Since its inception in 2007, the state-owned budget airline Mihin Lanka had faced a severe shortage of funds, and, as a result, it had been compelled to get sovereign-guaranteed loans from state institutions, with net losses after first two years in operation rising up to as much as six times the capital investment. These revelations [...]


Two years after operations began, Mihin Lanka losses reached sky high

Commission told there was no proper account of what happened to the Treasury and Presidential Secretariat money pumped into airline - Chandrasena signed documents without authority; Justice Gooneratne notes his conduct could amount to impersonation

Since its inception in 2007, the state-owned budget airline Mihin Lanka had faced a severe shortage of funds, and, as a result, it had been compelled to get sovereign-guaranteed loans from state institutions, with net losses after first two years in operation rising up to as much as six times the capital investment.

These revelations were made in audit reports produced this week in the Commission of Inquiry (CoI) appointed to investigate alleged irregularities in SriLankan Airlines, SriLankan Catering Ltd and Mihin Lanka (Pvt) Ltd.

Sujeeva Mudalige, Managing Partner of Price Waterhouse Coopers (PWC), an international auditors firm which was commissioned to audit Mihin Lanka’s accounts, informed the Commission on Friday that the airline which was infused with a capital investment of Rs 500 million in 2007 recorded a net loss of Rs 3.1 billion after two years into operation.

The startling misuse of state funds caused by a group of inefficient Board of Directors (BoD) was reflected when comprehensive independent audit reports compiled by the audit firm were placed before the Commission. The reports were submitted as tangible evidence to support allegations of financial misappropriation and administrative irregularities at the airline’s management.

Noting that this was the first time that vital evidence was brought before the Commission to support alleged financial regularities in Mihin Lanka, the commission’s chairman and retired Supreme Court Justice Anil Gooneratne said, “If not for this Commission of Inquiry, the evidence would have remain buried forever and wouldn’t have surfaced.”

As an entity governed under the Companies Act, the Mihin Lanka was fully funded and managed by the state at the expense of taxpayers’ money. Accordingly, the then Treasury Secretary Dr. P.B. Jayasundera became the company’s golden shareholder in 2007, in addition to be the founding director of the airline. He was also a sitting member of Board of Directors.

When asked whether these damning audit reports were brought to the attention of the airline’s directors or to the then Treasury Secretary, Mr Mudalige said the PWC did so by pointing out the serious concerns in its independent observations, but the airline’s management did not show much interest.

By the time Mihin Lanka ceased its operations, the airline had recorded a total net loss of Rs 17.2 billion of public funds. To recover the losses, Rs 14.48 billion was directly funded by the government and the rest was obtained from state institutions such as banks, corporations etc, the Commission was told.

The biggest net loss was recorded when the Mihin Lanka management decided to lease out three aircraft which were obtained under strict lease agreements from another company in 2007-2008. The management had to pay USD 1 million as security deposit and another USD 1 million as monthly payments.

“Mihin Lanka which was infused with capital investment of Rs 500 million generated expenses in the billions. There were no records to show that a competent team was sent to inspect the aircraft prior to agreeing on the lease agreements. There is a provision for the company to source expertise from external parties if the directors lack the expertise, but this wasn’t done either.” Mr Mudalige told the Commission.

Noting that this kind of administrative and technical lapses would have put passengers at great risk if one of the planes were faulty, Mr Mudalige said the money invested in the airline could have been used for better purposes like healthcare or education and to develop the country in general. “I never met any of the directors of Mihin Lanka, even though it is common to summon auditors for board meetings.”

Mr. Mudalige said that apart from funds allocated by parliament, Mihin Lanka was directly funded by the Treasury Secretary and the Presidential Secretariat. Most of these funds were allocated under the pretext of salaries to be paid for Mihin Lanka employees. Audit reports indicated that there were no entries made in the accounts to prove that the loans taken for salary payments were actually used for that purpose.

Pointing out that in terms of widely accepted audit practice, an auditor had to be given full access to all documents related to financial affairs of a company, Mr Mudalige said that some of the documents such as the register of tender agreements and some transactions were not brought to the attention of the audit firm. “I didn’t receive a clarification on this from Mihin Lanka. The amount should have been recorded but it wasn’t.”

The Commission was also informed by the senior PWC official that most of the airline’s employees were not aware of their job responsibilities, in the absence of a proper organisational plan, along with checks and balances put in place.

The legality of the 2007-2008 financial balance-sheets submitted by the Mihin Lanka management was also questioned by the prosecution team led by Additional Solicitor General (ASG) Neil Unamboowe. The commission was told two directors along with the Chief Financial Officer (CFO) signed and certified the documents.

The evidence was led by ASG Unamboowe, assisted by State Attorney Sajith Bandara.

The Commission was told that Kapila Chandrasena, one of the signatories, was not even holding the position of directorship in the company during that period and he had voluntarily taken the responsibility of company’s financial transactions. He was appointed to the Board of Directors after nine months.

Commission Chairman Justice Gooneratne noted Mr Chandrasena’s conduct could be considered as very misleading and it could even lead to a charge of impersonation, a serious offence under the criminal law.

Soon after the independent audit was carried out, the PWC expressed grave concerns about the forecast cash flow of the company, pointing out the situation as critical brought it to the notice of Finance Minister and the Treasury, the PWC official said.

Responding to independent observations made by the audit firm, B.M.S. Battagoda, the then Director General (DG) of Public Enterprises at Treasury, on behalf of the Treasury Secretary, wrote to the PWC, assuring that the Treasury would continue to support the smooth running of the airline with adequate funds which could be made available through the national budget. “Even after we shared our serious concerns on the viability of the airline, we were told by the Treasury, the main stakeholder of the airline, that it would continue to support the airline with state funds,” Mr Mudalige said.

Commission Chairman Gooneratne intervened to ask whether Mr Battagoda was vested with powers to take such decisions arbitrarily without going through the procedure of obtaining approval from the Cabinet and Parliament. “Is he taking the full liability on this?”Justice Gooneratne asked.

ASG Unamboowe noted that this massive amount of net loss was compensated through state funds belonging to the people of the country without their knowledge or their elected representative’s approval in Parliament.

The Commission comprises retired Supreme Court Justice Anil Gooneratne (Chairman), Court of Appeal Judge Gamini Rohan Amarasekara, retired High Court Judge Piyasena Ranasinghe, retired Deputy Auditor General Don Anthony Harold and Sri Lanka Accounting & Auditing Standards Monitoring Board Director General Wasantha Jayaseeli Kapugama. The hearings will continue tomorrow.

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