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Mihaly International Canada Ltd, one of the short listed bidders by the then Government in 1994, to construct a thermal power plant in Trincomalee is planning to sue the Government in an international court for loss of business and profits. Mihaly CEO John Walker, responding to questions e-mailed to him by the Daily News, said it would seek legal redress for damage including compensation for loss of profits of 120 million US dollars from the Government.

This action will have serious implications for Sri Lanka and its ability to obtain aid money and other finance for any project, Walker claimed.

"We will be willing to settle this claim now for US$ 30 million which includes all its lost costs (US$ 8 million) and a small portion of its lost profits," Walker said.

Extracts of Walker's responses are below:

The agreement to finance the project from all consortium members and most lenders, including the national export credit agencies of the USA, Canada and Italy, were submitted in August, 1994 in advance of the deadline, under Milestone #1 in the Letter of Extension issued by the Secretariat of Infrastructure Development an Investment (SIDI)in July 1994 on behalf of the Ministry of Power and Energy.

This letter of extension was negotiated with assistance from the Ambassadors of the US, Canada, Australia, Switzerland and Italy. The

Government of Sri Lanka (GOSL) changed shortly thereafter and the Anuruddha Ratwatte was appointed Minister of Power and Energy. Minister Ratwatte appointed Dr. Leslie Herath as the new Chairman of the CEB.

The Mihaly consortium repeatedly attempted in the Fall of 1994 and early in 1995 to complete negotiations with the new Government of Sri Lanka and in particular Dr. Leslie Herath representing the CEB. Many drafts of the key agreements were submitted by our legal counsel and financial advisers but it became increasingly difficult to obtain any meaningful and constructive response to them. Dr. Herath himself rarely attended negotiations, leaving those to CEB and SIDI staff, who were always very poorly prepared.

At this time, President Chandrika Bandaranaike Kumaratunga requested an independent review of the Trincomalee project from Lal Jayawardena, Economic Advisor to the President and the World Bank Representative in Colombo, Roberto Benjerodt. They reported that Mihaly had acted in good faith, had met all of the project milestones and that the GOSL should understand that financing commitments can only become "firm" after the key agreements, particularly the power purchase agreement, have been settled.

The GOSL was similarly advised later in writing by a senior World Bank officer. The World Bank's private project unit, the I.F.C. was to be a major investor in and lender to this project and wanted confirmation from the GOSL of its commitments to the project.

However, notwithstanding this expert advice and after eight drafts and two years of fruitless negotiations, the Government of Sri Lanka issued a cancellation letter to Mihaly on October 31, 1995 which stated, for the first time, that the Government of Sri Lanka did not believe that Mihaly had achieved Milestone #1 of the 10 Milestones under the Letter of Extension. (No. 1 was with the one respect to submitting a firm financial proposal.) Mihaly's exclusivity was terminated. In fact, Mihaly had met every one of its milestones under the Letter of Extension but the GOSL met none of it.

Q: In your opinion, was the failure due to former Chairman, Herath's Mismanagement?

A: I believe that Dr. Herath was only one of many in the GOSL, SIDI and CEB who mismanaged the project.

Q: Do you still want to talk to the new Government about this issue. Or have you already spoken to them?

A: The Canadian High Commission was approached by the Ministry of Power in 2002 and asked to inquire whether the Mihaly consortium was prepared to return and do the project. Mihaly responded that it was, but only if its claim were settled. There was no response to that.

The Attorney's General's Department has been leading the defence of the arbitration claim brought by Mihaly at the World Bank's International Centre for the Settlement of Investment Disputes and would appear to have advised the Ministry of Energy and Power not to talk to the Mihaly Group. I am still prepared to try to reassemble the consortium to restart the Trincomalee project, after we have received a compensation settlement.

Q: What is the latest about the legal battle?

A: This case is primarily a corruption case. Mihaly did not pay bribes.

The World Bank's International Centre for the Settlement for Investment Disputes rendered an award against Mihaly on a narrow question of legal jurisdiction, not on the merits of the Mihaly claim, on March 15, 2002. The decision was based on the view that development costs for negotiating a contract including travel, engineering, legal, environmental studies and financial advisory costs do not constitute an "investment" under the ICSID Convention until the formal contracts are settled.

On this issue, Mihaly produced an Affidavit of a former high ranking World Bank official stating that Mihaly's position on Milestone #1 was correct and that development costs for public/private partnership (BOOT) projects, which were unknown when the ICSID Convention was developed in 1968, must be recognised as an integral part of the investment or such projects would be seriously curtailed.

This decision has slowed BOOT projects worldwide to a trickle and it is doubtful that such projects will go forward, especially in Sri Lanka, as a result.

The ICSID decision also indicated that, based on the evidence given by Mihaly, Mihaly could and should continue to pursue its claim against the Government of Sri Lanka on its merits elsewhere. More details of and the actual award are available on the ICSID website of the World Bank. The case number is 64.

Mihaly is, therefore, preparing an additional legal case against the GOSL in another jurisdiction to hear the evidence and obtain a judgement and award for damages, including compensation for loss of profits of $U.S.120 million, against the GOSL. This action will have serious implications for Sri Lanka and its ability to obtain aid money and other finance for any project.

Q: How do you plan to settle the problem? Is the Sri Lanka Government willing to pay your dues? How much?

A: Our plan to settle the claim is to induce the Government of Sri Lanka to settle by the further legal action. Mihaly would be willing to settle this claim now for US$30 million, which includes all its lost costs (eight million US dollars) and a small portion of its lost profits.

RL

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