Monday, December 22, 2014

Who will pay off Sri Lanka’s loans ?

Cerno wondered who should pay Sri Lanka's loans. I'm not sure but I certainly don't want it to be me!

I woke up from a dream the other night. I had been dreaming of Chinese loans and lying a awake in bed a solution to the problem came to me.

The Chinese loans are mostly project-based therefore the logical thing to do would be to swap the loans for equity. In other words, give the ownership of the projects to the Chinese in return for the cancellation of the loan.

In plain language, we default on the loans but dress up the process in enough financial fig leaves to make it appear that we are not. The Chinese will not go away empty handed either, they will gain ownership of the project together with whatever income that it generates. The projects have obviously cost far more than they are worth, but that is a question the lenders will have to ask of themselves. The citizenry and parliament were not privy to the full details of either the loans or the projects so will feel little responsibility for repayment. 

The Chinese will of course have to manage the regular operations of the project, whether it is the harbour, the airport or the highway; as the new owners the onus is on them to make the assets pay their way.

The Government will need to set up a regulator (such as OFGEM in Britain which regulates the energy industry ) to ensure that the pricing is not unreasonable and that basic service standards are met. We do not want the toll on the highways suddenly raised to Rs.10,000/- a trip just because the Chinese want their loans repaid.

The country is overburdened with debt and trying to service these loans will be a punishing experience  for citizens, therefore a default at some point  seems almost inevitable. Given a choice between defaulting on the international bond market and defaulting on China, the Chinese options looks a lot safer, especially since we will not technically be defaulting at all, we will be assigning the project assets to the lenders.

It may not be possible to convert all loans in this manner due to geopolitical considerations-the harbour may be particularly problematic. The alternative would be to sell the assets to private investors (privatisation) and use the money raised to repay the debt but the problem is that due to the massive cost overruns on the project it will never be possible to recover more than a fraction of its value through a sale on the open market, which is why the debt swap option is the most attractive.

Moreover the Government can sweeten the deal further by liberalising regulation that will stimulate business activity, giving the projects a better chance of success. The Government has spun a web of red tape that is strangling business. For example reintroducing the automatic visa on arrival and removing the minimum pricing on hotels can be an imediate boost to tourism.

The debt/equity swap will involve a lot of legal paperwork, even more work will need to go into the role of the regulator and the formula for pricing but this is an option that is worth exploring. 


Anonymous said...

Paying back power loans is not a problem. In fact power loans are perhaps the highest yielding loans. Compare power at 28 rupees a unit and 10. Even if you sell power uniformly at 15 rupees you can still make a profit.

What may make sense is to give Chinese the airport in Hambantota and the port. The roads are also questionable.

Even those could perhaps be paid back if the state does not expand the public sector and employ unemployable graduates every year and reduce some subsidies. And if SriLankan Airlines stops making losses 200-300mn dollars will be saved every year. That is the cost of a 300MW coal plant.

Jack Point said...

Thanks Anon, yes power is probably somewhat better than the airport and port, but there seem to be recurrent issues with reliability.

In addition are we counting full costs? Stockholding costs on the coal (they need to maintain about six months stock), downtime/startup costs during breakdowns, emergency repair and maintenance.

It would be interesting to see the accounts of the CEB, with income staements broken down by power plant.

In fact all government businesses should be made to publish quarterly accounts in the press and on the web so that we may know what is happening to taxpayers money.