Advocata backs Expert Committee recommendations on SriLankan restructuring

• Praises approach taken by committee to separate management from ownership
• Commends proposal to introduce a legal framework and performance monitoring mechanism

Advocata, a free-market policy think tank based in Colombo, yesterday said it supports the President-appointed Expert Committee recommendations on the restructuring of State-run SriLankan Airlines. 

“The approach recommended by the committee is one where the management will be separated from the ownership, ensuring independence and accountability.

“The recommendation to introduce a legal framework and performance monitoring mechanism in particular is commendable, as it will send a positive message to investors, while guaranteeing that management has the freedom to run operations independently, with the board acting as a source of accountability,” Advocata said in a brief statement. 

The Expert Committee recommends SriLankan Airlines to be the holding company for the two subsidiaries—SriLankan Catering and SriLankan Ground Handling—and 49 percent stake in each subsidiary to be divested to a strategic partner as the first phase of partial privatization.

The Expert Committee report also recommends the cash inflow from these divestitures to be used to settle a component of outstanding debt, in order to create a more favaourable balance sheet for SriLankan.

The second phase of the privatization which the Expert Committee suggests is the divestiture of 49 percent stake in the holding company SriLankan Airlines to a strategic partner where the management of the airline will fall under the purview of this partner with an independent board.

The Expert Committee also recommends setting up of a legal framework that will allow the management to take decisions independent from ownership.

“Advocata Institute strongly supports these recommendations, and the financial and operational restructuring mentioned above should be a priority for the country. 

“However, in the event that the restructuring fails to demonstrate rapid progression towards recovery, the government should withdraw all State guarantees that support the borrowings of the airline, thereby preventing further losses from being funded by the Treasury,” the statement said.

During the ten-year period when the SriLankan Airlines management was under Emirates, the airline enjoyed a decade of profits. 

This is in stark contrast to the 2009-2017period, when SriLankan Airlines was under State management, and accumulated losses of Rs. 148,707 million. 

The restructuring is critical as the airline has negative net worth and is insolvent. 

As of 31st March 2018, the airline is in debt to the Bank of Ceylon and People’s Bank for a total of Rs. 57 billion on the basis of letters of comfort issued from the Ministry of Finance. 
Further, the airline owes Rs. 27 billion to international bondholders which are secured on the basis of a government guarantee for US $ 175 million.

The Auditor General reported that SriLankan’s current liabilities exceeded its current assets by Rs.94, 205.97 million and Rs.100, 268.11 million and total liabilities exceeded its total assets by Rs.125, 582.89 million and Rs.132, 196.34 million respectively. 

Hence he said the situation indicated a material uncertainty that may cast significant doubt on the airline group’s ability to continue as a going concern.