Gas and the public

" As everyone is aware, the government’s debt position is unenvious with easily over 50 % of revenue being used only on interest payments for substantial loans being taken. Debt in recent times through a combination of loans, bonds and treasury bills has risen sharply and is a favourite topic amongst opposition politicians and economists."

by FS

(October 11, Colombo, Sri Lanka Guardian) Finally the government and Shell Gas have agreed on a price - $63 million – on the sale of the foreign company’s 51 % stake in Sri Lanka’s biggest domestic and industrial liquified petroleum gas (LPG) company.

While a few teething problems need to be sorted out, the share price agreement would most probably be signed in the next few days or weeks. Some of the issues to be resolved includes the status of Shell staff and the management team.

With private sector expertise hard to come up, it is incumbent that the government retains this team which has all the experience required to run a giant processing and distribution facility. However the focus of today’s comment is to look at the whole aspect of privatisation, de-nationalisation, the cost of re-purchase and creating monopolies which are issues that have dogged governments over the years.

In the latest case, the government says 49% of the Shell stake would be offered to the public which is a good step towards bringing wider public participation in essential goods, which is what gas is today to the middle class consumer.

Privatisation is a double-edged sword. Given the Sri Lankan experience of running state entitities with a bloated labour force, inefficiencies and lower productivity, privatisation has been the way forward since the 1980s.

However there have also been some bad privatisations or ‘suspect’ ones in which the Supreme Court have been called upon to adjudicate on like Waters Edge, LMS and Sri Lanka Insurance. The other concerns over privatisation (over the years) is that the entry of private buses has done little to ease congestion and overcrowding while the privatisation of gas has brought relief only in the context of consumers getting a better service. In terms of prices, it moves only one way – UP, consumers grumble. However if this is a product that is governed by global market rates, then a state institution may have subsided the product and in a different way (rising government debt) added to the burden of the consumer.

Thus privatisation has its benefits and also disadvantages. The present government is keen to retain state institutions and recently authorities have said that many unproductive and loss-making state organisations would be re-organised and re-structured to continue under government control, rather then sell it to the public.

On the cost of buy-backs like the government has done in the case of SriLankan Airlines and soon in Shell Gas, millions of rupees are being coughed out by state banks to pay for these purchases.
Buying back Emirates’ 44 % stake in SriLankan cost the government $53 million while the Shell stake is $63 million making it a total of $116 million which works out to billions of rupees being added to government debt. In the Shell case however the sale of 49% to the public in the next few weeks or months would ease the debt burden.

As everyone is aware, the government’s debt position is unenvious with easily over 50 % of revenue being used only on interest payments for substantial loans being taken. Debt in recent times through a combination of loans, bonds and treasury bills has risen sharply and is a favourite topic amongst opposition politicians and economists.

In the Shell case, Laugfs Gas founder and chairman W.K.H. Wegapitiya has gone on record saying he is keen on the business when the shares were first made available. At that point however the government was given first preference with Laugfs waiting on the sidelines.

Subsequently Laugfs has been eying the management of the Shell business which is mostly likely to go to the private sector unless the government decides on running it, which would be disastrous.
Apart from this however, is the issue of conflict of interests if Laugfs, which has a lot of political clout, is handed over management. Can Laugfs manage two brands of a similar nature and if so will the consumer benefit and provided a competitive service?

A good example now is the petroleum business where the entry of LIOC (Indian Oil subsidiary) has whipped up much more enthusiasm from the Ceylon Petroleum Corporation (CPC) to provide a more-friendly service. CPC sheds are looking brighter today that before – all because of competition.
The same applied in the case of Shell and Laufgs. What then would happen when one company (Laugfs) monopolises the market? Would consumers benefit?

These are all issues the government needs to consider carefully if it’s looking to privatise the management of Shell Gas which in due course would also be sold under a different brand name.