SRI LANKA: ALLEGATIONS OF IMPROPRIETY IN CONNECTION WITH

UNCLAS SECTION 01 OF 03 COLOMBO 000394

SIPDIS

SENSITIVE

SIPDIS
STATE FOR SCA/INS AND EEB/TRA/OTP
STATE PASS USTR, DOL/ILAB FOR TINA MCCARTER
SINGAPORE FOR FAA
E.O 12958: N/A
TAGS: ECON EIND ETRD EAIR EINV KCOR CE
SUBJECT: SRI LANKA: ALLEGATIONS OF IMPROPRIETY IN CONNECTION WITH
NEW STATE-OWNED BUDGET AIRLINE
REF: A) COLOMBO 263 B) COLOMBO 324


1. (SBU) SUMMARY AND COMMENT: The Government of Sri Lanka plans to
launch in March 2007 a state-run airline aimed at providing low-cost
travel for migrant workers and tourists to the Middle East and
India. The budget carrier, called Mihin Lanka, has elicited
criticism from politicians, the press, and the airline industry.
The recently sacked Minister of Ports and Aviation has charged the
President with circumventing procedural and financial regulations in
the process of creating the airline. Public criticism may have
caused the President to back away from allegedly planning to deal
free shares in the venture to himself and close family members and
political allies. Even so, the venture hardly appears to be in the
public interest: First, the plan to use civil service pension funds
to start the new venture is risky, as the South Asia region's budget
airline market is competitive and the GSL has a poor track record in
running airlines. Second, if the venture succeeds in building
market share, it will come at the expense of Sri Lankan Airlines,
which is still 51 percent government-owned. End summary and
comment.
CONTROVERSIAL BUDGET AIRLINE TO BE STATE-OWNED, NAMED FOR PRESIDENT,
RUN BY FAMILY AND FRIENDS

2. (U) The Government of Sri Lanka (GSL) is planning to launch a
state-run airline aimed at providing low-cost travel for Sri Lankan
migrant workers and tourists to the Middle East and India. The
budget carrier, apparently conceived and advanced by close advisors
to Sri Lankan President Mahinda Rajapaksa, is to be called Mihin
Lanka, after the President (short for Mihindu, which is the Pali
name for Mahinda). The non-transparent way in which the President's
coterie has advanced the airline has elicited extensive controversy.


3. (U) GSL officials say Mihin Lanka will begin operations this
month. (Mihin Lanka offices at the airport and Colombo are now
open, but a targeted launch of February 4, Sri Lanka's Independence
Day, came and went with no official explanation of the
postponement.) On March 5, the airline secured a provisional license
to fly after overcoming technical problems that temporarily delayed
its maiden test flight. Its initial flight from Colombo
Bandaranaike International Airport to India was a requirement for
the airline to get an "air operating certificate" from Sri Lanka's
Civil Aviation Authority (CAA). The certificate gives Mihin Lanka
clearance to operate and handle all aspects of a commercial flight
using a leased Fokker-27 aircraft. At this time, the airline does
not own any aircraft.

4. (U) The GSL is billing Mihin Lanka as the country's only national
airline. (Note: This is odd, because the government still has a 51
percent majority Sri Lankan Airlines; Emirates Airlines owns 43
percent, and the remaining six percent is owned by Sri Lankan
Airlines employees). This no-frills carrier is designed to cater to
local migrant workers traveling to the Middle East, and to tourists
to and from the Indian sub-continent. The government says Mihin
Lanka will also function as a cargo airline, transporting goods
produced by small and medium scale producers. The venture plans to
directly or indirectly create 500 jobs, including positions for Sri
Lankan Air Force personnel who want to move into civil aviation.

5. (U) The airline is to be a fully government-owned company
utilizing state funds. The initial capital contribution is
estimated at around 500 million Sri Lankan Rupees (approximately USD
4.6 million),with an estimated total cost set at Rs. 1.5 billion
(approx USD 13.8 million). The government initially intended to tap
the state-run Foreign Employment Bureau and the Employees' Trust
Fund for start up capital in the venture. After a strong public
backlash supported by negative media reporting against using public
funds, the government may be seeking financial backing elsewhere,
but has not publicly identified possible alternate sources.

6. (SBU) Critics argue that the carrier's lack of transparency stems
from its leadership - a handful of politicians and advisors close to
the President. According to a Civil Aviation Authority gazette, the
Board of Directors of Mihin Lanka will be composed of Defense
Secretary Gothabaya Rajapaksa (the President's brother),Finance

SIPDIS
Secretary P.B. Jayasundera, Air Marshall Roshan Goonetilake, and

SIPDIS
Presidential Coordinating Secretary Sajin de Vass Gunawardena.
Gunawardena, who has been appointed "Accountable Manager in charge"
of the airline, has been linked to a number of past allegations of
financial impropriety involving government procurement.
AVIATION MINISTER'S OPPOSITION COSTS HIM HIS JOB

7. (U) On February 9, President Rajapaksa sacked Minister of Ports

COLOMBO 00000394 002 OF 003


1. (SBU) SUMMARY AND COMMENT: The Government of Sri Lanka plans to
launch in March 2007 a state-run airline aimed at providing low-cost
travel for migrant workers and tourists to the Middle East and
India. The budget carrier, called Mihin Lanka, has elicited
criticism from politicians, the press, and the airline industry.
The recently sacked Minister of Ports and Aviation has charged the
President with circumventing procedural and financial regulations in
the process of creating the airline. Public criticism may have
caused the President to back away from allegedly planning to deal
free shares in the venture to himself and close family members and
political allies. Even so, the venture hardly appears to be in the
public interest: First, the plan to use civil service pension funds
to start the new venture is risky, as the South Asia region's budget
airline market is competitive and the GSL has a poor track record in
running airlines. Second, if the venture succeeds in building
market share, it will come at the expense of Sri Lankan Airlines,
which is still 51 percent government-owned. End summary and
comment.
CONTROVERSIAL BUDGET AIRLINE TO BE STATE-OWNED, NAMED FOR PRESIDENT,
RUN BY FAMILY AND FRIENDS

2. (U) The Government of Sri Lanka (GSL) is planning to launch a
state-run airline aimed at providing low-cost travel for Sri Lankan
migrant workers and tourists to the Middle East and India. The
budget carrier, apparently conceived and advanced by close advisors
to Sri Lankan President Mahinda Rajapaksa, is to be called Mihin
Lanka, after the President (short for Mihindu, which is the Pali
name for Mahinda). The non-transparent way in which the President's
coterie has advanced the airline has elicited extensive controversy.

and Aviation Mangala Samaraweera, who had opposed the Mihin Lanka
arrangement (ref A). Rajapaksa did not appoint a replacement for
Samaraweera, instead keeping the Ports and Aviation portfolio for
himself. On February 17, Samaraweera, who had also served as
Rajapaksa's Minister of Foreign Affairs until he was removed in the
January 28 cabinet reshuffle, sent a letter to the President listing
a series of grievances (ref B). In this, Samaraweera stated his
strong disapproval of the Mihin Lanka project due to the planned use
of public funds and the rushed approval process that circumvented
normal administrative and financial regulations.
LAUNDRY LIST OF IRREGULARITIES SUGGESTS IMPROPRIETY

8. (SBU) Since its conception, Mihin Lanka has appeared to evade a
number of Sri Lanka's standard business start-up regulations, many
of which former minister Samaraweera outlined in his public letter:

-The President's October 2006 budget proposal for FY 2007 did not
mention Mihin Lanka despite plans to use public money to capitalize
it.
-Presidential advisors submitted a memorandum to the Cabinet for
endorsement of the airline only hours before the cabinet meeting at
which they sought approval of the venture.
-No capital appraisal report was conducted on the venture.
-The Board of Investment (BOI) allegedly approved the airline
proposal in less than 24 hours.
-The Civil Aviation Authority had already short-listed three budget
airline operations prior to Mihin Lanka, but put further processing
of their license applications on hold until after Mihin Lanka
launches.
DUBIOUS BUSINESS MODEL: STEAL THE OTHER GSL AIRLINE'S CUSTOMERS

9. (SBU) Aviation industry insiders told Econoff that if Mihin Lanka
succeeds, it would only be by cannibalizing passengers from Sri
Lankan Airlines' most profitable routes - those to India and the
Middle East. They add that the government's plan to launch the
airline by wet-leasing a single plane makes little economic sense,
as the high cost of a crew- and maintenance-included wet lease is
unlikely to be covered by ticket sales in the low-cost travel
sector. Finally, the local aviation market is skeptical of Mihin
Lanka's prospects simply because the GSL had such a poor track
record for many years running Sri Lankan Airlines, before bringing
in Emirates Airlines as an operating partner.

10. (SBU) Comment: Civil Aviation Authority officials and
representatives of Airport and Aviation Services Ltd. appear less
than enthusiastic about the Mihin Lanka venture. In fielding Post's
queries, they seemed cautious and uncomfortable, repeatedly stating
that they were not aware of many key operational details. Post also
notes that local media coverage of the Mihin venture no longer

COLOMBO 00000394 003 OF 003


1. (SBU) SUMMARY AND COMMENT: The Government of Sri Lanka plans to
launch in March 2007 a state-run airline aimed at providing low-cost
travel for migrant workers and tourists to the Middle East and
India. The budget carrier, called Mihin Lanka, has elicited
criticism from politicians, the press, and the airline industry.
The recently sacked Minister of Ports and Aviation has charged the
President with circumventing procedural and financial regulations in
the process of creating the airline. Public criticism may have
caused the President to back away from allegedly planning to deal
free shares in the venture to himself and close family members and
political allies. Even so, the venture hardly appears to be in the
public interest: First, the plan to use civil service pension funds
to start the new venture is risky, as the South Asia region's budget
airline market is competitive and the GSL has a poor track record in
running airlines. Second, if the venture succeeds in building
market share, it will come at the expense of Sri Lankan Airlines,
which is still 51 percent government-owned. End summary and
comment.
CONTROVERSIAL BUDGET AIRLINE TO BE STATE-OWNED, NAMED FOR PRESIDENT,
RUN BY FAMILY AND FRIENDS

2. (U) The Government of Sri Lanka (GSL) is planning to launch a
state-run airline aimed at providing low-cost travel for Sri Lankan
migrant workers and tourists to the Middle East and India. The
budget carrier, apparently conceived and advanced by close advisors
to Sri Lankan President Mahinda Rajapaksa, is to be called Mihin
Lanka, after the President (short for Mihindu, which is the Pali
name for Mahinda). The non-transparent way in which the President's
coterie has advanced the airline has elicited extensive controversy.

mentions any of the earlier controversy around the airline. In
fact, coverage disappeared entirely for about two months, and only
resumed this week with brief and uncritical coverage of the test
flight described in para 3. Many Sri Lankans view the Mihin Lanka
venture as a sign that the populist and socialist President
Rajapaksa may be tempted to practice crony capitalism if he can
avoid press, opposition, and regulatory scrutiny.
BLAKE