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Badalgama Dairy Factory restart faces delay

Sri Lanka, Denmark negotiate over penalty fees
Factory needs 200,000 litres of milk daily to operate at full capacity

Plans to recommence work at the abandoned Badalgama Dairy Factory are likely to be delayed as the Sri Lankan Government negotiates with the Danish Government over penalty fees relating to the late payment of a € 63.9 million loan obtained from Denmark to construct the factory.

Speaking to The Sunday Morning Business, Deputy Minister of Agriculture and Livestock Namal Karunaratne stated that the commencement of operations at the abandoned dairy factory was vital to Sri Lanka’s goal of achieving near self-sufficiency in dairy products.

“Once the factory commences operations, it will need 200,000 litres of milk to operate if it runs at full capacity. This means we will be producing a large quantity of [dairy] products,” he stated.

However, he added that the Government was facing certain difficulties in completing the project due to the excessive penalty fees owed to the Danish Government in relation to the loan obtained for the project.

The Deputy Minister attributed the situation to the previous regime’s failure to complete the project on time and make timely payments.

Accordingly, he stated that the Government was attempting to resolve this issue at present before recommencing work under the project. He added that they had commenced talks with the Danish Government in order to reduce the penalty charges.

According to the audited financial statements of Milco Ltd., the company had, on 15 May 2015, entered into an agreement with Desmi Contracting A/S, a company incorporated in Denmark, for the establishment of a dairy processing plant in Badalgama at a cost of € 63.9 million.

The Cabinet paper on the Establishment of a Dairy Processing Plant at Badalgama (No.14/1399/511/001-i, dated 9 October 2014), presented by the Ministry of Livestock and Rural Community Development, was approved by the Cabinet on 17 December 2014.

Accordingly, the Department of External Resources was authorised to borrow € 63.9 million from Denmark’s Export Credit Fund (Eksport Kredit Fonden/EKF) on terms agreed upon by the ministry.

Subsequently, the Government of Sri Lanka entered into an on-lending agreement on behalf of Milco with the Hongkong and Shanghai Banking Corporation (HSBC) for the borrowing of the € 63.9 million, under which the principal, interest, commitment fee, structuring fee, and other costs were to be repaid in rupees to the Treasury of the Government of Sri Lanka.

Under the arrangement, an amount equivalent to € 2,234,919 was payable upfront as the EKF premium, while an amount equivalent to € 19,180,692.30, representing 30% of the contract value, had been paid to Desmi Contracting A/S by Milco as an advance payment in 2015.

The arrangement further provided for overdue charges at 2% per annum in the event of payment defaults.