Columns

• Line minister had no knowledge on national carrier’s decision to terminate deal with Airbus
• CID probe underway on the purchase of four Airbus A -350 900 aircraft
• AG questions legality of Airbus agreement and the need to sign numerous agreements with other parties

By Our Political Editor
Hitherto unknown details of the financially wrecked national carrier SriLankan Airlines unravelled this week. A highlight is a Criminal Investigation Department (CID) probe on how four Airbus A-350 900 aircraft came to be purchased during the previous regime. As a result, Public Enterprises Development Minister Kabir Hashim told his ministerial colleagues in a memorandum that Airbus S.A.S. had declined to continue further discussion on the purchase agreement until it received confirmation from SriLankan Airlines that these investigations were concluded. The contents of the memorandum were somewhat outdated and the Minister seemed unaware of the new developments. Airbus S.A.S. is a division of the multinational Airbus Group SE that manufactures civil aircraft. It is based in Blagnac, a suburb of Toulouse in France.

No end to the financially wrecked SriLankan Airlines' problems

Hashim’s memo dated May 24, 2017 and circulated to ministers ahead of Tuesday’s weekly ministerial meeting, draws their attention to five different recommendations made by the Attorney General. The AG’s office which has also confirmed that CID investigations were under way, among other matters, noted that the purchase agreement may be found to be illegal is a matter that cannot be ruled out at this juncture. The Attorney General has opined that “it is advisable that any decision to terminate the purchase agreement should be informed to the Cabinet prior to giving effect to the decision of the SriLankan board. Yet, the AG has said that “any decision to terminate the Purchase Agreement should be taken by the Board of SriLankan as “an independent decision of a corporate body.”

The AG’s detailed opinion is contained in a letter he sent to SriLankan on April 24 this year. This was after the acting Secretary to the Enterprise Development Ministry wrote to him on March 8 this year to seek “advice from the Department regarding the cancellation of the aforesaid Purchase Agreement…” It made clear that by the time the letter was written, the termination agreement had been concluded by SriLankan.

There is a glaring disparity in the positions taken up by the Enterprise Development Ministry and SriLankan Airlines. The Ministry was blissfully unaware that a termination agreement had already been signed by SriLankan on October 4, 2016 – almost six months before. Nevertheless, copies of a few letters from the Cabinet Committee on Economic Management (CCEM) and the Prime Minister’s office had been sent to the Ministry. The Public Enterprise Development Ministry was seeking the AG’s advice when a deal had already been done. It is not clear why SriLankan did not keep its own line Ministry informed.

The recitals in this “Termination and Amendment Agreement” (Airbus 350) states: A. “LESSEE has entered into certain Aircraft Lease Agreement dated 27 September 2013, (as amended and supplemented from time to time, collectively, the “Lease Agreement”), pursuant to which LESSOR has agreed to lease, and LESSEE has agreed to take on lease three Airbus A350-900 aircraft with original Scheduled Delivery Dates of July 2016 (designated Prod No 50110, August 2016 (designated Prod No 5012) and September 2016 (designated Prod No 5013) (collectively, the “Aircraft”).

B. LESSEE has requested to terminate the Lease Agreement, and subject to and in accordance with the terms hereof, LESSOR has agreed to such termination. It is in terms of this amended termination agreement “in consideration of LESSOR’s agreement to terminate the Lease Agreements subject to and in accordance with Articles 3 and 4 , LESSEE hereby agrees to pay LESSOR an amount of US$ 146,500,000.00 (one hundred and forty six million five hundred thousand dollars (the “Termination Fee”), payable in eight (8) instalments …:”

The first payment was US$ 10,500,000 (ten million five hundred thousand) just five days from the date the agreement was signed on October 4, 2016. Thereafter, from January onwards until June 2017 US$ 13,500,000 (thirteen million five hundred thousand) was paid either before the second or the third of each month. On or before June 30, 2017, US$ 56,000,000 (fifty six million) was paid.

All payments were directed to AerCap Global Aviation Trust. All funds have been remitted to Citibank NA, London, Citigroup Centre, Canada Square, Canary Wharf, London E 14 5 LB. In addition to the termination fee, the Lessor retained the Security Deposit “pursuant to the Lease Agreements as its sole and exclusive property.” The agreement adds “the LESSEE will have no right, title or interest therein or claim thereto….”

Confidential agreement
A clause in the Termination and Amendment Agreement insists on confidentiality. It states: “This agreement is strictly confidential and its provisions will not be disclosed by a party to third Persons (other than to such party’s auditors or legal advisors or as required in connection with applicable Law). LESSEE or LESSOR will co-operate with one another to obtain confidential treatment as to the commercial terms and other material provisions of this Agreement.” Since the Public Enterprise Development Ministry was unaware, as revealed in its own correspondence, it would be a safe assumption to say it had no knowledge, firstly of the termination Agreement. Secondly, it was also unaware what the different provisions were and why a sum of US$ 146.5 million dollars was being remitted.

More so when the Cabinet Committee on Economic Management (CCEM) chaired by Prime Minister Ranil Wickremesinghe on September 28, 2016 had decided on the following: “Termination of the A 350 lease contract between SriLankan Airlines and AerCap – It was stated that there had been a discussion with the then Minister of Finance (Ravi Karunanayake), and the AerCap representatives. Termination fee has been reduced to US$ 98 million but two conditions have been added. They are, lease of another aircraft and also to extend the lease of another aircraft currently being used.”

In the light of this, why SriLankan did agree to a sum of US$ 146.5 million dollars is unclear. True there is provision for the reduction of the termination fees “provided each of the conditions” has been ‘satisfied in full.’ The question that begs answer is why the negotiators for SriLankan did not heed the CCEM decision and settle in the agreement for US$ 98 million. It is now clear that SriLankan would have to begin negotiations again with AerCap to seek the release of the balance amount money. Or would they have to wait until AerCap decides? There is no provision for SriLankan to receive interest on the surplus payment.

Matters seem to have been made worse by a disclosure in Minister Hashim’s latest memorandum. He has said that SriLankan had paid pre-delivery payments of US$ 19,214,638.45. He has noted that SriLankan had stopped making pre-delivery payments, with the approval of the board of directors, only since November 2016. It is clear from the facts made available by SriLankan that the pre-delivery payments have not been factored in when negotiating the termination agreement. Are those monies, over US$ 19 million, therefore a write off?

Minister Hashim has traced the history of the Airbus A-350 900 deal. SriLankan had entered into a purchase agreement on June 28, 2013 for the manufacture and delivery of four aircraft. Delivery was to begin from the second quarter of 2020 with the last aircraft being delivered in the first quarter of 2021. Pre-delivery payments had commenced in 2013 and the last such payment was due in December 2018. The total cost was US$ 222,356,600.85. There was settlement on the first aircraft to be delivered earlier than Hashim mentioned and thus the remaining three were left for negotiation.

Minister Hashim says, “According to SLA (SriLankan Airlines), the possibility of cancelling the said purchase agreement had been broached at a discussion with Airbus in November 2016 and the SLA reported to the Board of Directors that the airbus had indicated “cancellation is not an option…..” Alas, this is not the factual position. Either the Minister who is responsible for SriLankan had not been informed or he had overlooked a key factor. The termination agreement has already been signed on October 4, 2016.

Cabinet Ministers, or at least some of them, were confused at the contradictory positions. Minister Hashim has presented facts that are at variance with the action taken by SriLankan. It is in this backdrop that President Sirisena, having ended chairing the weekly Cabinet meeting on Tuesday, walked in to his office also at the Presidential Secretariat. Joining him thereafter were Prime Minister Ranil Wickremesinghe, Ministers Kabir Hashim, Malik Samarawickrema, Sarath Amunugama, S.B. Dissanayake, Mahinda Amaraweera, Rajitha Senaratne and Sarath Fonseka.

As revealed in these columns last week, Sirisena summoned a meeting with the SriLankan Board Directors after the previous week’s ministerial meeting. This was after a discussion on a routine memorandum presented jointly by Ministers Ravi Karunanayake (then Finance) and Kabir Hashim led to issues being raised about SriLankan. Minister Hashim was to complain that the SriLankan management overlooked his role as the minister-in-charge and had not kept him informed of most developments.

Hashim was backed by his ministerial colleagues who argued that such a situation should not be allowed to exist. Sirisena intervened and declared he would summon the board of directors. He said ministers who wish to take part in the discussion were welcome to do so.

The board of directors of SriLankan comprise Ajith Dias (Chairman), Joseph M.S. Britto, Rakhita S. Jayawardena, Lt. Col. Sunil Peiris, Harindra K. Balapatabendi, R. Chanaka D. De Silva, Mahinda Haradasa and Niranjan De Silva Deva Aditya.

Court room atmosphere
There were heated exchanges, with Ministers Senaratne and Fonseka directing most of the questions to Chairman Ajit Dias. He was asked how much was being drawn every month by Suren Ratwatte, a former Emirates A 380 pilot who is now the Chief Executive Officer (CEO). The Chairman replied that he was receiving a monthly payment of Rs 3.5 million. “You have jacked up the salaries of all top management people,” exhorted Fonseka.

Asked for the salary of another senior executive, Chairman Dias replied that he was being paid Sterling Pounds 13,500 (or more than Rs 2.7 million) per month. The previous incumbent had held the post for a lower salary but was not found suitable. Hence, the person in question, he said, was recruited from overseas.

Minister Senaratne questioned the Chairman on his connections to a former test cricketer turned businessman who is now a shareholder in one of his private companies. He asked whether some investigations, based on the findings of the Weliamuna one-man-committee of inquiry were not being investigated due to influence brought to bear by this person. The cricketer is related by marriage to the former CEO of the airline who had been named in the Weliamuna report. Chairman Dias denied the allegation and said that the businessman in question held a ‘small share’ in one of his private companies. Intervened Minister Fonseka to say “the whole issue is because there has been no probe into numerous issues raised by the Weliamuna committee.” It does not appear that the Board of Directors wanted to go into those matters, he said.

Minister Senaratne then turned to those in charge of security. He said a retired officer who was the bestman at the wedding of the previous Chairman had continued to remain in office. He wanted to know how many free tickets this official was entitled to. Chairman Dias responded that six tickets were issued free of charge. One official who was present admitted he had more tickets than the allotted quota but insisted that he did not utilise them. He declined to answer when a question was posed to him about the payments he received. Fonseka was to allege that “there is a mafia” in SriLankan and urged the matter to be gone into.

One minister who was at the discussion said the atmosphere was more like a courtroom where a prosecution counsel was cross-examining an accused. “They were quite aggressive and insisted on answers,” he said. The embarrassment all round was exacerbated by another fact, he said. The two ministers who raised the searching questions represented the United National Party (UNP). Their leader Premier Wickremesinghe listened patiently and did not intervene as the Q & A session continued.

Taking note of the developments was President Sirisena. Sources close to the Presidency said he was now further studying matters relating to SriLankan. “In the light of the vast sums of money incurred as losses,” the source said “he is examining corrective measures.”

It seemed ironical that the concluding paragraph of Minister Hashim’s memorandum had this to say: “However, the total cost of cancellation of this purchase agreement cannot be ascertained and it depends on the legal claim of Airbus agreement and other contractual agreements if any. Until the said purchase agreement is being cancelled SLA and Airbus are in intact and legally binding with the said agreement and legally enforceable.” That speaks volumes about the relations between the minister and the airline which is under his charge. Whilst Minister Hashim is talking about the “total cost of cancellation” in his memo of May 24, 2017, SriLankan had already concluded the termination agreement on October 4, 2016. That endorses Hashim’s claim that he is not being consulted by the SriLankan management as the minister in charge of the subject.

A similar situation prevailed when the previous government went ahead with the purchase agreement with Airbus and now the subject of a probe by the CID. Then, the Attorney General’s Department was not consulted. However, this time the AG was consulted after both the CCEM and the then Finance Minister Ravi Karunanayake said that it should be done.

AG’s observations
Among the observations made by the AG’s Department is one which states that “It is observed that although advice has been sought only with regard to the cancellation of the Purchase Agreement, the Purchase Agreement deals only with the purchase of the “airframe” and “propulsion system.” A large number of other separate Agreements have been entered into with several other parties dealing with other essential components of the aircraft, (including aircraft engines) without which the aircraft cannot function. It is not clear why several such agreements have been entered into. However, this department has been advised by the officers of SLA that this is “industry practice.” Whether this is in fact correct should be considered, since SLA is now faced with potential liabilities to all such other contractual counter parties, in addition to Airbus S.A.S. upon cancellation of the Purchase Agreement….”

In keeping with this assertion, SriLankan has entered into a purchase agreement with Zodiac Set, France to purchase seats, Thales Avionics Inc for supply of inflight entertainment, Lukedesig for cabin design and eOperation Services Agreement, eSolutions Agreement and eSolutions Hosting Agreement with Airbus. The latter has been terminated with a fee of US$ 115,569.

Noting that SriLankan had submitted two plans containing two options to a Cabinet Sub Committee, Option 1 had proposed that SriLankan would continue operations within the existing corporate structure under a comprehensive restructuring plan, including the amalgamation of Mihin Lanka. Option 2 had been the transfer of the entire business of the two airlines to a new company.

The Cabinet Sub Committee, the AG’s letter points out, had recommended option 1. That is for “SLA to continue to discontinue long distance destinations such as Paris, Rome and Frankfurt and to downsize the fleet pursuant to which it had been proposed that the ‘8x A 350-900s be converted to options, deferred, re-negotiated or cancelled’. Although Option 1 in its totality has been in principle approved by the Cabinet, no specific direction has been given by Cabinet as to whether the Purchase Agreement should be deferred, re-negotiated or cancelled.” The letter also makes clear that any decision to terminate the Purchase Agreement should be informed to Cabinet prior to giving effect to the decision of the SriLankan board. SriLankan has also entered into an agreement with Rolls Royce PLC where they were to provide “products” like spares, engines, parts and used parts). The AG has said Rolls Royce is entitled to payments in the event of repudiation by SriLankan.

SLFP-UNP deal
For the Government, the crisis over SriLankan comes at a time when the two main partners – the Sri Lanka Freedom Party (SLFP) and the United National Party (UNP) – are focusing on reaching accord on key political issues. The Joint Council of the two parties met last Tuesday at the Parliament Complex but the all-important issue, the renewal of the Memorandum of Understanding (MoU) did not figure, Minister Anura Priyadarshana Yapa told the Sunday Times,

“There is still time for us to discuss those matters. In our Agreement of August, there is provision for time till December this year for us to negotiate he said.”

The two sides discussed the proposed constitutional changes as well holding the long overdue local council elections. In the case of the constitutional changes, it became clear once more, that each side is waiting for the other to make its position known. There was apprehension among some who represented the UNP on whether the SLFP was tacitly seeking its backing to retain the Executive Presidency. However, an SLFP participant said, “We are yet to make a final decision on the issue.” On the conduct of local council elections, the two sides appear deadlocked over which electoral system should be adopted. There were suggestions that in the event they failed to reach consensus, the existing proportional representation system be adopted. There was, however, no decision except to agree that the two sides should meet again.

The joint Council is made up of: SLFP – Mahinda Amaraweera, Duminda Dissanayake, Anura Priyadarshana Yapa, Susil Premajayantha, S.B. Dissanayake, Lasantha Alagiyawanna. UNP – Kabir Hashim, Malik Samarawickrema, Mangala Samaraweera, Ravi Karunanayake, Harin Fernando, Akila Viraj Kariyawasam, Ranjit Madduma Bandara, Ravindra Samaraweera and Talatha Athukotale.

At a time when the Government is facing an acute financial situation, diverting funds to priority areas has become one of utmost importance. On top of that, it has to raise resources to meet the colossal damage caused by the recent floods and landslides. Hence, cutting down on extravagant expenditure on ventures like Srilankan, there is no gainsaying, becomes inevitable. The focus is on President Sirisena who is due to respond after he makes a study.

Army Commander Crisantha de Silva new Chief of Defence Staff Lt. Gen. Crisantha de Silva, to be promoted to General will be the new Chief of Defence Staff. He is expected to be appointed from Tuesday (June 27).His extended term as Commander of the Army was set to expire on August 22 this year. However, the retirement of Air Marshal (to be promoted Air Chief Marshal) Kolitha Gunatilleke left the post of CDS vacant. The former CDS is now being tipped for a diplomatic appointment.Lt. Gen. Silva’s early relinquishing of the post of Commander of the Army has led to speculation over who will succeed him. The next in line is Chief of Staff Major General Mahesh Senanayake. Though he is set to retire on August 18, an appointment would automatically help him continue in office. Another name being mentioned is Major General Boniface Perera, who is described as senior most. He is presently the Volunteer Force Commander. Air Marshal Kolitha Gunatilleke Major General Boniface Perera Lt. Gen. Crisantha de Silva