China Eximbank provides $891 million preferential buyer’s credit for Phase II of the Puttalam/Norochcholai Coal Power Project (Linked to Record ID#33244 and #33463)

Project narrative

On December 25, 2009, China Eximbank signed a $891,000,000 preferential buyer’s credit (PBC) agreement [CHINA EXIMBANK PBC 2009 NO. (42) Total No.(104)] with the Ministry of Finance of the Government of Sri Lanka for the Phase II of Puttalam/Norochcholai Coal Power Project. The PBC carries a 20 year maturity, 5 year grace period, an interest rate of 2%, a 0.5% commitment fee, and a 0.5% management fee. The Ministry of Finance of the Government of Sri Lanka then used the proceeds from the PBC (loan) to on-lend to Ceylon Electricity Board (CEB), which is a state-owned electricity company that controls all major functions of electricity generation, transmission, distribution and retailing in Sri Lanka. CEB was expected to use the proceeds of the loan to partially finance a commercial contract [ID# PCPP/CANC/2009/01] with China National Machinery Import & Export Corporation, which was signed on July 29, 2009. China Eximbank disbursed an unknown amount in 2009, and unknown amount in 2010, an unknown amount in 2011, $127,781,680 in 2012, $110,377,930 in 2013, $50,765,212 in 2014, and $66,952,892 In 2015. The loan's amount outstanding was $772,200,000 as of December 31, 2016, $445,500,000 as of June 30, 2022. The project involved the establishment of two power plants with a capacity of 300MW, a transmission line from Norochcholai to Anuradhapura, new substations at Chilaw and Anuradhapura and the construction of the expansion of coal handling port facilities and employees' housing. China Machinery Engineering Corporation was the contractor responsible for project implementation and its work was overseen by the CEB. Phase I of the project, which was also financed by China Eximbank, ran from 2007 to 2011 (as captured via Record ID#33244 and #33463). The groundbreaking ceremony for Phase II of the project took place on March 18, 2010. Phase II was completed on September 16, 2014. However, the project has encountered debt repayment problems. On April 12, 2022, the Government of Sri Lanka announced a ‘pre-emptive’ sovereign debt default, noting that it would suspend debt repayments to all external creditors other than multilateral institutions. Its decision to suspend external debt service reportedly affected all China Eximbank loans with amounts outstanding at the time of the announcement. The project has been controversial since the inauguration. The three units have broken down several times after they were put into operation. A recent breakdown happened on August 8, 2023. According to certain Sri Lankan experts, a reason behind the plant’s persistent breakdowns is China’s failure to train Sri Lankan staff in maintenance. Insufficient staffing and funding since its establishment have resulted in inadequate maintenance, exacerbating the plant’s issues. At the same time, the project also has environmental concerns. In 2019, a study conducted by the University of Peradeniya highlighted that sulphur dioxide levels in the air surrounding the Sri Maha Bodhi tree exceeded the recommended limits set by the World Health Organization. The study also found a correlation between sulphur dioxide levels and the number of dead leaves on the tree.