ECONOMYNEXT - Sri Lanka's state-run Ceylon Shipping Corporation Ltd has warned that ships ordered from China in 2014 were overpriced and financing costs were higher than promised when the unsolicited deal was instigated.
In February 2014, the cabinet of ministers had approved the controversial deal to buy two 63,600 deadweight tonne vessels (Panamax Bulkers) from AVIC International Beijing Company Limited of China following an unsolicited proposal on December 23, 2013, for $35 million each.
Originally, a soft loan from the government of China "in par with ship building industry globally" had been promised in a feasibility study, but in the end, a loan at a higher interest from another state-run entity, People Bank, had been arranged.
"All efforts made by the incumbent management to secure an alternative workable ship financing package did not succeed," the report said. "On top of the unhealthy financing arrangement, the price of ships has been found to be above the market price."
Ceylon Shipping Corporation had borrowed $70 million from People's Bank at a floating rate of 6-month London Interbank Offered Rate plus 5.5 percent.
A government statement at the time showed the Commander of the Navy and Chairman of the Ceylon Shipping Corporation Limited Vice Admiral Jayanath Colombage had signed the agreement in the presence of Director Ariyaseela Wickramanyake and senior officials of the shipping firm and People's Bank.
Ceylon Shipping Corporation had borrowed another $10 million at Libor plus 3 percent to pay interest on the loan.
The CSC said dry-bulk shipping rates were low. The Baltic Time Charter Average of $11,402 in 2014 had come down to $6,797 per day by March 2015.
"CSC management, which took office in January 2015, took immediate steps to bring to the notice of the line ministry of the ensuing financial hardships befalling on CSC, if the market conditions remain dull, when loan repayments to the People’s Bank commence in August 2016," the annual report said.
The loans had been guaranteed by the Treasury, which means taxpayers have to pick up the tab.
Like many of Sri Lanka's state enterprises, Ceylon Shipping Corporation has been in the midst of controversial deals in the past.
The ships had been bought promising a deal to carry coal to Ceylon Electricity Boards coal plants.
Critics say giving a monopoly to a state firm to carry coals without going for competitive tenders will push up electricity costs in Sri Lanka.
In 2016, Ceylon Shipping Corporation has reported a profit of 124 million rupees with the help coal transport contracts, with 1.636 million metric tonnes carried, up from 1.003 million tonnes a year earlier.
However, 282 million rupees charged as interest for payments made for ships being built had been capitalised without being charged to the profit and loss account. (Colombo/Sept01/2017)