MATTALA AIRPORT, ACHILLES HEEL IN PUBLIC INVESTMENTS AND POSSIBLE CONSEQUENCES IN PRIVATIZING (PART 2)
Posted on August 1st, 2018

BY EDWARD THEOPHILUS

The major management strategy proposed in the Treasury Economic Paper in 1990 of Australia was setting targets for public enterprises and monitoring the performance by an effective measurement.  This practice supports to identify the weakness of the management of public investments and rectifying the debility. Many public investments in Sri Lanka haven’t appreciated a norm or practice to set target performance.  There are inherent management problems in many public investments and performance measurement must be used to identify such inherent problems and correct the bottlenecks. There is no doubt that lack of wise management practices will open the way to go out of control.  As politicians in Sri Lanka except few are not educated and experienced people, so enterprise management needs educating them on management techniques. Creating such an environment would not force to privatize them.

Applying the capital asset pricing model and recent addendum to the model, it is possible to estimate the required returns from government investments, above the treasury bond rate.  In this way, the government can expect the good value to the public investments.  The pricing of products and services needs to recognize the market realities, which means that the price of products and services need to reflect the current operating costs plus depreciation of the associated assets and the opportunity cost of capital.  For example, operating cost of Mattala airport needs to calculate considering the entire cost associated with depreciation involved machinery, building and many others, the opportunity cost of capital which means, if the capital invested in an alternative project, government could have earned an additional volume of profit but due to investment in the airport, government lost a part of profits expected or opportunity, that is called opportunity cost of capital. Once all costs are added together, it is called the total cost of the investment. To manage the airport at a break-even level, the airport management requires to earn revenue equal to the calculated costs and that situation is called the break-even level. It is quite a difficult task but it is not impossible.  The airport is a fixed asset of Sri Lanka with social, cultural and economic values.

Under the financial reporting system of public investments, government as the owner of investments has similar responsibilities that private investors have, but there are some differences, the Treasury paper advice is to earn less commercial returns than shareholders of private companies anticipate. Sri Lanka’s anticipation is maintaining at a break-even level, where there is no profit no loss situation.

During the last decade of the 20th century, many government enterprises were privatized in Australia. The government aim was to use the proceeds of privatization to retiring government debt and to balance the budget.  The strategy was highly successful and is supported to maintain a higher value of Australian dollar against benchmark USD, increase foreign reserves, boosting new investments and many others.  Sri Lanka’s public enterprises have no quickly sellable status and obtaining a good price as they have monumental problems in relation to management and many others. however, currently, the Australian government has a pressure to privatize nationally interest assets or increase GST level from 10% to 15% as the current revenue inflow is not sufficed to finance for essential government services and infrastructure development. In this way when addicted to selling all assets, there wouldn’t be anything for sale in the country.  Sri Lanka needs to count if such a situation arises in the country what would be the alternative.

Economic management in the world appears that if any country uses a successful strategy, all other countries want to follow same and if one strategy successful, economic managers want to hang on it without diversification of strategies. It is like addicted to heroin.  The government economic strategy of Sri Lanka is like a person addicted to heroin. When there are many diversified economic strategies the current government is behaving like a person addicted to heroin.  The government asset privatization is last option and the certain asset cannot be privatized as they are containing national interest and the citizens of the country must share the cost of maintaining such assets. However, Mattala airport has tremendous opportunities for business, later we discuss what are the opportunities.

The late 1980s and early 1990s, Sri Lanka has been adopting market economic policies. agreed with international financial institutions to privatize or to implement management reforms in public investments as the public enterprises were making losses, which pressurized the government budget process.  However, the advice was not properly implemented by the government.  Politicians in the parliament have no idea about these complex issues, in fact, policy advisers need to educate politicians to take the country to the right pathway. Politicians are people with short-term interest to attract votes but dealing with an international airport, the country’s interest is long term.

The strategy of privatizing public enterprises has confronted several national issues. The first major national problem was the justification of handing over national assets to foreigners as many Sri Lankans had a feeling that national assets of the country should not be sold to foreigners. Such an exercise might negatively impact on the country’s independence and sovereignty.  When foreigners are controlling vital assets such as infrastructures of the country, it might negatively impact on the political administration and the public policy in relation to welfare, economic discretion and international relations of the country.

Next significant concern is that if the country’s vital and strategic assets sell to foreigners it would impact on the national security and the independence of the country.  Sri Lanka is situated in the South Asian, region, which has an especial interest of countries like India, China, Japan, and the USA. Since the Bandung conference in 1954, Sri Lanka has been able to maintain the non-align policy in relation to international matters. Would it be possible to stand on such a neutral status, when the country’s influential assets like airports and harbors are controlled by foreign hands?  People of Australia also have a similar feeling and the handling of traditional farmlands to Chinese investors is a genuine concern of Australians.  Mattala airport is an analogous case. Hambantota harbor and surrounding investment zone cannot be compared to Mattala airport. People have not seen a plan that India supposed to implement as an investor, but China has a clear plan for investment and development of Hambantota port because it is a part of Chines economic vision.  Hambantota port development has mutual benefits to Sri Lanka and China.  Let India submit an investment and development plan to Mattala airport. People of Sri Lanka have a right to see the plan.

Past experiences in Sri Lanka clearly indicated that the government and people of Sri Lanka were equally concerned on the management of many privatized public enterprises.  Especially textile factories, steel corporation, tire corporation and many other organizations were privatized but the management style did not reflect the satisfaction of the general public.    The government had to pass a new legislation to take back privatized organizations if it finds problems with privatized firms.  However, there is only clear evidence that the government attempted to take back privatized enterprises was the insurance business under the enacted legislation.  The common experience was that many privatized public enterprises were closed down on the private hands, especially creating problems to the community by job loss, losses of services.  It might be a valid reason that people of Sri Lanka dissatisfied with reengagement in privatization.  In this year people saw that what was going to happen Sevenagala sugar factory. It is a question to the public whether an Indian investor had a genuine interest to produce sugar to the country or the investor was planning to sell fixed assets of sugar factor at a higher profit and close down the industry.

Many public enterprises were in private hands before they become public enterprises.  They became nationalized organizations under the socialist policy.  For example, BBC, Colombo Commercial Company, CTB, Lake House, Plantation Industry and Insurance business was under the private hands and the government took over the problems of others through a nationalization program.  In fact, the government should have regulated and supervised the organizations instead of taking over the operations.

It seems that some countries are successfully managing public enterprises while other countries have failed, for example, China manages many public enterprises adapting right management and control measures. Similar to the private sector. Public enterprises in China are not influenced by politicians and they operate like independent organizations in the economy. Management is a uniform action whether the enterprise is owned by the government or private sector. The management supposes to do the right thing whoever own by the firms.

I believe that Sri Lanka has tremendous business opportunities to manage Mattala airport at a break-even level.  Another vital factor is Sri Lanka’s population is growing little higher and foreign relationships of ordinary people also growing the consistent increasing population. The second international airport must be needed.  The cost of Mattala airport was cheaper but after ten years’ time, Sri Lanka cannot build an international airport at such a cost. What kind of opportunities Mattala has? We look at in brief.

  • The original purpose of Mattala airport was to serve as the second international airport. It is the major business, however, until it is established as the second international airport (It might take more than 10 years), it can be used for many business purposes.  Sri Lanka is in a lower level of aviation business despite it has an excellent air force with sophisticated knowledge and skills. The more competitive aviation industry, Sri Lanka can negotiate with Russia to develop a variety of area of the industry., which include production and assembling of helicopters, light aircraft for export purposes and training of professional related to the aviation industry. If Sri Lanka commences the aviation industry with a joint venture with Russia. Sri Lanka will have a good market in Asia, Africa, and Latin American countries.  In addition to Russia, Sri Lanka can seek supports for joint ventures with Japan, China, Korea and Germany.
  • Sri Lanka needs a technical and university level for training aviation industry skills. Mattala airport has an excellent background for such a tertiary college and Russia can provide skilled personnel to run the college.  Such a business program would be helpful to all countries in the Asian region.
  • Mattala airport already demonstrated capabilities for fuel supply to logistic transporting aircraft and this business can be extended to passenger aircraft too.
  • If Mattala airport develops business as indicated above, it would be a centre for providing jobs for increasing population and retraining people

However, we can see that government MPs are talking bullshit in the state assembly as well as in outside the parliament.  It is an ocean of potential business. However, stupid politicians have skills to talk bullshit and mislead people.

One Response to “MATTALA AIRPORT, ACHILLES HEEL IN PUBLIC INVESTMENTS AND POSSIBLE CONSEQUENCES IN PRIVATIZING (PART 2)”

  1. aloy Says:

    “Let India submit an investment and development plan to Mattala airport. People of Sri Lanka have a right to see the plan”

    So, this article is in support of India if there is any bogus plan to develop Mattala area?.

    There are many ways to develop SL. First we must have a leader with a backbone and a vision. Everything will fall into correct places after that. India has been our adversary as long as Sr Lanka has been in existence. We cannot assume it will change overnight. No need to give any land to China for industries either. Today’s industrial complexes will be a junk yards tomorrow. The way they are running their country without any regard for environment tells us that they will not care about ours. How ever China can run Hambanthtota for a limited period (not 99 years) without endangering our national security if they like to do so.

    Mattala or any land in the country should never be given to India ( which trained, funded and nurtured LTTE) at the same time we should consider their security concerns when dealing with other nations.

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