Did Expert Committee use similar standards in evaluating MCC and Port City loans?

By Harim Peiris-July 8, 2020, 5:56 pm

Sri Lanka has at least US Dollars one and a half billion (USD $1.5B) debt repayment due later this year and both the status of the global economy in the Covid-19 environment and our own vulnerabilities caused by the pandemic, namely the total curtailment of foreign tourism, the drastic drop in expatriate worker earnings and reduced earnings from exports such as apparel, together with fiscal slippage, has downgraded our international credit ratings and made access to international financial markets prohibitively expensive. Though our trade balance has been assisted in no small measure by the curtailment of vehicle imports and historically low global crude oil prices, (not passed on to the Sri Lankan public), we still have serious economic challenges ahead, especially with regards our foreign reserves, balance of payments and exchange rates. Pending subsequent confirmation through Central Bank numbers, in all probability, we are in a period of negative economic growth, increasing unemployment and rising inflation, or stagflation.

It is in this context, that with much fanfare, an "Expert Committee" was tasked by the SLPP Administration, to examine the Millennium Challenge Corporation (MCC) grant compact, which has drawn heavy fire from the SLPP even while in Opposition. Rather predictably, last week the Expert Committee gave in its report, which is to be first given to the Cabinet of Ministers and then made publicly available. Predictably the government experts have determined that the MCC grant compact has clauses "detrimental to the sovereignty of Sri Lanka and in violation of her constitution" and on those grounds it is to be rejected.

The issue that arises is whether the SLPP and its experts use the same criteria and standards when evaluating the MCC grant with the Port City loans and project. The SLPP, or its predecessor the UPFA Administration of 2010-2014, never saw a Chinese project with high priced loans, during that era, which it did not like and as experience has shown continues to be of very limited public or economic value. From the Port City to the Hambantota Harbour, including the Mattala Airport, these white elephants are costly.

Firstly, the Expert Committee seemed to have come to a conclusion on "sovereignty" and "constitutionality" of the MCC grant compact (agreement), though the expertise of the committee was more economics and specifically public transportation rather than law and especially constitutional law. Generally speaking, all international agreements are run through the Attorney General’s Department, which is the appropriate place for examination of constitutionality. There were no AG Dept. seniors or constitutional lawyers among the experts, so one wonders how they came to conclusions on matters of constitutional law and sovereignty, which rather like justice is a challenging concept to be dealing with at the best of times. Conversely, the Experts seemed to have made not much comment on their field of expertise, which is public transportation, a prime focus of the MCC grant.

The MCC grant compact did try and cut through some bureaucratic red tape, as does any foreign investment, in a concept similar to a Free Trade Zone, or through the BOI for fast tracked approvals. Sri Lanka has not significantly reformed our colonial era, pre-computerization bureaucratic procedures despite all the nationalistic rhetoric from our political platforms. This red tape is a serious constraint for the local SME sector, foreign investment and overall economic growth.

Unlike funding for the Port City and all Chinese projects, the MCC grant is non-repayable. A half a billion, dollar grant is no joke. In contrast, all the Chinese projects have been loans, generally at interest rates of about six percent and or higher, at a considerable premium to the international benchmark of LIBOR for US dollars. So, the experts of the SLPP actually prefer in practice, high priced loans to free money.

The Chinese projects of the previous Rajapaksa administration’s era were also all infrastructure-related, a port, an airport and in the Port City, high priced apartments, hotels and office space. Looking around Colombo, we certainly don’t seem short of either high priced apartments or office space, hardly the priority. In fact, we are dangerously close to an asset bubble and Colombo is full of empty apartments. What we are short of though and do have a serious problem with is, transportation and traffic management, with the estimates of GDP lost or foregone due to congestion caused productivity losses being as high as one and a half to two percent annually or about one and a half billion dollars a year. A significant part of the MCC grant or about USD $350 million out of the total of $500 million, was all about addressing this issue or improving inter-provincial roads, improving access to markets, reducing transportation related losses on agriculture and lowering transport time and hence costs for industry.

Another developmental constraint for Sri Lanka is efficient land usage. The solution is not reclaiming a few hectares of land from the sea at billions of dollars, while causing serious environmental damage, down the coast. It is efficient use of the land we do have. The MCC grant was to enable the government to compile a complete inventory of all state lands and to improve the evaluation system of all lands. Also, to build on the government’s e-Land Registry initiative and to improve the Deeds Registry by digitizing existing records. Additionally, to improve tenure security for all land holders by moving properties from the archaic deeds system to a title registration system and while funding research to improve land administration policies. These are all international best practice in public administration of land. Of course, efficient use of land has a lot of opponents, from politically connected land grabbers to the use of state land through patronage, to the lucrative but archaic legal practice of writing deeds, which is open to fraud, as we regularly see and is also costly.

The reality is we have looked a gift horse in the mouth, in a highly visible demonstration of double standards and given up the opportunity to increase our GDP growth by perhaps 1.5% annually through an investment, which is a gift rather than a loan. We should all hope that post-election sanity will prevail.

(The writer served as Advisor, Ministry of Foreign Affairs from 2016/17)