ENERGY INVESTOR WOES AS SRI LANKA DISPUTES

UNCLAS SECTION 01 OF 02 COLOMBO 000186 SIPDIS SIPDIS SENSITIVE STATE FOR SA/INS; STATE PASS TO USTR E.O 12958: N/A TAGS: EFIN EINV ENRG CE SUBJECT: ENERGY INVESTOR WOES AS SRI LANKA DISPUTES PAYMENT OBLIGATIONS AND HOLDS BACK PRICE INCREASES ¶1. (SBU) Summary: Sri Lanka?s oil and liquefied petroleum gas (LPG) suppliers, including two foreign investors (neither American),are facing significant losses as the government has not allowed price increases or has not paid previously agreed subsidies in a timely manner despite increased world prices. Currently, firms importing and supplying liquefied petroleum gas and petroleum oil are embroiled in a dispute with the government on these issues. After intense lobbying, the government approved a partial price hike with respect to LPG on January 31. Investors in Sri Lanka face difficulties with contract implementation and a general failure on the part of certain GSL officials to grasp ordinary economic and business realities. Post continues to make efforts to educate GSL officials and prompt them toward enhancing the country?s investment climate. End Summary. ¶2. (U) Government control of the price of petroleum oil and LPG has resulted in major financial crises for companies doing business in these sectors. Petroleum oil is subsidized by the government, which abandoned early last year an automatic pricing formula that allowed price increases in line with world market prices. The government does not subsidize LPG, but LPG companies need approval from the Consumer Affairs Authority (CAA) to increase prices. As a result, companies in oil and LPG are required to sell their products below market value, and the petroleum oil companies have not been paid their subsidy in a timely manner. PARTIAL SUBSIDIES PAID, BUT DISPUTE OVER CONTRACT TERMS ¶3. (SBU) The Lanka Indian Oil Corporation?s (LIOC) subsidy bill due from the government stood at Rs 7.34 billion (USD 73 million) at the end of 2005. According to K. Ramakrishnan, Managing Director of LIOC, the company received Rs 500 million (USD 5 million) in subsidy payments in January. Previously, the company received Rs 700 million (USD 7 million) in 2005. Recently, newspapers quoted Treasury Secretary P.B. Jayasundera saying the government SIPDIS would honor all legitimate dues owed to LIOC. (Note: A government study done in 2005 has ruled that subsidies would be paid only if the company suffered a loss. We understand the Attorney General?s office agrees that these are the terms of the GSL?s contract with LIOC. End Note.) Ramakrishnan, confirming these reports, told the Embassy that the government has promised to pay part of the subsidies but has refused to pay amounts in excess of losses suffered by the company. According to him, the LIOC has tried to impress upon the government the need to earn a return on capital and pay dividends to the shareholders for the company to continue in business. ¶4. (SBU) LIOC is a publicly listed company, with 75 percent equity from Indian Government-controlled Indian Oil Corporation Ltd and 25 percent equity from the public and foreign institutional investors. The company has been unable to declare a dividend due to losses and the share price has plummeted. Analysts believe that due to bilateral pressure, the LIOC will eventually be paid at least most of what it is owed, but the timing is unknown. LPG PRICE INCREASE PERMIT DELAYED - SUPPLIER MUST SUBSIDIZE NATIONAL LPG DEMAND ¶5. (U) Meanwhile, Shell Gas Lanka (SGL) is also facing problems due to the failure to increase LPG prices. After much haggling, and SGL?s threats to curtail supplies, the government moved to increase the price of LPG sold by SGL by 13 percent on January ¶31. SGL, an arm of the Royal Dutch Shell Group which holds a 51 percent stake of the company, is the COLOMBO 00000186 002 OF 002 largest LPG supplier with 86 percent market share for cooking gas. The balance of shares is held by the Government. ¶6. (SBU) Mahesha Ranasoma, Director of Shell Gas, told EconFSN that the company was facing a crisis due to its inability to increase its price. According to Ranasoma, as a result of recent world gas price hikes, the price of LPG needs to be increased by about 23 percent, from Rs 850 per 12.5 kg cylinder to about Rs 1,050 for the company to break even. The February 1 increase takes the price to Rs 960 per 12.5 kg cylinder, which reduces the magnitude of SGL?s accumulating losses. Shell has reported accumulated losses of about Rs 742 million (USD 7.4 million). ¶7. (SBU) While the LPG price is determined by the Consumer Affairs Authority (CAA),the Minster of Trade and Commerce (under whom the CAA falls) is directly involved with decision making, given the sensitivity of these items to the economy. The Minister has previously threatened to import gas at lower prices. Last weekend, Ranasoma told newspapers that SGL is willing to make available its facilities for government use, if the government could import LPG at a lower cost. CAA chairman, Wijesinghe told EconFSN last week that CAA is conscious of the need to maintain a positive investment climate. However, indicating the limited role of CAA in these issues, he said he is currently acting only as a facilitator in negotiations between the companies and the Minister. Meanwhile, local company Laugfs Gas, the other player in the LPG industry, has protested as the government has not yet acted on their request for an increase. ¶8. (SBU) COMMENT: These issues highlight difficulties faced by investors doing business in Sri Lanka due to populist economic policies of the government, and the failure of top government ministers and bureaucrats to understand basic economic, financial and business issues (especially the need to honor contracts). The subsidies have not only caused problems for investors, but also have increased the financial burden on the government budget. The Ambassador continues to use his public speaking engagements, and meetings with Ministers and other officials, to explain the price, quality, quantity trade-off that subsidies require. While there is a basic failure to understand this principle among some Government officials, some newly-appointed senior officials understand or are getting the message. We hope to continue to work with them in developing Sri Lanka?s investment climate. LUNSTEAD