Prevent Shell from becoming another sob story

Friday, 8 October 2010 23:16 -     - {{hitsCtrl.values.hits}}

THE government decision to buyback Shell Gas for US$ 63 million has sparked off an interesting debate on the role of the State in private enterprise. According to information released at the Cabinet news briefing on Thursday morning 51% of Shell Gas Lanka Limited and 100% of Shell Terminal Lankan Limited will become a State enterprise following the completion of the transaction. Even though the information dispensed indicates the deal as finalised, the company released a statement saying that they are still continuing negotiations and insisted that the process remain confidential.

The transaction is to be financed through the Bank of Ceylon, People’s Bank, National Savings Bank and the Sri Lanka Insurance Corporation. While the government will maintain controlling interest it plans to issue the remaining 49% of shares to the private sector, effectively forming a public-private partnership.

This has raised the question of whether any private sector company would want to invest in the enterprise given that decision making control remains with the government. Given the track record of State Owned Enterprises in Sri Lanka this seems too much of a risk. Led by the Ceylon Petroleum Corporation and Ceylon Electricity Board, these enterprises are estimated to cost around 2% of the GDP and continue to be one of the biggest wastes of public resources.

The government’s decision to purchase Shell Gas can be considered laudable on several factors. One is the fact that it is a valuable national asset and as Sri Lanka remains perched on the verge of economic growth a strong energy sector is essential. However the downside is, if the government attempts to run it on its own disregarding the need to maintain it as a profit making enterprise. This does not mean that it has to focus on fleecing the consumer but as a global industry LPG can only be subsidised significantly if the money to do so is being supplied from another source. This means that even if the people get gas at a lower price they will be taxed to compensate for the inefficiency of the gas company.

It is an accepted school of thought that governments must create a business enabling environment through implementing the correct policy framework. Whether the government has managed to achieve that since the end of the war despite many promises is questionable. However Shell Gas must not be allowed to deplete itself into the same debt trap that other prominent State owned enterprises have managed to drag themselves into.     

The Cabinet paper stated that the Chief Valuer has estimated both companies for Rs.17, 440 million (US$ 154.37 million). Bank of Ceylon has valued the same as ongoing business concerns and recommended a price ranging from US$65 million to US$ 70 million. The maximum price recommended is US$ 70 million. The Project Committee, based on the report submitted by the Bank of Ceylon recommended a price range of US$ 65-70 million for the negotiations.

Regarding employees the document stated that Shell gas and the government were having issues as the former wished the staff to remain for 24 months with the present remuneration. Even though the government wanted this clause changed Shell refused to do so and an agreement was reached to decide the future of the workers in accordance with laws and requirements of the Labour Department.

It is clear that these significant investments much bear fruit and the gas company must spearhead the energy sector and synergise with the rest of the economy. Without some level of control given to the private sector they will be wary of involving themselves and strong attention to profit ensuring practices is commendable. It is imperative that the government does not let Shell Gas become another sob story.