Chandra J writes to President on planned conversion of Government debt to equity

14th November 2011

By Fax and Registered Post

H. E. Mahinda Rajapakse

President of Sri Lanka,

Presidents Office,

Temple Trees,

Colombo 3.

Your Excellency,

Planned conversion of Sri Lanka Government debt to equity

I write this letter to bring to Your Excellency’s kind notice and possible executive response action, an issue of strategic national importance in the interests of the Government led by you as well as the long term interests of Sri Lanka and its people. This issue relates to the planned conversion of Sri Lanka Government debt to equity.

The media has reported the Hon. Senior Minister of International Monetary Cooperation having stated at a recent international Tax Conference held in Sri Lanka, that;

• “negations were underway to convert Chinese loans that are funding various infrastructure development projects in to equity giving Chinese entities a stake in the management”, and
• “this will help the to save some money and will also enhance the management of these projects”, by
• “giving the contractors a hand in the management”, and
• “Negotiations were underway regarding loans taken to construct the Norochcholai coal- fired power plant” and
• “This is a good option because we cannot manage this plant, but the Ceylon Electricity Board is opposing this initiative as it would take some control away from them” despite
• “The planned offer to Chinese contractor is for a minority stake”

The planned debt equity conversion prima facie appears to be in the interests of the of the Government led by you, as well as the long term interests of Sri Lanka and its people, due to;

• The promotion of Public Private Partnerships in infrastructure projects,
• The reduction of the annual interest payments of the Government on the foreign debt,
• The debt repayment commitments after grace period being removed,
• The positive enhancement of project free cash flows,
• The effective mitigation of project linked risks of exchange rate, interest rate etc,
• The enhancement of the ability to contract further foreign debt for other national infrastructure development projects

I hasten however to caution you and the Government to kindly consider the essential need for international best advice in conducting these debt equity conversion negotiations.

I believe that the scope of the external best advise must include the review of following areas, where, in addition to expertise and experience at a global level, their advice must be supplemented by a review of case studies of post audits of similar international debt equity conversions;

1.Long term macroeconomic impact assessments and national economic value additions justifications

2.Available options structures and methodologies for debt equity swaps

3.Best fit options for structures and bench mark term sheets for negotiation

4.Best fit option partners for debt equity swaps

5.How the best fit long term technology partner involvement can be secured, bearing in mind the need for long term support in management, technology transfers and effective good governance

6.National and project linked risk assessments and risk mitigation plans

7.The potential impact on existing contractual commitments of the lenders and contractors and associated dispute resolution process

8.Assessment of the likely impact and risk mitigation steps consequent to the proposed debt equity swap on the power plant operations and its management, its projected cash flows and operational outcomes, and also the likely future relations with the Ministry of Power and Energy and its policy framework, the relations with the Ceylon Electricity Board , future power pricing, environmental impact, management/employee relations, and stakeholder expectations and policy pronouncements of the Government

9.Development of business models, structures, best option partner selections, best option management and technology partner selection, bench mark term sheets for negotiation, risk assessment/mitigation methodologies and best advice guidelines and negotiation techniques to be applied in other similar debt equity swaps in the future.

It may be opportune for the Government under your leadership to engage the same external advisory partners to conduct along with the local expert team, a post audit by mid 2012 of the Southern Expressway, looking at alternate options that may have been available to the Government for better and long term national economic benefit linked public private partnership options in the planning and implementation of the Southern Expressway project.

The World Bank, The International Finance Corporation and Asian Development Bank may be some of the best independent choices for the Government to supplement its own negotiations team and associated professionals, in seeking external best advice guidance noted above.

In addition I earnestly appeal that Your Excellency to engage a team of local experts to provide an independent assessment of the planned debt equity swap linked international and regional relations challenges if any and seek their best advice on effective mitigation of any potential risks.

This expert panel could especially address any international relations risks and potential national impact of the debt equity swap planned with Chinese origin debt holders (including the Chinese Government and linked Banks and Finance House) and also the potential contractors and equity partners who may become the long-term minority partners in the Norochcholai Power Plant and other potential infrastructure projects financed by Chinese loans.

This team may be requested to review possible restructures these Chinese lending institutions and contractors may be subjected to due to future changes in their capital and ownership structures and control as well as national level leadership changes due in 2012.

I trust that Your Excellency, the Ministers and senior officials copied will accept that the independent recommendations made herein and shared with civil society at large arises purely out of my commitment to the assure the sustainable growth and development of Sri Lanka and its people.

With warm wishes to Your Excellency,

Yours sincerely,

Chandra Jayaratne

cc. Hon. Basil Rajapaksa, Minister of Economic Development,

 Hon. Dr. Sarath Amunugama, Senior Minister of International Monetary Cooperation,

 Hon. Professor. G. L. Pieris, Minister of External Affairs,

 Lalith Weeratunga Esq. Secretary to HE the President,

 Dr. P. B. Jayasundera, Secretary to the Treasury and Secretary Ministry of Economic Development,

 Nivard Cabral Esq, Governor of the Central Bank