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PB made to bite the dust


National carrier under Sajin's brother takes Mihin route

Chamal Rajapakse, Manoj Vaas,
and Ravi Karunanayake

SriLankan nosedives with Rs. 5
billion loss in three months

By Ruan Pethiyagoda

The news from the state aviation industry only continues to go from bad to worse. Aviation officials from Minister Chamal Rajapakse, outgoing Mihin Lanka CEO Sajin Vaas Gunawardena and his replacement Anura Bandara insist that the situation is improving. But it is not.

The latest blow for the industry's reputation came last Wednesday in parliament when UNP MP Ravi Karunanayake sparked an adjournment debate that revealed the dilapidated state of SriLankan Airlines, just three months after its management was taken over by the government from Emirates.

Speaking on behalf of the government, Engineering and Construction Services Minister Rajitha Senaratne admitted that the flight operations of SriLankan Airlines had in the past three months lost an unprecedented sum of Rs. 5.67 billion rupees. He claimed however that the catering services, ground handling and duty free sections of the company had made profits in the same period, leaving the total 'group loss' at "only Rs.4.885 billion."

Double the loss

This was more than double the loss sustained by the airline last year during the same period under Emirates management, which was Rs.2.3 billion; a loss that the government attributes primarily to the increased fuel cost over the last year.

The Minister also did not deny that the national carrier was suffering from a lack of pilots, and that it was mishandling its casual staff by firing and re-hiring them every six months to prevent being drawn into an employment contract.

The national carrier's Communications Manager, Ruwini Jayasinghe confirmed the financial statistics presented in parliament, but was not able to comment on the casual staff policy since it was not formally raised in parliament.

Speaking to The Sunday Leader, Karunanayake alleged that all of SriLankan Airline's woes began with the privatisation and handover of management to Emirates. "This is something the UNP was against from the very beginning," he said. "The SLFP went ahead with this without heeding our concerns. Then this government started Mihin Lanka, which has lost over Rs.3 billion. And now just months after taking over SriLankan Airlines from Emirates, they have posted an unprecedented loss."

The MP also rebuffed the government's explanation of skyrocketing fuel costs as the reason for SriLankan Airline's turning a loss. "Fuel costs have been steadily rising for over a year, but this loss is sudden. They cannot possibly expect anyone to believe that only on the day they take over the airline, it starts making thumping losses, and that it's someone else's fault."

A senior SriLankan Airlines official who did not wish to be named also said that the board is of the view that the downturn in tourist arrivals in recent months has also contributed to the carrier's poor performance over the last few months.

Alternate routes

This cannot however be a significant factor. Although tourist arrivals for April 2008 were 10% lower than those for the same month in 2007, and arrivals in June similarly dropped 9.3%, there was an increase of 18.4% in tourist arrivals in May, and the net drop in arrivals for this period was thus just under 1.5%.

What is more likely is that tourists have begun flying on alternate routes due to SriLankan Airlines' uncompetitive fares. Due to a recently added fuel surcharge, travel on SriLankan Airlines is more expensive than competing airlines such as Emirates on several key routes - even though Emirates is renowned for better service and aircraft condition. Both the base fare and tax components of SriLankan Airlines flights are higher than the corresponding rates on Emirates.

We chose Emirates to compare with for two reasons. Firstly it is in the same prestige category as SriLankan Airlines and secondly due to its former relationship with our national carrier.

The total SriLankan Airlines internet return fare from Colombo to London in August is Rs.144,100; yet the corresponding price for an Emirates ticket during the same period is Rs.133,800; over Rs.10,000 cheaper. Similarly, return flights to Male in August are Rs.37,000 on SriLankan Airlines and Rs.31,500 on Emirates.

With several other airlines also available to fly the majority of SriLankan's routes, such as Qatar, Kuwait Airways and Austrian Air, the carrier will be hard-pressed to compete with its higher prices and its recently blemished safety record.

Potential catastrophe

It was by chance only that a potential catastrophe for SriLankan Airlines at Heathrow Airport was avoided some weeks ago. A UL flight bound for Heathrow had taken off carrying a piece of luggage belonging to a passenger who had been off-loaded, of all reasons, for 'security' reasons!

It was only when the aircraft was soaring over the Middle East that the mistake was realised and the plane was forced to make an emergency landing in Dubai that cost the carrier over Rs.40 million in fuel alone.

Should the mistake not have been detected, and the plane had carried on to Heathrow and unloaded the unaccompanied bag, the potential reaction of the terror-paranoid British authorities would have left little to the imagination. This near disaster came in succession to the collision of another SriLankan Airlines flight with a stationary British Airways craft on the Heathrow tarmac last October, and President Rajapakse's temper tantrum last December which led to the booting of Emirates in the first place.

It said an awful lot for the President's patriotism when all it took for him to cause the expulsion of Emirates-appointed CEO Peter Hill was for the latter to hurt his feelings by not kicking off passengers from a fully booked flight to accommodate his entourage, after many months of grandstanding on 'real' issues between the government and the UAE giant.

What matters now is not the mess that the government has gotten SriLankan Airlines into over the last three months, but how it plans to extricate the carrier from this mess and prevent it from becoming yet another dreaded Mihin Lanka.

Aviation Minister Chamal Rajapakse told parliament on Wednesday that his Ministry was taking several measures to cut costs at SriLankan Airlines, which we can only hope will find its way out of this most recent depression.

Labelled

The stakes are high, and it is incumbent upon the Minister to ensure that SriLankan Airlines' new CEO, Manoj Vaas Gunawardena does not get prematurely labelled as his "brother's brother" taking SriLankan down the same path that Sajin took Mihin Lanka.

Manoj Vaas counts many years of experience both at SriLankan and in the aviation industry as a whole, yet his reputation and position have been made precarious by brother Sajin's pooping of Rs. 3 billion at Mihin Lanka. Efforts to contact Gunawardena for comment however failed as his office said that he was unavailable.

Lease agreement

What complicates the situation further is a tacit clause in the SriLankan Airlines' lease agreements with the owners of its aircraft. According to Parliamentarian Ravi Karunanayake, should the cash flow or bank balance of SriLankan drop below a certain fixed amount, the lessor retains the right to repossess all the aircraft.

"They had Rs.14 billion in the bank when they took over from Emirates, and now they are down to just over Rs.7 billion," said Karunanayake. "If they don't get their act together soon, this will become another disaster for the people at the hands of this government."

It is in the best interests of the Minister, the CEO and the public that a plan to bring SriLankan out of its current position is laid out on the table and thrashed out. The country can scarcely afford the kind of money that the state aviation industry has been costing it in losses and debts over the last year.


PB made to bite the dust


P.B. Jayasundera and Sarath Silva

PB has no moral authority to continue
as Treasury Sec.

SC says LMSL deal was a questionable fix

All impugned decisions made entirely by PB

PB arrogated to himself authority of
executive government

Judgment will boost investor confidence
says BOI Chief

By Sonali Samarasinghe

Last week the business world stood shaken as a Supreme Court Order rocked its environs and shattered its peace, holding the controversial Lanka Marine Services Ltd (LMSL) privatisation and sale of shares to John Keells Holdings illegal, in excess of lawful authority and biased in favour of the corporate giant.

More importantly the 69 page judgment brushed aside ministerial and presidential involvement in the privatisation deal that also magnanimously gifted to JKH a valuable land of over eight acres in the heart of the Colombo Port, while focusing in almost astounding detail on the actions of Treasury Secretary and then Chairman of the Public Enterprise Reform Commission (PERC), P.B. Jayasundera.

Ratings

Fitch on Friday said JKH's ratings may be negatively affected going forward if short term cash assets are deployed into longer-term investments yielding lower rates of return, significantly higher risks or long gestation periods. The credit rating company also noted the elevated level of concentration risk on the company's free cash flows resulting from the possible elimination of LMS as a key contributor.   

Nonetheless Fitch also ruled that JKH National Long-term Rating of 'AAA(lka)' with Stable Outlook and 'AAA(lka)' rating for its senior unsecured notes were not immediately affected by the judgment.

Be that as it may the three judge Supreme Court bench comprising Chief Justice Sarath N. Silva, Justice Amaratunge and Justice Balapatabendi held the impugned deal to be the responsibility of the former PERC chairman and last Monday's order by the apex court of the land was to serve as a severe personal indictment on incumbent Treasury Secretary - Punchi Banda Jayasundera.

The Treasury bigwig was accused of acting in collusion with JKH to effect the illegal deal and ordered to pay Rs.500,000 as compensation to the state for his yielding hand.  

Vasudeva Nanayakkara in June 2007 filed a fundamental rights petition in the public interest impugning the executive action of Jayasundera as PERC chairman alleging he caused the sale of shares of LMSL - a wholly owned company of the Ceylon Petroleum Corporation (CPC) which was a profit making, debt free, tax paying company, to JKH, without prior approval of the cabinet, in a process which lacked transparency and was biased in favour of JKH.

Ironically LMSL, wholly owned by the Ceylon Petroleum Corporation in the year 2000/2001 made a profit of Rs.318 million and paid Rs. 163 million as income tax. After privatisation following a sweet, tax free agreement with the Board of Investment (BOI) it paid no tax at all. 

It was also alleged that Jayasundera did not obtain a valuation for LMSL from the government valuer but relied only on a valuation secured at his discretion from the private DFCC Bank. LMSL was valued at Rs.1.2 billion when its profits alone for  four years including the year of sale was Rs.2.4 billion - double that amount.

Illegal state grant

It was also alleged that an illegal state grant of Sri Lanka Ports Authority prime land in extent of approximately eight and a half acres at Bloemendhal Road was gifted to JKH for no consideration by then President Kumaratunga - some two and a half years after the sale of shares.

In a collateral proceeding JKH also obtained tax free status for its investment in LMSL from the BOI by amending a regulation. Thus the privatisation did not adhere to the spirit of PERC policy as it merely converted a tax paying, public enterprise into a tax free, private enterprise which also claimed a monopoly in the business.

The court last Monday held with the petitioner and declared null and void the state grant of approximately 8.64 acres belonging to the Sri Lanka Port Authority to LMSL on which the assets of LMSL resided, the granting of tax free concessions by the Board of Investment (BOI), and the Common User Facility (CUF) agreements entered into between LMSL and Sri Lanka Ports Authority. However the share transfer was left intact and JKH retained the ownership of assets. LMSL is thus still 99.4% - owned by JKH.

While P.B. Jayasundera as a public official has a greater level of responsibility to protect public property and act in the public interest JKH was not able to win over the court with its submission that it merely asked for concessions from an already yielding hand.

And it is in this context that this newspaper now assesses the judgment. The court very early in its lengthy judgment, sees fit to quote the concluding paragraph of the Committee on Public Enterprises (COPE) report as follows:

"This transaction has been executed blatantly without cabinet approval with several flaws causing loss and detriment to the government and demonstrating it to be a questionable 'fix' and is therefore ab initio - bad in law, null and void."

Indictments and censures

Monday's judgment which is liberally peppered right through with various indictments and censures of the Treasury Secretary Punchi Banda Jayasundera, also makes the following damaging statements. 

(1) "Whilst purporting to act under the said cabinet decision PERC embarked on a course of action devised by itself"

(2) "Jayasundera has conveniently sought to explain the failure to appoint a Cabinet Appointed Tender Board (CATB) on the basis that it is not a practice to appoint such a board in respect of the sale of government shares. If it is so his practice is contrary to his own circular. ."

".the appointment of a CATB would have afforded a mechanism to redress the bitter grievances such as. lack of transparency and of unfavourable treatment. ensured the cabinet was apprised of the process of valuation of bids and a decision being made by the cabinet as to the manner in which the sale should be effected, without Jayasundera on his own accord purporting to 'clinch the deal' with JKH."

(3) "I conclude .that the steps taken by Jayasundera and PERC .is not in any way mandated by the decision of the cabinet of ministers and is manifestly contrary to the process that has been authorised. The procedure adopted is also contrary to the Public Finance Circular issued by Jayasundera himself."

(4) "The only reason given by Jayasundera for not pursuing the matter with the chief valuer is that 'it would not have been feasible to have expected a business valuation to be done by the chief valuer within a short period of time.'"

"....Even the DFCC Bank appears to have been rushed through by PERC to furnish the valuation. Question looms large as to whose deadline Jayasundera was trying to keep."

"..having successfully stalled the process he selected a private bank on his own and paid the full fee that was sought. This is completely contrary to the basic tenets of public sector procurement..Jayasundera's conduct in the matter of obtaining the valuation is basically not authorised by the cabinet, is characterised by inexplicable haste; erratic, apparently designed to suit his own objectives, contrary to all accepted procedures and furthest removed from a lawful exercise of power under the PERC Act of tendering a well considered recommendation to the cabinet."

(5) "Jayasundera's action was adverse to the interests of the state in securing a better price; he failed to take into account the specific decision of the cabinet that the monopoly would at the least continue to the Port of Colombo for one year."

On the inclusion of Clause 8.2 into the agreement granting a monopoly on the Common User Facility the judgment had this to say:

(6) "Jayasundera has.in his affidavit admitted the subsequent inclusion of Clause 8.2 and seeks to justify his action on the basis that it was done, 'in order to maintain a level playing field among all bunker operators.' I have to observe in respect of this quaint defence that his perception of a level playing field appears to be with one single player."

On the matter of the transfer of the land to JKH for summa the court states:

(7) "Although the covering letter has been signed by the Director General (PERC) it is clear that it has been sent on Jayasundera's instructions because he has subsequently acted on this representation that there would be no separate payment for the eight acre land within the Port of Colombo. Jayasundera has no mandate whatsoever from the cabinet or anyone else to make an astounding representation that title to eight acres of state land would be transferred without any payment in such a casual manner on a sheet of paper that does not bear even a signature."

Damning

It further states, damningly, "In normal circumstances a false statement as to a payment to the government could not be made since it has to be verified by the Treasury. But regrettably that check is not there since by now the same Jayasundera who was responsible for the creation of the fiction in favour of JKH that there would be no additional payment in respect of the land, is now ensconced as the Secretary to the Treasury."

The court makes other damning statements regarding the Treasury Secretary. 

"Thus documents clearly establish that all impugned decisions have been made entirely by Jayasundera at his discretion."

"He not only acted contrary to law but purported to arrogate himself the authority of the executive government. His action is not only illegal and in excess of lawful authority but also biased in favour of JKH."

Lethal wording

And the specific wording and findings in the judgment are lethal to Jayasundera's survival as Treasury Secretary. As quoted above the court alludes to a cover up of his earlier actions as PERC Chairman by him later as Treasury Secretary. This not only casts a cloud upon his performance in PERC but also his present performance in the Treasury.

The judgment specifically alludes to illegal procurements, to contrivance, to manipulation, misrepresentation to cabinet and misleading the government. These are formidable allegations and it is only fair by the rest of the public service and the people of this country that Jayasundera's appointing authority President Rajapakse immediately calls for his resignation.

Be that as it may a copy of the judgment was ordered to be sent to the Inland Revenue Department as well.

Action

But what is even more damning is the last sentence of the judgment which states that "all parties to the proceedings will take necessary action on the basis of the findings stated above." This is a telling sentence given that of the 31 respondents some were more crucial than others as far as Punchi Banda Jayasundera  was concerned.

The Bribery Commissioner, the BOI Chairman Dammika Perera, Director General Securities Exchange Commission, the Criminal Investigations Department, COPE Chairman , the Attorney General and most importantly Secretary to the President, Lalith Weeratunga are named as respondents. As respondents in the fundamental rights petition filed by Vasudeva Nanayakkara and according to the mandatory wording of the last sentence the parties are duty bound to take necessary action based on the judgment according to one school of argument.

Notified

Certainly President Rajapakse as the appointing authority must be notified of the findings. Already Rajapakse has called for Jayasundera's explanation (See page 1) even though his thinking earlier was that public officials cannot be held accountable for the actions of politicians. (See page 11)

Legal experts comment that a failure on the part of these respondents to take action may even tantamount to contempt of court but the point is debatable. Bribery Commissioner Justice Ameer Ismail told this newspaper Friday the commission had already obtained a copy of the judgment and would be studying the judgment carefully.

Speaking in general terms he said that even if a case had been closed due to lack of sufficient evidence it could be reopened for investigation at a later date if new evidence surfaced. Justice Ismail also said the commission would normally investigate any complaint even if it is anonymously made.

Four weeks

Be that as it may sources said Petitioner Vasudeva Nanayakkara, through his lawyers would be sending out letters to the respondents tomorrow or Tuesday as per the last line of the judgment putting the respondents on notice to take necessary action according to the findings.

It is learnt the letters to be sent through his lawyers will give the parties a period of four weeks to respond before the petitioner takes up the matter before the Supreme Court for possible contempt.

Legal experts told this newspaper that according to the judgment charges may be formulated under the Public Property Act for the loss caused to the state and to public property. Charges if any may also be framed under the Bribery Act and the Penal Code.

Meanwhile some civil rights groups were set to meet a cross section of the business community last Friday evening to ascertain their views after the landmark judgment that sent Sri Lanka into shock, and to decide whether the business community should call for the resignation of the country's most important public official.

Satisfied

BOI Chairman Dammika Perera reacted with satisfaction over the judgment and rejected wholesale the idea that investor confidence would weaken if agreements made could be shot down at a later date under another regime. "Not at all," he said. "If anything, investor confidence would be strengthened by such landmark judgments. It would send a message to investors that there is law in our land."

"At one time if Podi Singho went against Bandaranaike there may not have been justice. This shows that even if it is a multi-million dollar conglomerate there is a law. This will not only give confidence to foreign investors but also to the poor man on the street," Perera said.

"If not for The Sunday Leader this country would have been teeming with crooks. But for the more subtle, professional crooks we need the courts," the BOI Chairman opined.   

Executive Director, Transparency International Sri Lanka - Lawyer J.C. Weliamuna was equally determined that such a judgment was good for the investor climate. "After the Eppawela case people thought investor confidence would wane but it did not. For investor confidence there must be a level playing field," he said.

However some economists are of the view that such judgments would send a negative message to potential investors who would think twice before entering into an agreement with the government if the agreement could be nullified at a later date. In this case, even after the legal time period for instituting action had lapsed.


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