2/10/2020 The Island

Sunday February 9th 2020

HOME NEWS BUSINESS EDITORIAL FEATURES SPORTS LEISURE IMAGE GALLERY CONTACT US ADVERTISING RATES

NAVIGATE : Home » » Tender for floating LNG terminal under Swiss Challenge – Why it should
be cancelled?
Breaking News
Await Breaking News
Tender for floating LNG terminal under Swiss Challenge – Why it should be Last Updated Feb 08 2020 | 08:10 pm
cancelled?
...
May 7, 2019, 12:00 pm

Dr. Janaka Ratnasiri

The Ministry of Power and Energy (MP&E) on 05.11.2018

announced a Request for Proposals (RFP) for the establishment of
an offshore Floating Storage and Regasification Unit (FSRU) and
pipeline infrastructure for the supply of liquefied natural gas (LNG)
for Ceylon Electricity Board (CEB) with the closing date given as
12.12.2018. The RFP document, in its title described the bid as a
counter proposal under Swiss Challenge procedure.

1. Background

The Ambassador of South Korea, in mid-2017, handed over to President Maithripala Sirisena a
proposal from a South Korean Company, SK E&S Co. Ltd., to supply a FSRU free of charge for
importing LNG to Sri Lanka. The Koreans apparently put forward their original bid on Sri Lanka’s Featured News
request, made during President Maithripala Sirisena’s official visit to Seoul in 2017 (ST, 20.01.2019).
However, there was a condition attached to the offer that Sri Lanka purchases LNG from the Korean
Company for 20 years from their own gas fields at a price based on prevailing international rates. The
Unit is expected to have a throughput initially of 0.5 million tonnes per year (Mt/y) of LNG
commencing in the second half of 2020 and thereafter maintaining at 1 Mt (LNG)/y from 2021 up to
2040.

A priest of God, an
The President, on receipt of the proposal, submitted a cabinet paper himself seeking its approval for avid reader...
accepting the Korean proposal, highlighting its potential to reduce carbon emissions as pledged by 2020-02-08
him at the Paris Climate Change Summit held in 2015. It is not known whether the President sought
the views of the electricity utility or the Public Utilities Commission, Sri Lanka (PUCSL) before he
submitted the cabinet paper. However, the Cabinet apparently had reservations and deferred taking a
decision (FT of 07.02.2019). About a year later, the matter was again taken up at the Cabinet, but
this time on a paper submitted by the Ministry of Power & Energy (MP&E). It is noteworthy that
according to relevant gazette notification, the subject of importing natural gas comes under the
purview of the Ministry of Petroleum Resources Development (MPRD), and not under MP&E.
Attacks on the
judiciary in...
Though the proposal was unsolicited as far as the electricity utility is concerned and the Government 2020-02-08
had no obligation to consider it, probably in view of the President’s personal interest in the matter
and also considering the fact that there was a need to import LNG expeditiously to feed the planned
combined cycle gas turbine (CCGT) power plants, the Cabinet evoked the already existing alternative
methodology of considering unsolicited proposals under special circumstances known as Swiss
Challenge and decided to consider the Korean proposal under the Swiss Challenge system.

2. Swiss Challenge System "The Sky Gets

Dark,...
2020-02-08
The Public Finance Department had issued on 26.12.2016, a set of Guidelines on the procedure to be
adopted in dealing with Unsolicited Project Proposals known as "Swiss Challenge" Procedure
(Guidelines on Government Tender Procedure - Part II, Reference 237 – Dealing with Unsolicited
Project Proposals).
(http://www.treasury.gov.lk/documents/10181/329538/ProcuManSupple30/b4189d65-183c-4f48-
9e77-f8edacbcc5c2?version=1.0). However, according to these Guidelines, projects which are
generally not of a strategic nature and can be managed through the conventional procurement
procedure as well as procurement of a general nature goods and services should not be considered Gota’s speech and
under these Guidelines. These Guidelines also do not apply to proposals which have been already SL...
2020-02-08
agreed and are at various stages of implementation by the Government prior to the introduction of
Swiss Challenge Procedure.

Under the Swiss Challenge system, once an unsolicited proposal is received, any other interested
party is given an opportunity to submit a counter proposal with better terms. The original proponent

www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=203850 1/4
2/10/2020 The Island
is given an opportunity to match the counter proposal and if he cannot, the tender will be awarded to
the prospective bidder submitting the counter proposal provided he pays the development cost of the
project to the original proponent. If the original proponent is able to match the counter proposal, the
Remembering the
Founder of Upali...
tender will be awarded to the original proponent. The Ministry’s call for counter proposals in 2020-02-08
November 2018 was in pursuance to this Cabinet decision.

A noteworthy factor in the RFP invitation, as indicated in the title, is that LNG is imported for the CEB. ARCHIVES RELATED LINKS
The RFP says that LNG after regasification in the FSRU has to be sent direct through pipelines to the
Sunday, 9th February 2020 [Current Issue]
two sites of the CCGT power plants, Kelanitissa and Kerawalapitiya directly. According to the current
regulations, only the Ceylon Petroleum Corporation (CPC) is permitted to import, refine and distribute Saturday, 8th February 2020
any petroleum product within the country so that even the CEB has to purchase its oil requirements
Friday, 7th February 2020
from the CPC. If the tender for the supply of LNG as advertised in allowed, next time CEB could call
for bids to purchase directly their oil requirements also, thus enjoying whatever benefits that go Thursday, 6th February 2020
along with such importing. Wednesday, 5th February 2020

Tuesday, 4th February 2020

The closing date for the submission of proposals was extended many times indicating that there was
poor response to the call for RFPs for whatever the reason. The initial closing date of 12.12.2018, just More Archives
5 weeks from date of RFP announcement, was first extended up to January 31st., extended for the
second time up to February 28, for the third time up to April 02nd, for the fourth time up to May 03rd
and finally up to May 23rd, as announced in a press notice appearing on May 02nd.

It is rather unusual for the closing date to be extended five times. It is also unusual to issue an RFP
giving only 5 weeks’ time to submit a proposal, which hardly gives sufficient time for an investor to
visit Sri Lanka and study the ground situation here before making his submission. Had the Ministry
gave initially 6 months’ time to submit proposals, which has already lapsed, there would have been
adequate number of investors making proposals. Extending the closing date five times only shows the
Ministry’s lack of professionalism.

3. Offers by India and Japan to build an LNG terminal and power plants

President Maithripala Sirisena in early 2016 announced that he did not want India to build the
proposed coal power plant at Sampur and instead wanted a natural gas power plant built. Soon after,
many reputed companies both from Asia and the West sent representatives to Sri Lanka armed with
proposals to export gas to Sri Lanka and build gas-operated power plants here. But they were sent
from pillar to post with no government authority in relevant sectors taking any decision. To
circumvent this situation, two parties, India and Japan, took a different strategy to get their heads of
state to enter into Memorandum of Understanding (MOU) with Sri Lankan head of state during their
official visits to those countries. If the Sri Lankan authorities took the initiative to prepare plans to
establish gas-operated power plants and invited proposals officially soon after the President made his
announcement, such a situation would not have arisen.

During a visit of Sri Lanka’s Prime Minister (PM) to India in April 2017, he signed a MOU with the
Indian PM on a number of development projects, including one on LNG terminal and power plant to
be jointly developed by India and Sri Lanka. Later, the Sri Lanka PM visited Japan where he met the
Japan PM when he requested Japan to provide a gas-operated power plant in place of the 500 MW
coal power plant which Japan had offered earlier, resulting in signing a MOU to that effect. With the
undertaking given to both India and Japan to build gas-operated power plants, Government set up a
tripartite negotiating committee to work out the modalities of implementing the project. Probably,
India and Japan would have convinced Sri Lanka that they being big players in the LNG trade, are in
a better position to bargain for a deal for purchasing LNG for Sri Lanka than what Sri Lanka, a new
comer to the trade, alone would have accomplished. Perhaps, they are correct.

Subsequently, the Minister of Development Strategies and International Trade and the Minister of
Ports and Shipping, submitted a paper on 27.02.2018 to the Cabinet seeking its approval to set up a
FSRU for importing LNG. The project is to be implemented by a joint venture in which the State-
owned Sri Lanka Gas Terminal Company Ltd held 15% equity, Indian Company nominated by the
Government of India held 47.5% equity and the balance 37.5% equity held jointly by two companies
nominated by the Government of Japan. The Cabinet granted approval for the project. A noteworthy
factor is that here too, the MPRD which has the mandate to import LNG has been excluded in the
exercise.

The joint venture has been set up for importing LNG, but not for building the two power plants. There
is no reference as to how the cost of building these power plants will be shared. When the MOU was
signed for the Sampur coal power plant, the initial understanding was that India would meet the
entire cost. But later, after the joint venture company was set up, the agreement signed between CEB
and the Indian party, it had provision to meet 30% of the capital cost by both parties jointly and the
balance 70% to be raised from commercial lending. It is not known how the capital cost will be met
in the case of the two 500 MW LNG power plants whether their cost will be met entirely by India and
Japan or whether Sri Lanka also has to foot a portion of the cost. Also, from what is available in
public domain, the negotiations are so far are silent as to how the two power plants will be selected,

www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=203850 2/4
2/10/2020 The Island
whether it is left totally in the hands of the two collaborators or whether Sri Lanka has a say in it. It
appears that Sri Lanka has to accept whatever India and Japan select!

4. Offer by a BOI approved project

to import LNG

There has been a separate proposal submitted to the Board of Investment (BOI) in 2017 by an
investor to develop an LNG terminal and storage facility at Dikkowita adjoining the present Fisheries
Harbour for the purpose of mainly re-exporting LNG. This project is to be implemented jointly with
the Ministry of Fisheries and Aquatic Resources Development (MF&ARD) who had submitted a cabinet
paper seeking its approval for the project. It is proposed to bring LNG in shallow carriers having
capacity between 15,000 - 30,000 cubic metres (m3) and draft between 5 - 7 m. It is possible to
bring such shallow carriers along the entrance canal to the Fisheries Harbour, and then directed to a
separate basin built seaward to the existing breakwater. The LNG terminal designed to bring 0.5 Mt/y
of LNG is expected to cost USD 300 million as a direct investment.

The proponent has been informed by the MF&ARD by their letter dated 17.01.2018 that the Cabinet
of Ministers has approved the project on build, own and operate (BOO) basis and that action would
be initiated to lease out necessary land for a period of 30 years and asking the proponent to initiate
environmental impact assessment (EIA) studies. Since then, the proponent has completed the
feasibility studies and is awaiting terms of reference from the project approving agency to undertake
EIA studies.

Once this project is completed within about 2-3 years, any party in Sri Lanka should be able to
purchase initially limited amounts of gas on short term basis for use in whatever application such as
transport, industries or commercial activities, subject to PUCSL and MPRD granting approval to the
proponent to sell gas to local consumers, for which rates need to be approved by PUCSL. It is noted
that such sale of gas is not subject to any condition such as take-or-pay as given in the Korean
project and also included in the current RFP for counter proposals.

5. Non-eligibility for Swiss

Challenge process

The proposed project comes under the categories which are not eligible for considering under Swiss
Challenge system, as spelt out in the Guidelines. Firstly, the project is not of strategic nature;
Secondly, the commodity to be purchased, viz. natural gas is a general commodity; and thirdly,
another project for the importation of LNG is being pursued as a tri-partite venture with shares
among Indian, Japanese and Sri Lankan parties. Further, a second project to import LNG in shallow
vessels has received the Cabinet approval and the project is being pursued. Hence the government’s
attempts to import LNG under a Swiss Challenge system is in violation of the criteria given in the
above Guidelines for considering unsolicited proposals.

A key condition for offering a FSRU free of charge by Korea is that Sri Lanka is required to purchase
LNG from the Korean company for 20 years at rates to be decided by the company which is said to
depend on prevailing international rates. There is also a second condition that if Sri Lanka does not
purchase the agreed amount, a penalty equivalent to the value of LNG not purchased has to be paid
to the company. A third condition is that in the event another party is selected upon calling counter
proposals, the selected party is required to pay the Korean Company the cost of project development
which is estimated at USD 10.074 million. Considering the total commitment that Sri Lanka has to
make on the project, it appears that the free FSRU is only a bait to trap Sri Lanka into a deal totally
unfavorable to Sri Lanka.

There is no justification whatsoever for the Korean Company to demand that their cost of project
development amounting to over USD 10 million be reimbursed. In a normal tender, every bidder will
incur some expenditure in preparing the proposal, but there is no practice for the winning bidder to
reimburse such expenditure incurred by others. Thus, there is absolutely no justification to give
preferential treatment to the Korean Company when they submitted an offer on their own will while
the government is in the process of developing a similar system with Indian and Japanese
collaboration. There has to be a level playing field for all parties which is lacking here.

6. Total commitment for the government

To be Continued

Hits: 1654 Send to Friend

www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=203850 3/4
2/10/2020 The Island

UPALI NEWSPAPERS (PVT) LTD

Copyright © Upali Newspapers (Pvt) Ltd.
All Rights Reserved.

Solution by Lankacom.

www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=203850 4/4