State Owned Enterprises divestment to prevent massive bailouts

Posted by
Check your BMI

By Sugeeswara Senadhira/Daily News

Colombo, November 3: A country needs a national carrier, not only for its prestige but also to bring revenue to the treasury. However, SriLankan Airlines could not fulfil its given task on both fronts despite continuous pumping of huge funds by the treasury with the hope that the loss-making Airlines would succeed in turning around one day.

Finally the authorities decided to face the bitter truth that there was no hope of early recovery and took the expert advice and called for potential investors to submit offers. The newspaper advertisement on Tuesday (October 31) was seen by many Sri Lankan who witnessed the glory days of its national carrier as a sad obituary, but acknowledged that the decision was a pragmatic necessity.

In this advertisement, Sri Lanka has requested interest from investors to divest SriLankan Airlines and the Washington-based International Finance Corporation has been appointed as the transaction advisor.

An airline or other financial or non-financial investors could bid subject to their strength and ability to raise funding and submit bids for a majority stake in SriLankan Airlines (UL, Colombo International).

Profitable Growth

For any local or foreign investor, buying a stake in the state-owned carrier will be a great opportunity for profitable growth as a partner of the rapidly expanding economy of a major hub in the Indian Ocean.

Addressing a forum on “Sri Lanka; Emerging Investment Destination,” Prime Minister Dinesh Gunawardena said that Sri Lanka has a huge advantage in its geographical location. “Asia is the epicenter of growth in this century and this island-nation is the gateway to the fastest growing economy in the world,” he said.

Any foreign stakeholder of SriLankan Airlines will automatically be a major beneficiary of future growth in tourism and business travel to and fro Sri Lanka.

The Sri Lankan government currently owns 99.52% of SriLankan Airlines and intends to sell a majority stake to a strategic investor. However, potential investors must satisfy certain technical, legal, and financial requirements, including having a minimum net worth of USD200 million and demonstrating the capacity to raise loans of at least USD100 million if that bidder is not a financial institution. A financial institution must have available investible funds and/or capital of at least USD 300 million. Subject to satisfying the stated criteria, the government invites body corporates, companies, firms, and any other legal entity or consortiums to apply.

During the last few decades, all the governments toyed with the idea of wholly or partially privatising the national carrier as its losses mounted every year. Apart from the successful management partnership with the Emirates, there was no serious attempt over the years to broadbase the SriLankan.

The imperative of divestment became evident after the twin blow of Covid pandemic and the economic crisis in the last two years. With the drastic drop in tourism, SriLankan Airlines’ passenger traffic drop to a very low level and its income losses further increased. Due to the economic crisis, the government found it difficult to repay loans. Hence the decision was finally taken to restructure multiple state-owned entities, including the national carrier, historically one of the country’s biggest loss-making entities. One prerequisite was for removing debts and liabilities that are still on the balance sheet. Sri Lanka’s Aviation Minister, Nimal Siripala de Silva, says it is unfair to expect taxpayers to keep propping up the airline, which went into the restructuring process with debts of approximately USD1.2 billion.

State-owned Enterprise Restructuring

President Ranil Wickremesinghe, Prime Minister Dinesh Gunawardena and Minister Nimal Siripala de Silva held series of discussions with the experts of the State-owned Enterprise Restructuring Unit regarding the need for expediting the process of divestment.

The SriLankan Airlines’ total losses stood at 372 billion rupees – a burden that all citizens would have to carry even if privatization succeeds. “You must be aware that this is a loss that must be borne even by the poor people of this country who have never stepped on an airplane,” President Wickremesinghe said.

Japanese newspaper Nikkei Asia, quoting experts, stated that restructuring of the SriLankan is “long overdue and must be implemented as soon as possible”. The experts added, “taxpayers ultimately have had to bear this burden, and these massive losses have crowded out much-needed social welfare spending. Besides that, entities such as airlines and hotels are not strategic enterprises that require state ownership.”

They agreed that proposal for restructuring lossmaking SOEs was sound, though finding a buyer will be difficult given the airline’s grim finances and the national crisis.

It took several years for the Indian government to finalize the sale of Air India. The government will have to take on the debt, which would make the airline more attractive, like what the Indian government has done. The key benefit will be that the public will not have to keep absorbing the massive losses this state-owned enterprise makes.

Air India was sold for $400 million, plus the assumption of a portion of the existing debts ($2 billion out of a total of $8 billion). Experts feel that Sri Lanka too could arrive at a similar arrangement during the discussions with potential buyers.

Airbus Wide bodies

SriLankan Airlines has a fleet of 14 Airbus narrow bodies and ten Airbus widebodies. Nineteen of these aircraft are currently operational. The airline flies to 38 destinations in 22 countries and flies around five million passengers and 80,000 tonnes of cargo annually.

The deadline for submission of prequalification applications is December 5 and thereafter a quick process of scrutiny will take place. The ministry will advise successful applicants by mid-December, and they will have the opportunity over the following months for site visits, one-on-one meetings, and due diligence. The deadline for submission of final bids will be in April 2024. Letters of intent will be issued to the successful bidder the following month, and definitive agreements will be entered into and signed in June.

The State-owned Enterprise Restructuring Unit has plans to restructure Sri Lanka Insurance Corporation, Litro Gas Lanka, Hotel Developers Lanka and Canwill Holdings in addition to SriLankan Airlines. The Quality and Cost Based Selection method of the Government’s Consultant Procurement Guideline will be used to select transaction advisors.

The divestitures will be carried out in a transparent and credible manner, following an EOI/RFP process which will be published in the local and international press. Unsolicited proposals will not be entertained. Major SOEs, which totally numbered 52 in the island, hold a public debt equivalent to 12 percent of the GDP as of June 2022. Hence, restructuring of these SOEs will be a huge relief to the treasury as the funds given to these entities could be utilized for development, welfare and other services in the future.


The post State Owned Enterprises divestment to prevent massive bailouts appeared first on NewsIn.Asia.