The Eppawela Phosphate Project - A Revealing Financial Analysis
by Premila Canagaratna

Much has been written about the Eppawela Phosphate deposits and the proposed joint venture project for “exploiting” them. Many are the voices that have been raised in opposition to this project. The environmentalists talk of irreparable environmental damage; the historians and the archaeologists of the cultural importance of the area; and religious leaders of the loss of homes and land. The list goes on and on... And the one main argument used by the proponents of the project to counter the mounting objections is that Sri Lanka is in desperate need of the foreign exchange that this project will bring into the country’s coffers. All the more reason, then, for an in-depth financial analysis of the venture. The results, to say the least, are astonishing. It would seem more appropriate to say that, more than the phosphate deposits, it is the people of Sri Lanka as a whole who are being targeted for ruthless exploitation. We shall endeavour not to burden the reader with a flood of figures, and where figures are unavoidable, we shall round up amounts to make it an easier read. Wherever necessary, we have done the arithmetic ourselves, assuming a very conservative annual inflation rate of 1.5 per cent for world prices based on "current" levels indicated in the official Report of the Negotiating Committee; the same basis has been followed for cost of production, based on levels indicated in the Dharmabandu Report. The 30-year span of the project can, for our purposes, be split into a first 12-year period when raw rock phosphate is exported unprocessed, and a final minimum 18-year period when processed fertilizer will be exported. The figures presented will be the 12-year averages and the 18-year averages for the two periods.

The Sri Lanka Government, according to the official Negotiating Committee, wanted to enter into a Joint Venture "with a foreign investor(s) having the required experience and technology", which was how Freeport McMoran was chosen in the first place. Yet, strangely, Freeport and the other foreign investor, Tomen Corp. of Japan, despite “a serious attempt” by the Committee, declined to sign the Mineral Investment Agreement (MIA), preferring instead to have a locally registered Project Company act as their representative (Page 3 of the Negotiating Committee Report). Of course, the Project Company’s major shareholder was to be Freeport (subsequently undergoing a name change to IMC-Agrico, according to the same official Report) with 65% of the equity, Tomen Corp. with 25 % and the Government-owned Lanka Phosphate Ltd. with the balance 10 %, gifted free by the other two shareholders, or so we are told by the Committee. The reluctance of the two foreign participants to be signatories to the MIA is not hard to comprehend. The Project Company, though ostensibly the Joint Venture partner with the Government, has neither the expereince nor the technology to literally get the phosphate off the ground. The answer, to everybody’s obvious satisfaction, was for the Project Company to enter into a separate Technical Advisory Services Agreement (TASA) with IMC-Agrico, its major shareholder who happens to have the necessary expertise and experience, and make that an integral part of the MIA. A word here about Tomen Corp. would not be out of place : Japan, which carefully monitors and strictly enforces laws to guard against environmental pollution back home, is not averse to having one of its industrial giants create environmental havoc in Third World countries in the heady pursuit of corporate profit.

To cut a long story short (or somewhat shorter), the TASA provides for IMC-Agrico to be financially "compensated" for assisting the Project Company “in all negotiations with contractors for designing, engineering, procurement, construction, installation etc. of the Plant, right up to commissioning, advice on operation procedures, supervision and maintenance.” The TASA is to terminate 5 years after commencement of commercial operations. But more of that presently.

Before we focus on the TASA, or the Agreement-within-an-Agreement, let us consider the potential revenues that would have been generated, and the dividends that would have accrued to IMC-Agrico and Tomen Corporation (the major shareholders with 90 per cent of the equity investment of US $ 425 million) had the two foreign corporate entities been the actual Joint Venture partners as originally envisaged, instead of a "Project Company" that is, in truth, no more than an advantageous sleeping partner. The MIA enables the foreign investor to export 3.6 million tons of raw rock phosphate within the first 12 years of the contract. The average 12-year export FOB price would be US $ 46.73 per ton, generating in all US $ 168.22 million as gross revenues.

Let us now consider the expenses involved. First comes the cost of extracting the rock phosphate, which, at an average of US $ 6.63 (Dharmabandu Report, Page 7) per ton over the 12-year period would work out to a total of US $ 23.86 million.

There is also another “cost” involved - that of a royalty payment. The Project Company will, in keeping with the MIA, pay a royalty of 5.5% to the Sri Lankan Government on every ton of rock phosphate extracted. The average royalty of US $ 2.57 per ton would drain the Project Company's profits by US $ 9. 25 million, bringing that amount into the country's coffers. Putting together IMC-Agrico and Tomen Corp's two “cost centres” for the 12-year period, we have US $ 23.86 million as cost of extraction, and US $ 9.25 million as royalty, making a total expenditure of US $ 33.12 million. The royalty of US $ 9.25 million certainly seems a lot of money, at least by our Third World standards. But that figure pales into insignificance when one considers the magnitude of the return on the investment. The foreign investors are still left with US $ 135.10 million after paying Sri Lanka, the owner of the deposits, a paltry 9.25 million US dollars as royalty. And yet those involved in negotiating this project would have us believe that they have done us proud in getting the foreign negotiators to agree to such high royalty rates! Considering the current world market value of the raw material involved, those willing to accept such a ridiculous offer as fair and equitable are either ignorant of commercial realities or, worse still, downright dishonest – to themselves and to this country.

Could it be that the Board of Investment (BOI), collectively, became an innocent victim, and was taken for the ride of its short yet oh-so-sweet life by the foreign investors? If that be the case, then what the Hon. Minister of Industrial Development, C.V.Gooneratne, said will certainly come true - that “...this massive investment will encourage other investors both from the US and elsewhere”. It most certainly will for, after all, one good robbery deserves another. And there’s never been, nor will there ever be, a shortage of robber-barons waiting in the wings to play the Third World for suckers and make a killing.

Here is an interesting, and revealing, alternative scenario. The Government could earn the same US $ 9. 25 million over a 12-year period by merely extracting and exporting 230,723 tons, as against the huge 3.6 million tons to be shipped out by IMC-Agrico. That works out to under 20,000 tons of a non-renewable resource each year compared to a whopping 300,000 tons vanishing each year thanks to the foreign investors' predatory plans. And this 20,000-ton target is an eminently achievable one, because the Government-owned Lanka Phosphate Limited, alone and unaided, currently mines 40,000 tons of phosphate a year for local consumption.

Of course, Sri Lanka, for argument’s sake, could also mine 3.6 million tons of rock phosphate over a 12-year period and earn US$ 144.36 million, which is an astronomical increase on the US$ 9.25 million the country would get as royalty under the MIA. But what is important to stress is that such massive exploitation of a limited and non-renewable natural resource is, in the long term, a suicidal course to follow. In the present context, to also export without any value addition is a commercially senseless proposition. Moreover, why sell, nay sell-out, within a brief 30 years, the whole of this valuable resource when phosphate is so vital for the future well being of our own country’s largely agriculture-based economy?

The Sri Lanka Government-owned company now produces 40,000 tons of rock phosphate each year, all of it for our own farmers’ use (Page 1 of Note by C.V.Gooneratne in 1997). What we say next does sound truly weird but, believe it or not, in terms of the proposed MIA, this ‘right’ will be denied immediately the project comes into operation, and the Sri Lanka Government itself will thereafter have to buy rock phosphate for its farmer-citizens from the Project Company at US$ 40.85 per ton (the world market price of $43 less a discount of 5%) once extraction of ore begins! Please be assured, this is no joke.

Only those who through age have reached an advanced state of imbecility would accept without murmur a situation where Sri Lanka, from Year One itself, has to buy back its own rock phosphate for what will average out over the 12-year period to US$ 44.16 per ton, after allowing the foreign investors to mine it on payment of a pittance of US$ 2.57 per ton (average) as royalty. The figures are truly staggering : we purchase our own rock phosphate back over a 12-year period, paying US$ 21.20 million for it, while we get paid as royalty a laughable fraction of that amount - US$ 1.23 million. The difference of US$ 19.96 million, in rupee terms and at today’s exchange rate of Rs. 73.25, is a colossal sum. To be precise, Rupees 1.46 Billion, in return for Rupees 90 Million. And this, remember, is only over the first 12-year period of a project designed to span 30 years, possibly more, the Agreement also providing for possible export of raw rock phosphate beyond the original 12-year period.

IMC-Agrico and Tomen Corp. will be permitted to mine a total of 26.1 million tons of rock phosphate over a 30-year period. Of this, we have so far only dealt with the 3.6 million tons that will be mined over 12 years and exported as raw rock phosphate; the balance 22.5 million tons, from Year 13 onward, are to be processed in Trincomalee to produce Diammonium Phosphate (DAP) and other fertilizers.

That leads us to some more interesting, if speculative, figures. Were Sri Lanka to mine and export, without processing, all 26.1 million tons of its rock phosphate, it could earn US$ 1.40 Billion over the 30-year period. On the other hand, royalty payments under the Agreement for that 26.1 million tons would amount to only US$ 81.8 million. And the direct benefits to Sri Lanka from this project are estimated at around US$ 319 million, according to the official Report of the Negotiating Committee on the Joint Venture Project. So, all in all, Sri Lanka would willingly and wantingly kiss goodbye to a cool 1.3 Billion US dollars in valuable foreign exchange over 30 years. Work that out in rupees at today’s rate of exchange, and wow! Yes, nit-wits don't come any better, and the foreign investors’ negotiating team must have been over the moon at its other fortuitous discovery.

Lest readers are unaware, the major part of the foreign investment in this Joint Venture is the cost of the heavy equipment needed to process the raw rock phosphate. The cost of equipment needed for mining the rock itself is minimal and Sri Lanka could very well afford the funds necessary for this purpose without foreign collaboration.

The Dharmabandu Report puts the cost of processing a ton of DAP fertilizer at US $ 115, which when averaged gives US $ 131.47 per ton. The Report has the following figures : 3 tons of Eppawela rock required to produce 1 ton of P2O5, and 0.46 tons of P2O5 are needed to make 1 ton of DAP fertilizer. So from the 22.5 million tons of rock phosphate to be mined from Year 13 to Year 30, the Project will have 7.5 Million tons of P2O5, ending up with 16.3 million tons of DAP fertilizer for export. The total cost of processing will be US $ 2.14 Billion. The cost of extraction, from Year 13 to Year 30, of the 22.5 million tons would be US $ 186.91 Million. The (averaged) royalty payment would be US $ 72.55 Million, giving a final cost of production of US$ 2.40 Billion. The gross revenue from the sale of the 16.3 million tons of DAP fertilizer, at an average of US $ 630 per ton (based on current world prices indicated in the official Report by the Joint Venture Committee) would bring US $ 10.27 Billion.

After deducting all costs the Project Company will still be left with a whopping profit of US $ 7.87 Billion! And that's only for the last 18 of the 30-year period of the Agreement. We have already noted that the clear profit from the export of raw rock phosphate over the first 12-year period would be US $ 135.10 Million, giving the Project Company an overall profit of over US $ 8.05 Billion.

Based on the equity participation, IMC-Agrico’s 65% of the profit would give it US $ 5.20 Billion, Tomen Corp.’s 25 % taking just over US $ 2 Billion, and the Government-owned Lanka Phosphate Ltd. getting a paltry US $ 800 million.

So even after inexplicably upping the cost of their investment from US $ 260 Million to US $ 425 Million, IMC-Agrico and Tomen Corp, between them, would get an unconscionable profit of US $ 7.20 Billion. Understandably, the experienced duo of foreign investors did not relish the idea of having such allegations levelled at them. And this is where TASA, the Agreement-within-an-Agreement, comes in, helping largely to skim off the cream, so to speak, by way of "reimbursements" and drastically reducing, on paper, the percentage return on their modest investment. There is ample evidence to suggest that the original figure of US$ 260 million is, in fact, a reasonable estimate of the actual capital requirements of the project. The upward revision was no doubt a ploy, partly to accommodate the equity ‘gift’ to Sri Lanka, partly to make the investment appear bigger than it really is – but largely, as can now be seen from the financial projections, to ward off the inevitable accusations of unconscionable profits from a very modest investment. Over-valuing of plant and machinery is a time-honoured ruse in joint-venture projects involving foreign parties. Thanks to TASA, IMC-Agrico gets the following tid-bits, all officially incorporated in the MIA as payable by the Project Company. (If the reader gets the impression that what has been offered, and accepted, is rather like giving IMC-Agrico a whole book of signed, blank cheque leaves, to be filled in as they saw fit, that impression is not altogether without basis.) Here, then, is a summary of the tid-bits to be found in Annex "F" to the MIA, pages 7-8 :

In return for acting as the Project Company’s exclusive Export Distributor, IMC-Agrico or one of its Affiliates, will enjoy the following discounts on the Gross Selling Prices :

As already noted, it is impossible to quantify the actual amounts that the Project Company would have to remit overseas each month to IMC-Agrico in foreign exchange as “reimbursements”, “fees” and “discounts” under the numerous headings in the Technical Services and the Export Distributor Agreements. That the final figure will be very, very substantial, and enormous, is hardly in doubt. The major loser in this massive rip-off will be none other than Sri Lanka. The country will be lucky to get even a fraction of the originally projected US $ 800 Million after all the reimbursements, fees and discounts are set off as “expenses” against the Project Company’s profits.

Adding insult to injury, in the circumstances, is the reference in the Report of the official Negotiating Committee to the various benefits supposedly accruing to Sri Lanka from the Agreement which are, like Mark Twain’s response to reports of his premature demise, highly exaggerated. Also very questionable. For example, Sri Lanka is “gifted” with 10% equity of the joint venture – the cost supposedly being borne by the other two parties. Truth to tell, this is only a book-keeping entry and does not cost the two parties anything in real terms.

The estimates of tax and defence levies collectible by Sri Lankan Government authorities from the project are also highly questionable. The projected Port Authority revenue of US$ 137 million is dependent on many variables. But what we have to keep in mind is that once the phosphate reserves are completely exhausted at the end of the 30-year contract, Sri Lanka will be forced to import fertilizers, probably from IMC-Agrico itself. Using the same conservative annual inflation rate of 1.5%, the current price of a ton of DAP fertilizer would, in 30 years’ time, have moved up from US$ 463 to US$ 713 per ton. Sri Lanka currently uses 130,000 tons of fertilizer each year. Since Lanka Phosphate Limited mines 40,000 tons of rock phosphate a year, imports now account for the balance 90,000 tons. Even assuming no increase in the use of fertilizer over the 30-year period, the annual cost to this country of imported fertilizer in Year 31 will be US $ 64.17 million. In short, the much vaunted direct benefits of US$ 319 million from this project, or US $ 10.6 million for each of the 30 years, will get erased in just under five years after the project ends! Yes, all can’t be winners, as the saying goes. And losers make up the other side of the coin, so to speak. One hardly needs to be a financial wizard to figure out on which side of the coin Sri Lanka will find itself throughout this project. Environmentalists are constantly accused of being idealistic and not “looking at the big picture.” Well, that is exactly what we have endeavoured to do in this exercise. The Eppawela project, an environmental disaster in waiting, will, if implemented, prove to be an economic disaster as well. Which of the twin disasters will prove to be the last straw is anybody’s guess.

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