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by Sellakapu S. Upasiri de Silva

What is wrong with the proposed Upper Kotmale project? Why is it subjected to all these unnecessary and unwanted controversies after the Cabinet of Ministers has given the green light to go ahead with the construction work? Why is SLAAs (Sri Lankan Association for Advancement of Science) professionals trying to give life to the rejected CECB's Yoxford option? Why have they based their argument on a properly prepared cost benefit analysis, and trying to prove that it is wrong? Did they compare the cost benefit analyse for the Yoxford proposal?

SLAAS professionals maybe unaware that cost analysts used many other methods along with the cost benefit analysis to assess the economic viability of a major project like UPHP before rejecting or recommending it to the principal. CECB's Yoxford option was rejected by the CEB and the consultants due to major inadequacies in the design and the projected estimate (project cost) as explained in my article "Upper Kotmale delay may cause economic disaster" which appeared in Daily News of 01-08-2002 after evaluating the CECB proposal.

All those professionals trying to sponsor and give life to the rejected CECB's Yoxford proposal are pushing the CEB to commit economical and commercial suicide by implementing (even a redesign) the Yoxford option, if the contract to construct the UKHP is (already) signed by the CEB and the Japanese contractors.

There are many facets to the project planning. Project planning is defined to include the whole cycle of project work. This includes, identification / selection, design / preparation, appraisal, implementation and monitoring / evaluation. Planning authorities in developing countries and the external aid agencies should select and design projects to support their respective development objectives.

Upper Kotmale was identified, designed, appraised and to be implemented within the development objectives of the Ceylon Electricity Board and the Government of Sri Lankan. However, too often the authorities get locked into the processing of projects simply because of the pressure of special interest groups and the desire to transfer resources to ensure that time tables are kept or to modify the projects and if necessary to abandon them completely due to pressure brought in by various other interest groups.

Upper Kotmale has fallen into these pressures, as most people who are applying the pressure are supporting the CECB's Yoxford option and criticising the analytically prepared cost-benefits analysis for the UKHP to meet their own agendas. Cost benefit analysis is a system designed to ensure that all relevant factors are taken into consideration in estimating the net benefits, whether this be for the individual, the firm, the public sector organizations or the country as a whole. Most analysts responsible for preparing cost-benefit analyses for major projects in the developing countries are using the cost-benefit analyses developed by Margolin, Dasgupta and Sen for UNIDO. In their analysis, they use the consumption measured in domestic prices as its numerarie.

Many analysts are aware that these measures are summary ones, which merely reflects the tip of a very large iceberg. Cost-benefit analysis involves complicated economic and social analysis, which needs to be made explicit for the benefit and judgement of policymakers. Professionals involved in preparation of cost-benefit analysis, consider many other criteria in preparing a cost-benefit analysis for a major construction project like UKHP. In addition to application of Life Cycle Coasting, it is necessary to consider project preparation and appraisal, such as the importance of realistically estimating technical coefficients, build-up rates, border prices and devising a workable organization and procedures for implementation.

The use of economic/social cost-benefit analysis as distinct from private or financial cost-benefit analysis arises from the need to take account of distortions in the project caused by the market imperfections of various kinds and fiscal policies of the government. Just as market prices are interconnected, so also are the accounting prices.

As such in preparing cost-benefit analysis we must make do with partial equilibrium analysis, always bearing in mind that changing one price will have no effect on other prices. It is necessary to have a common unit of account - a numerarie - in terms of which everything is measured. As the writer is desperately trying to establish in his article that the cost-benefit analysis for the UKHP is based on different units of accounts, he is surprised that a project of this magnitude could proceed beyond the feasibility stage when there were basic flaws in its economic and financial evaluations.

This argument is without any substance and technically incorrect as the choice of numerarie does not make any real differences from a technical, economic or mathematical point of view, provided one uses the appropriate discount rate. Because every project is unique, benchmark beta factors, discount rates or capitalization ratios must be adjusted to reflect differences in risk and opportunity. between the benchmark investment and the investment. Usually this is a matter of judgement for the analyst, but a systematic approach helps.

When preparing a cost-benefit analysis many cost analysts consider following risk factors [London Business School, Risk Management Services (1994)]:

* demand risk;
* price risk;
* cost of production risk;
* construction cost risk;
* financial and taxation risk;
* regulatory risk or risk mitigation;
* industry structure risks.

In this case the process of selecting an appropriate asset beta involves finding one or more benchmarks which have a similar risk profile. These same risk factors can be used to adjust discount rates obtained by direct comparison.

"It is time for a serious reappraisal of the Government policy on discounting cost and benefit in the evaluation of public policies, program, and projects". (Lind, 1990)

The discount rate used in a cost benefit analysis (CBA) is critical for the social profitability of projects or policies with large environment impacts. This project created many protests from the Environmental groups because the lenders used a nominal 10% discount rate. The application of this discount rate to the cost benefit analysis changed the benefits and the economic viability of this project. In calculating the cost-benefit analyse for this project the analyst should have been burdened with the 10% social discount rate than the cost of selling power, as it will restrict the distribution of benefits after 25 - 30 years.

The importance of the discount rate for the assessment of future costs and benefits can be illustrated with many examples, but with a 10% discount rate the net present value of a cost benefit analysis will reduce more than 100 times in the life of the project. The cost benefit analysis of the UKHP may be subjected to this illusion known among construction economist as the "tyranny of discounting".

The analyst who prepared the cost-benefit analysis should have considered, (according to my professional opinion), that the basic premise on which the analyst will proceed is that the appropriate rate of discount for public projects is one which measures correctly the social opportunity cost. The decision to devote resources to investment in public project means, given the overall level of employment in the economy, that these resources will become unavailable for use by the private sector. The social rate of discount, then, must be chosen in such a way that it leads to a positive number of evaluated net benefits of a public project if only its gross benefits exceed its opportunity cost in the private sector.

World Bank has set the following guidelines in calculating project benefits, (wherever the WB are the lenders or stand as sureties), and stress that the benefits might have a different value depending on:

a) Whether the benefit is measured in domestic market prices or in boarder prices;

b) whether the benefit is realized today or sometime in the future;

c) Whether the income is saved or consumed;

d) Whether the recipient of a benefit is private or government;

e) Which private income group receives the benefit?

Each of these categories of differences creates a need for a basic parameter or conversion factor to convert the value as it occurs into the common numerarie.

In the Economic Evaluation for the UKHP at Talawakele and for the alternative proposals of CECB - Yoxford and Lindula - the consultants have used the unit of accounting for the coal power and the gas thermal power in the same manner they used it for the original UKHP study.

CECB's Yoxford proposal was underestimated by US $ 200 million and never took into account the 10% discount rate attached to the investment loan by the lender. Has the CECB met the requirements of a proper cost-benefit analysis (Never sighted one during my research). Why are our professionals in the SLAAS trying to give life to a project that goes against the national interest?

Under the ICE/FIDIC Condition of Contract (Clause 41, & 42.1) the Engineer must certify such sums as in his opinion will be fair to cover the cost incurred, if the Contractor incurs cost from failure on the part of the Employers, the CEB, to give possession of the site in accordance with the terms of this clause. How reasonable will this payment be, where most of our professionals are still not very familiar with the Condition of contract used for Construction projects?

It is my professional opinion the consultants who prepared this cost benefit analysis for the UKHP have taken into consideration the facts stated above and the cost benefit analysis is in order. The 10% discount rate applicable to the loan is a very critical factor in this cost benefit analysis, which was not taken into consideration by the SLAAS in their deliberations. I hope that all those professionals and other individuals pushing the CECB's Yoxford proposal may consider the national interest above their personal interest and join together to get this project going.

I hope that the Sri Lankan Government may take the initiative to appoint panels of experts in Environment, Construction, Costing, Project Planning and implementation of projects before commencement of planning future major projects of this nature to avoid controversies, for the common good of the country.

Majority of the Sri Lankan professionals (engineers, architects & quantity surveyors) may be experts in their respective fields but somewhat lack practical experience, due to a lack of projects to gain experience and expertise in the areas of their respective field of works. Most of our professionals are not capable of taking hard knock decisions in contract administration when outside lending organizations are financing projects in Sri Lanka. Samanalawewa Hydro Project construction is a good example.

Sri Lankan expatriates domiciled in many Western countries who are experts in the construction planning and execution of major construction projects are willing to help the Sri Lankan Government, and train the local experts, if the Government approaches them with correct incentive packages. I hope the CEB can start this with the UKHP by appointing an expert Construction Manager who is very familiar with the ICE/FIDIC Condition of Contract to manage the UKHP with the blessing of the Sri Lankan Government.

Minister Karu Jayasuriya can initiate this by evaluating the expert professionals who are capable of helping the Sri Lankan government to complete this project mitigating the environmental problems and save millions of dollars in construction cost for the benefit of the Sri Lankan taxpayers.

(The writer is a Chartered Quantity Surveyor, Construction Cost Consultant, Sydney, Australia)

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