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

BY EDWARD THEOPHILUS

It has been reported that Mattala airport would be privatized offering a larger stake (70% of initial capital) to Indian company and many people are of opinion that it would be led to a power play between China and India in Sri Lanka’s land.  When there were negative conjecture of the government decision, India and Sri Lanka deny that there was not a plan to the airport to Indian government but some reports bespeak that there is a plan to give Indian private company.   There is no doubt that when Mattala airport could manage at breakeven level securing the national interest of the infrastructure facility. why is the government of Sri Lanka having a keen interest in privatizing infrastructure facilities disregarding possible consequence?  There are opinions that the privatizing of public enterprises or government assets may generate economic benefits to a country depending on many factors such as the monitoring of operations and working out remedial strategies for the identified issues through the monitoring process. Mattala airport is an infrastructure facility, which supposed to provide services of a second international airport.  An international airport is infrastructure with a strategic interest and the current government has an irrevocable responsibility to safeguard vital infrastructure facilities in spite of the leasing of the airport will generate few millions of dollars to the country.

The historical evidence in Sri Lanka indicates that privatized public enterprises, as well as nationalized private enterprises, have been running with tremendous managerial problems and many developing countries have faced similar problems. Therefore, investigating possible consequences and planning alternative options to manage public assets at break even or lower profit margin is an erudite acumen. When the government gives a 70% of stake of Mattala airport to an Indian company, the majority power of the management of airport will go to Indian hands and Sri Lankans have no control over the company management and its business operations.  There may be legal implications in the future as a result of this type of careless decisions. The government should not make ad hoc decisions with a pure interest in making money. As far as the public concerns, the airport has a national interest and if the government considers it must lease out, the right option is to give 40% of stake to the Indian company and the government holds a 60 % of controlling power.  The other option is that there may be Sri Lankans, who are in the country and living overseas with interest in investing in shares, if it is performed by the way of initial public offering.  For this purpose, lots of work needed to do, but people are not aware of what sort of procedures have been followed by the government, when making decision to privatize, since the idea of coming to light. People of the country haven’t the financial statement of the airport but Mr Ranil Wickramasinghe assured in the parliament that the capital of the airport will be disclosed to the nation.

Next important point needs to be considered is why India wants to take over this airport, if it is running at a huge loss. People of Sri Lanka fully aware of the problems faced in the past leasing of oil tanks in Trincomalee during the administration of Mr. JR Jayawardena. A Singapore based dummy company was given oil tanks for development and later a part of tanks complex was given to India considering the Indian protest.  Ultimately, no company was done the development and later it was disclosed that leasing oil tanks were a gimmick or an international power play, eye washing people of Sri Lanka.  In this task, the government has to follow transparent procedures without making a hasty decision. It appears that the behaviour of the government and opposition members of parliament showed that they were acting like doltish or children without knowledge of possible consequences.

In regard to public asset leasing or privatizing, Sri Lanka has no clear policies and the Yahapalana government has not concentrated to develop essential policies and procedures for securing national interest. In fact, the Yahapalana government has been created to make more problems in the country with a view to satisfying Indian interest than solving the problems of the country.  Therefore, it is vital to understand the possible consequence of selling or leasing government assets comparatively looking at overseas experiences.

After the cold war, the global economic strategy was broadly focused on privatizing public enterprises in many countries with a view to relieving the burden of them to the government budget process.  Public enterprises in many countries mismanaged and as the owner of public enterprises, the government had to allocate a large volume of budgetary funds for the operations of public enterprises as they were making huge losses with the mismanagement.  In many times, the government had to take responsibility for the recapitalization of public enterprises when losses incurred. The accounting procedures and standards direct to set off the losses against the capital of the organizations.  Many government enterprises initiated with a small quantum of capital or with borrowings from domestic or foreign sources.  When accumulated losses are written off from the capital and reserves of the organization, it is subject to maintain a negative capital status and accounting standards do not permit run business organizations with negative capital and reserves.  For example, in the early 1990s, the recapitalization of government banks in Sri Lanka was a serious pressure to the fiscal process and the government had to create more debt issuing bonds to find funds for the recapitalization of banks rather than issuing shares to the public for finding capital.  The most disgraceful experience was that Treasury issued bonds to capitalize banks and same banks purchased issued the bond and financing for own capital structure.

The economic strategies applied during the cold war period did not permit to subscribe capital from the private sector. Many private investors attempted to get away from risky government investments as the state policy strived to control private business in order to satisfy the feeling of the general public, which was influenced by communist and socialist views of politics and there was a risk of nationalization.  For example, when Mr. TB Illangaratne and Mr Felix RD Bandaranaike were holding the Finance portfolio in the cabinet, nationalized the portion of private ownership of Bank of Ceylon and many other foreign companies such as CCC and BBC, Lakehouse, Bus Service and many others. In Sri Lanka too, socialism and communism were fascinated ideology in politics at that time and the responsibility of everything in the life pushed to the government hand.

During this period the world’s opinion on economic management visibly divided to capitalists and socialists.  The general public’s opinion appeared to be going along with the socialist politics and the government had a colossal pressure to make investments in business as well as in infrastructure development.  When unemployment was reported at a higher level, the government had to make a choice of investing money in the business for employing jobless people.  This idea indirectly expressed by JM Keynes in his general theory and his followers used the concept encouraging deficit budgets, however, Keynes view based on an economy which had an excess capacity and many developing countries including Sri Lanka used the Keynesian theory to reach full employment by public spending for government enterprises and infrastructure development disregarding the economic impact.

The other significant pressure to the government was supplying products and services of public enterprises at a subsidized price, despite the real cost of production and services.  When the government was in short of sufficient capital through domestic savings, the popular option was taxing rich or borrowing without considering the future debt service issues.  For example, when Dr. NM Perera was the Minister of Finance, he introduced 5% of Wealth Tax and 3% business turnover tax, which negatively impact on the economy.  This situation appeared in around the globe.  After 1950s Sri Lanka also encountered a similar situation because unemployment among educated youth was becoming an acute macroeconomic problem, which appeared to be leading to a social unrest.  In 1971 JVP insurrection was purely contributed by youth unemployment, thereby preventing the contribution of the young generation to economic development.  As a solution to the unemployment problem, elected governments of Sri Lanka determined to invest in business, in which the capital requirements were within the capacity of the private sector.  The socialist views of Sri Lanka forced the government to spend for investments in the business to provide employment to unemployed. In early 1970s Sri Lanka’s government established a public corporation to make gunny bags.

Governments in many countries encountered a serious problem with managing public enterprises.  The applying of effective management strategies used by the private sector was also rejected by the party politics and the trade union system as such techniques were believed to be associated with capitalism.  During the cold war period management of public investment was a burdensome task and compressing activity that managers were pushing into troubled water.  The minister in charge for the public enterprises was the sole authority and managers of the enterprises haven’t had the power to making the right decisions.  As reported in many instances, executive management of public enterprises was puppets, who were controlled by the strings of minister in charge.

Experience of Sri Lanka demonstrated that the management of public enterprises was a job of political henchmen, who had no knowledge, experience, and skills to successfully perform the job.  Why did this type of management use to perform complex management tasks, was a problem that needed to be investigated and taken actions to resurrect public enterprises? All elected government after 1950 purposely neglected the issue as they wanted to satisfy their henchmen rather than protecting public investments using efficient and capable management personnel.  Government banks were managed with less political influence, but after 1970, the bank management too influenced by ruling political parties and after 1977 many politicians of the government influenced to credit decisions forcing bank management to approve credits.

IBRD and International financial institutions advised many developing countries that public investments should be privatized using different formats to get away from the burden and to push responsibility to the private sector or share the responsibility of the government with private investors.  There was a highly merit in the advice as a short-term solution to fiscal problems, however, public investments in many developing as well as in developed countries were not in a condition that they could sale overnight or attract right price for investments

The management of public investments and developing different managerial options was an attractive debate in late 1980s and early 1990s.  In Sri left political parties directly opposed to privatize public investments and attempted to take reforming public investment as a political issue in the platforms disregarding national interest.  It was self-centred attitudes of left political parties.  Nationalist attitudes of the public also discouraged privatizing public investments with a clear understanding of potential consequences.  Trade unions opposed to retrenchment of excess staff under the restructuring strategies of public investments, which focused on cost effective management.  In this background management reforms in public investments was a coarse option and selected options were unacceptable to politics in Sri Lanka.

If it looks at international experience, Australian government had been carrying a large volume of investments in public enterprises and infrastructure facilities. Late 1980s, it was highly concerned on the management of public enterprises   Many public investments were owned by state governments.  Australia principally recognized the deregulation of financial and other markets and stimulated reforming government investments.  In 1990, the Department of Treasury in Canberra issued Treasury Economic Paper No 14 on financial Monitoring of the Government Enterprises and Economic Framework, which gave highly significant views on managing public entries and reporting system in support of public investments.  This paper must be read by Sri Lanka’s cabinet members and policy makers.  If they can understand the contents of the paper, I don’t think that Mattala airport should be leased out to India. It can be run at break-even level.

Next part of this article make attention to the consequences of privatizing public investments.  There are many strategic options.  I can see that government policy makers have no understanding of effective policy making and advising nationally interested policy advising whichever political party is in power, the national interest is a long-term desideratum than temporary indulgent selling or leasing out public investment. (TO BE CONTINUED)

One Response to “MATTALA AIRPORT,ACHELLES HEEL IN PUBLIC INVESTMENTS AND POSSIBLE CONSEQUENCES OF PRIVATIZING  (PART 1)”

  1. Henry Says:

    I fully agree with what you have stated in your letter Mr. Theophilus.

    Giving away parts of the country to foreign powers should be considered nothing less than traitorous. Our sad history of ‘agreements’ with the Europeans who scourged the land since 1505 should be deterrent enough for all those who want to make a fast buck by giving away the land, which belongs to all of the people of Sri Lanka. Not to a bunch of lunatic politicians who got themselves elected to ‘serve’ the country.

    Giving away parts of the country is in effect giving away part of her sovereignty. That is not what a government is elected to do. The first duty of a government is to safeguard that.

    There is a limit to lunacy-even among politicians!

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