Lack of professionalism when procuring aircraft cost SL billions

Lack of professionalism among the senior management at SriLankan and failure to comply with Co. rules and regulations during the procurement process of aircraft, led to the loss of billions, over the past decade, it was revealed by the evidence of a key witness at the Commission of Inquiry

(CoI) into Irregularities at SriLankan Airlines (SriLankan), SriLankan Catering (SLC) and Mihin Lanka (Mihin).

The Attorney General's (AG) Department commenced prosecution of ‘Re-fleeting’ process of the SriLankan's fleet in 2010, shortly after the country’s internal conflict came to an end, and the ambitious plan was put into motion, targeting the booming tourism industry in the region. A comprehensive testimony by SriLankan's Finance Head Yasantha Dissanayake, commenced this week.

A key piece of evidence relating to leasing and termination of orders for A350-900 wide body aircraft was an email sent by the then Chief Executive Officer (CEO) Kapila Chandrasena to other top SriLankan employees, asking them to fast track the process to finalise the deal with Airbus, as the ‘Shareholders’ instructed him to do so. Of a total of 8 wide body aircraft that were commissioned, 4 were leased and the rest were purchased by the then management.

When witness was asked about what the then CEO meant by a directive coming from the ‘Shareholders’, Mr Dissanayake suggested it could have been from the then Treasury Secretary Dr P.B. Jayasundera. However, the next day, witness refused to elaborate on the matter when questioned.

Additional Solicitor General (ASG) Niel Unamboowe P.C. questioned whether other Shareholders such as Peoples’ Bank, Bank of Ceylon, Employees' Provident Fund and former employees of SriLankan, along with the Treasury which holds 51% of Shares in Srilankan, were consulted before the decision was taken to procure A350 aircraft.

Pointing out that that proposed financial deal with Airbus for A350s, accounted for more than half the total assets value of SriLankan, Supreme Court Justice Gamini Amarasekara asked whether the then management sought approval from the Board of Directors (BoD), as per Section 184 and 185 of the Companies Act.

“Honestly, I did not think about those Acts at that time. I was more worried about securing a good deal for the Co. at the lowest price,” Mr Dissanayake said, while stressing that he was aware of the sluggish cash flow of SriLankan at that time, and submitted monthly financial reports to the BoD. ASG Unamboowe inquired whether the senior management were already engaged in informal talks with Airbus over SriLankan’s requirement.

The CoI was told that SriLankan's senior management failed to adhere to Co. procedures when it decided arbitrarily, through an email originating from CEO Chandrasena, and two days later, a related paper was submitted to the BoD. The Commissioners pointed out that, in keeping with the Co. Act, BoD approval should be obtained before negotiating with Airbus. The Cabinet was not informed of this major transaction beforehand, it was established.

Mr. Dissanayake admitted that the Business Plan (BP) by Via Capital, a US based firm just set up, didn’t have a Financial Plan (FP) for the fleet restructuring project. The FP is supposed to state the total project cost and the expected income from it, where and how to source the funds for it, and the return on investment.

However, witness argued there were details about this in various sections of the BP. The BP had a total requirement of US$ 510 million, with US$ 210 million for the purpose of re-fleeting. A Cabinet paper was submitted on July 2, 2011, requesting for US$ 500 million. Though the BP wasn’t produced before the Cabinet, SriLankan obtained these funds.

In 2010, SriLankan's former Chief Financial Officer (CFO) S.A. Chandrasekara was asked to formulate a strategic BP, which he did. But, on the directions of the top management, Via Capital was chosen to validate it. Via Capital ended up preparing a new BP. The CoI was told that Via Capital had no contact details and no local representatives in the country.

The evidence focused exclusively on the re-fleeting section of the BP. This was sanctioned to replace SriLankan’s ageing A340 aircraft with A330-200, before the former’s lease period ended. The plan was made for a 5-year period ending 2016, and the method of funding chosen was a ‘blended combination of lease and buy, for 6-13 aircraft.

ASG Unamboowe drew the witness’s attention to how this differed from Mr. Chandrasekara’s BP, which suggested only operational leasing and included both A320200 and A350 aircraft, in addition to the A330s.

The monthly lease payments were, US$ 400,000 for the A320-200s, US$ 850,000 for the A330-200s and US$ 1 million for the A350s. However, none of these details made it to Via Capital’s plan.

SC Justice Amarasekara asked Mr. Dissanayake whether any assessment or evaluation was done prior to approving the Via Capital BP. Witness responded saying they had discussed it while it was being prepared, but Via Capital themselves submitted it to the BoD, and he wasn’t present at the time.

However, the BoD meeting minutes mention Mr. Dissanayake’s name, while omitting to mention Via Capital representative Dr. Emre Serpen, who was an employee of InterVISTAS. “The BoD minutes have been wrong on previous occasions too, and this is the responsibility of the Co. Secretary,” Mr. Dissanayake said.

Noting that former CFO Chandrasekara was a highly qualified person with years of industry experience, Mr. Unamboowe questioned the logic behind replacing a strategic plan formulated by him, with one from a ‘novice firm without any experience in such consultancies’.

Later, SriLankan deviated from the BP and went about procuring aircraft that weren’t suggested by Via Capital, including the 8 A350s. SriLankan’s BoD issued a directive to go ahead and procure aircraft for a period beyond the BP’s validity until 2016. Mr. Unamboowe remarked that this meant the Co. was going beyond Cabinet approval, which was only up to 2016. “We eventually submitted a Cabinet paper at the end of the selection process of A350s,” said Mr. Dissanayake. The witness didn’t state when this request for funds was approved.

The decision to procure A350S meant the routes and frequencies for the respective destinations had to be changed. However, later, as SriLankan was struggling with a debt burden, the then management terminated long haul destinations eventually, where A350s were no longer required.

The CoI was told that contract prices for wide body A350-900 aircraft negotiated by the then SriLankan management were significantly higher than the prevailing market prices. Responding to the argument by the Prosecution team, Mr Dissanayake said he was aware of those allegations, but claimed that market prices were slashed significantly, later when the aircraft were delivered, due to downturn of fuel prices globally.

By 2014, according to Mr Dissanayake’s testimony, the then management had to termi- nate orders placed for Airbus A350-900 aircraft, as SriLankan was struggling with negative cash flow and the decision to cancel long haul destinations, except for the LondonColombo route. It was revealed that, though the Rome-Colombo route was running at a heavy loss at that time, a directive was issued by then President Mahinda Rajapaksa, not to discontinue direct flight services, which the airline adhered to, while struggling with additional financial burdens.

The CoI was also informed of a 'general' letter sent to Airbus in 2013, by the then SriLankan management, seeking aircraft to be included into its fleet, without stipulating any specifications or models of the aircraft.

Central Bank's (CB) Acting Director of Legal & Compliance Department K.G. P. Sirikumara denied claims of being responsible for issuing a ‘blanket’ legal clearance to issue Treasury Bonds (TB) under a direct placed system,

Mr Sirikumara claimed that his clearance for a particular financial transaction was misinterpreted by another senior employee of the CB last week. He disputed the transactions that were said to have been cleared using his legal clearance which he claimed was to have been used for a particular issuance of TBs in 2008.

He was disputing the claims made by Assistant Governor N.W.G.R.D. Nanayakkara last week, saying that one particular legal clearance was used to issue TBs issued thereafter by the CB.

The ASG noted that, under the Registered Stock & Securities Ordinance (RSSO), Section 4, the Minister of Finance is vested with powers to issue TBs using legal procedures including a prior gazette notification, before issuing the TBs.

Mr Srikumara said that, though the CB failed to comply with some legal procedures including the issuing of a prior gazette notification ahead of issuing TBs, his department always maintained that proper procedures were adhered to..

The sittings will continue tomorrow.