16th September 2001
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Political or economic stability?

Political stability is generally rec ognised as a pre-requisite for economic growth. Does the Memorandum of Understanding (MoU) between the People's Alliance and the Janatha Vimukthi Peramuna provide the much needed stability or is it an understanding that could destabilise the economy?

In the first place there is considerable scepticism that the arrangement would last. The varying interpretations of the conditions, delay in implementing the conditions and the possibility of several government members crossing over leave doubts that the MoU would ensure stability.

Owing to these doubts the government continues to focus on moves to ensure its majority rather than concentrate on the economic issues that are plaguing the country. Therefore the MoU has failed to ensure a stable government even in the narrow sense of the word. The country continues to have a government unable to give priority to the serious economic problems facing the country.

The other dimension of political stability for economic growth is that it should be achieved with partners that have a common approach to economic issues. The MoU makes it very clear that privatisation - a key area of government's economic policy - should be given up. While the privatisation process is in any case halted owing to the lack of takers, especially internationally, the agreement to abandon the privatisation process could do more harm than the inability to privatise. The basic economic policies of the PA government and the JVP are so different that it is difficult to predict what policies the government would pursue.

The government's pledge to privatise was an agreed condition for the release of IMF's funds to assist the government to get over its balance of payments difficulties. In any event it was very unlikely that it could have kept to this promise owing to the country's economic situation as well as global conditions. If it had not kept to this promise owing to these reasons, it may have been able to plead that the international conditions did not permit it to privatise further. That argument cannot be put forward as the government has agreed to put aside privatisation during its "period of probation".

This move of the government may result in multilateral agencies withholding their facilities and loans. Perhaps the government has a way of convincing the donor agencies that they intend to proceed with their economic programme although they have signed such a MoU. Whether the IMF, World Bank and other agencies would accept such an assurance is difficult to predict.

More broadly the alliance with the JVP, that has a very divergent approach to economic issues, is not likely to assist the country obtain the much needed foreign assistance on the one hand, and on the other hand, attract foreign investors. The Sri Lankan business community too may lose its confidence in the government pursuing market-oriented economic policies.

In an already depressed economic condition with business confidence eroded, the MoU is likely to undermine it further. The economic policies as well as the likely actions of the government remain unpredictable after this alliance with the JVP. That does not augur well for international and national business confidence.

The political alliance for stability may not even achieve that limited objective for a long period. The government is likely to be in a state of flux always seeking new ways of keeping afloat, rather than focusing on the economic issues. The alliance with a party having very divergent economic policies is also likely to lead it to difficulties in finding the resources for resolving the immediate economic problems as well. The alliance with the JVP is a hopeless piece of patchwork that is unlikely to inspire confidence in the business world.

Takeover of oil companies

Another point of view
By S. Talpahewa, former chairman/managing director of CPC
This is a rejoinder to an article written by C.P. de Silva, a former employee of the Ceylon Petroleum Corporation (CPC), which was carried in the Sunday Times Business on July 29 headlined "The saga of the takeover of the oil companies" relating to the nationalisation of the oil companies in the 1960s. Mr. Talpahewa says Mr. de Silva's article contains some factual errors.

I would like to present the drama exactly as it occurred having observed it from within, as a former employee of the CPC from its inception. In the course of doing so, errors in Mr. de Silva's statement will also be corrected.

Inception of CPC and initial planning
Mr. de Silva appears to make out that the prime motivator of the oil company takeover was the late Mr. G.V.S. de Silva, and that the latter, along with the late Mr. Sam Silva, "convinced T.B. Ilangaratne that the country was being exploited by the oil companies." This is incorrect. The takeover of foreign- owned sectors vital to the economy had been debated, discussed and analysed for years before that, by trade unions, in the press, by the socialist movements, in parliament and even in the State Council before independence. This was a conviction that was accepted, not only in our country but in several other countries all over the world including India. Mr. T.B. Ilangaratne needed no 'convincing' on this account as this was part of the policy of the political party then in power.

Mr. Sam H. Silva, a member of the former elite Ceylon Civil Service, was hand-picked by the government to implement this programme. Mr. G.V.S. de Silva, a lecturer in economics (with a first class) at the University in Colombo, was at the time of the initial takeover in 1961, was working as an economic advisor to the government.

The initial plans for the takeover were prepared by Mr. Sam H. Silva. Assisting him from the very start were Mr. Lanerolle, (also a member of the former Ceylon Civil Service who at that time was a member of the ministry planning committee), Mr. G.F.P. Vithana, a highly competent senior engineer in charge of operations, Mr. L.N.T. Mendis, who was in charge of the establishment's side of the takeover and Mr. Noel Tittawela on the legal side. Mr. P.M.W. Wijayasuriya and Mr. G.V.S. de Silva joined a few months later. This was the original team that created the enterprise.

The drama began in a bungalow rented out at Rosmead Place, where the first negotiations with SOJUZNAFT EXPORT (the Soviet State Petroleum Company) and with ICPA (the American International Co-operative Petroleum Association) were held. The first Chairman of the CPC was Mr. N.E. Weerasuriya, Q.C., Mr. Walter Wickramasingha, a member of the first board helped recruit some senior staff from the oil companies. These included Mr. R.S. Wickramasuriya (Ronny), Mr. W. P. Gunasekara and Mr. K.K.G.L. (Lucky) Wijetilleke from Mobil; Mr. Jon Vittachi, Mr. Ekanayake and Mr. Wimaladasa from Caltex. Mr. G.V.S. de Silva was not at any time the Finance Manager as asserted by Mr. C.P. de Silva and he joined as a regular Petroleum Corporation employee a few months after the takeover, attending to economic aspects.

The planning of the storage and distribution aspects at Kolonnawa and bulk deposits was under the direction of Mr. Vithana, assisted by the ex-Caltex staffers mentioned above. An interesting set of developments was the designing of the logo of the CPC and the determination of Sinhala equivalents of English terms used in the petroleum trade. The logo was designed by Mr. G.K.L. Samarasinghe, who was in the advertising trade and the linguistics done with the advice of Mr. Aelian de Silva and Mr. G.V.S. de Silva. The operations management from the very start under the direction of the G.F.P. Withana was marked by the utmost efficiency and expedition, and he gave fine leadership to his own technical team.

Mr. P.M.W. Wijayasuriya's management of the finances of the CPC. was perhaps unequalled elsewhere in terms, not only of precision and unquestionable professionalism but also in terms of continuous evaluation and assessment of performance, covering all functions of the enterprise.

takeover and final monopoly
The first step was the takeover of some of the distribution facilities of the oil companies - i.e. over 175 petrol stations throughout the country and some of the bulk storage points in the estate areas, as well as some of the bulk storage facilities at Kolonnawa.

Thus the CPC first entered business as a bulk and retail distributor. From the outset, however, it became clear that with the newly established CPC importing refined products at prices substantially lower than those of the oil companies the position was clearly uneconomic to the country. The question was first raised by the then Governor of the Central Bank in a memorandum addressed to the Minister of Finance on 7th May 1962, which resulted in the submission of a joint cabinet memorandum by the Minister of Finance and Minister of Commerce, Trade, Food and Shipping on the "outgoing of foreign exchange for importation of petroleum products in bulk". It was pointed in that memorandum that if Ceylon's (Sri Lanka's) entire requirements of petrol, kerosene, high speed diesel and fuel oil were imported at the c.i.f. prices at which the CPC imported those products Ceylon would effect considerable savings in foreign exchange.

In response, the cabinet directed two ministers to negotiate with the oil companies with a view to reducing the c.i.f. prices of their petroleum product imports into the country. Several discussions with the oil companies were to no avail. The oil companies were adamant that they could not reduce their c.i.f. prices nor could they submit alternate proposals to reduce foreign exchange expenditure on petroleum product imports.

The government finally decided on 27th February, 1963 that the oil companies would be allowed to import petroleum products only on the basis of fixed maximum prices notified by the Import Controller. Those prices provided for a 5% premium on the CPC's c.i.f. prices. The oil companies took the stand that they could not import their products with those ceiling prices. After a series of discussions with the oil companies the government on 14th March 1963 decided to allocate to the oil companies a foreign exchange quota equivalent to the cost of their share of sales but at the c.i.f. prices of the CPC subject to certain conditions. The Board of Directors of CPC found that the imposition of the quotas was not workable unless a rationing of oil company sales was introduced together with restriction of oil company imports.

The CPC Board was also of the view that in order to cope with the greater share of imports and distribution the quota system entailed, which was about twenty percent of all products handled by oil companies, the CPC should obtain the use of a few more storage tanks at Kolonnawa, about fifty further retail outlets and a few other facilities from the three oil companies. Several discussions were held with the oil companies with a view to arriving at a workable scheme of internal distribution based on the new quotas which would ensure that there would not be any breakdown of supplies in any part of the island. Despite those discussions no satisfactory workable scheme could be reached. Nor could the oil companies be persuaded to allow even the temporary use of additional tanks required by the CPC to stock its additional imports resulting from the curtailment of the oil companies' imports. On the other hand the oil companies were contemplating a request to the Government either for increased quotas or for withdrawal of certain products from the quota system. It was also evident that the oil companies were even not taking steps to decrease their sales according to their restricted quotas. They, in fact, referred to the possibility of a shortage if the steps proposed by them were not adopted by the government, which was a threat.

In the light of those developments the government reviewed the whole position and after a careful examination of the various proposals put forward by the oil companies and the CPC, the government decided on 5th June, 1963 that there was no satisfactory scheme to achieve the twin objectives of conserving foreign exchange and ensuring an uninterrupted supply to consumers except to make the CPC the sole importer and distributor of bulk petroleum products with effect from 1st January, 1964.

Accordingly the Ceylon Petroleum Corporation Act No. 5 of 1963 was enacted and became law on 22nd August, 1963. Like the principal Act, the subsequent legislation too was passed unanimously by the House of Representatives.

Mr. C.P. de Silva's statement that Mr. Sam H. Silva and Mr. G.V.S. de Silva were both sacked or sent out of the CPC because they were "Philip's men" is a gross untruth. At the time of the complete takeover both had left on their own. Mr. Sam Silva left on April 29, 1963 and Mr. G.V.S. de Silva left on July 01, 1963. Nor did the final takeover occur under the aegis of Mr. Felix Dias Bandaranaike.

International tenders
From the very start, with the partial takeover of import and distribution in 1961 as well as the monopoly takeover in 1963, it became clear that rather than continue to import refined products, it was much more economic and sensible to import crude for refining here. As a matter of fact even the oil companies themselves had mooted this idea as far back as 1955.

Serious plans for the refinery began in 1962. The Italian state enterprises, ENI, (Ente National Indro-carburi) made a proposal based on equity participation. Turnkey proposals also came from others as well. The CPC commissioned the French Petroleum Institute to prepare a feasibility study which was completed by them by 1963.

International tenders were called for the construction of a refinery and the tenders were evaluated by both the French Petroleum Institute and by the Egyptian General Petroleum Corporation with UOP, (Universal Oil Products) of USA acting as advisors. The tender evaluation was carefully reviewed by Mr. K. Alvapillai, a senior member of the CCS with a distinguished record and who after retirement as a Permanent Secretary had been appointed to succeed Mr. N.E. Weerasuriya as Chairman of the CPC.

The contract for the construction of the refinery was awarded to SNAM PROGETTI of Italy and the foundation stone was laid on 9th May, 1967 at the 165 acre site at Sapugaskanda by the then Prime Minister, the late Hon. Dudley Senanayake. The start-up of the distillation unit of the 38,000 barrels per stream day refinery commenced with crude oil circulation on 5th August, 1969 and the "Flare" which is an obvious landmark of any oil refinery was lit for the first time on that day. The refinery was officially declared open by the then Prime Minister, Dudley Senanayake on 12th October, 1969. The total construction cost of the refinery, including cost of land, custom's duties, taxes and cost of infra-structure development was around Rs. 200 million of which the foreign exchange cost amounted to Rs. 125 million. If a refinery with the same capacity and complexity is to be established today the cost would be over Rs. 30 billion. (Subsequently the processing capacity of the refinery was increased to 50,000 barrels per stream day.)

The main objective of the government in deciding to set up a refinery was to save foreign exchange spent on the import of refined petroleum products. It had been estimated that about 20-25% of the total foreign exchange spent on importing refined petroleum products prior to the establishment of the refinery had been eventually saved.

Bunkering, aviation and exports
In 1971/1972 the Ceylon Petroleum Corporation entered the bunkering and aviation business with facilities taken over from oil companies. The foreign exchange earnings from bunkering and aviation during the first five years were Rs. 514 million and Rs. 197 million respectively. The corporation also exported its surplus products such as naphtha and furnace oil bringing in valuable foreign exchange to the country. Foreign exchange earned on direct exports and sale of bunker and aviation fuel during 1970 to 1993 is given in the box.

The total capital contribution made by the government to the corporation was Rs. 117.8 million. Contributions made by the corporation to the exchequer by way of custom's duty, turnover tax and income tax. Contributions to the Consolidated Fund, dividends and special levies for the period 1972 to 1991 amounted to over Rs. 42,000 million, i.e. the corporation had paid back to the government 35,500% of what it received from the government.

The corporation had been making sufficient profits up to 1993 except for the periods 1975-1978 (subsidised by the government) and 1987 to 1989. The subsidy received from the government in 1970s was recovered by the government in the years 1986 and 1987. The corporation did not burden the low-income group of the community in the sale of kerosene. The price of kerosene was subsidised and the loss the corporation incurred in the kerosene subsidy during the period 1982 to 1992 was Rs. 4025 million.

The foregoing is a factual statement involving a "view from within". Mr. C P. de Silva, as a professional accountant, might have checked his figures thoroughly before embarking on composing a "saga". In referring to persons like Mr. Sam H. Silva and Mr. G.V.S. de Silva who are no longer living he might have been more prudent in making statements involving them.

(Business Editor: Correspondence on this issue is now closed).

Mind your business

Great acceptations
Now that the reds are dictating terms whether the blues like it or not, the private sector no longer feels very secure, what with a moratorium on privatisation and peace talks and the ominous threat of trade union action at the drop of a hat.

Which is why one major corporate blue chip is adopting the ruse of joining the reds because it cannot beat them. It will encourage trade union activity and offer decent wage hikes - but these will be linked to productivity.

The workers are likely to favour the deal; so, there is little the reds can do except to accept it, or so we hear.

Laughing gas
With the monopoly on gas due to end shortly, a price war is likely to emerge and one can only hope that it will leave the long-suffering consumer laughing all the way to the kitchen.

But those who previously held sway are not happy and claim they are the victims of unfair trading practices.

And, who knows, this snowballing dispute may slowly but surely end in a court of law.

Coal war?
Most investors may be running away from paradise but those in the power generation sector are only too aware that there is a potential gold mine waiting to be exploited here.Worse power crisis scenarios have been projected for 2004 and 2008 and there have been many inquiries as to what precautions will be taken.

But almost everyone is asking the same question: what will the environmentalists do? And almost everyone gets the same answer too - that there can be no guarantees about that!

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