etc, the Speaker of Parliament must assess the need for awareness building and training and development gaps to be filled amongst the parliamentarians. Finally the Citizens wish to be assured that misrepresentations, wrongful classifications and erroneous and non compliant with standards accounting by State entities do not expose the nation to be classified by the trading/investing/rating and lending agencies and entities globally, to believe that Sri Lanka is resorting to window dressing and off balance sheet accounting to distort the real nature and extent of its external debt obligations, debt to GDP ratio, Debt Service capacity and other key indices.