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FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 2498
INFO RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9231
RUEHKA/AMEMBASSY DHAKA 8890
RUEHIL/AMEMBASSY ISLAMABAD 5775
RUEHKT/AMEMBASSY KATHMANDU 3809
RUEHCG/AMCONSUL CHENNAI 6329
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 000186 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SA/INS; STATE PASS TO USTR 
 
E.O 12958: N/A 
TAGS: EFIN EINV ENRG CE
SUBJECT:  ENERGY INVESTOR WOES AS SRI LANKA DISPUTES 
PAYMENT OBLIGATIONS AND HOLDS BACK PRICE INCREASES 
 
 
¶1.  (SBU) Summary:  Sri Lanka?s oil and liquefied 
petroleum gas (LPG) suppliers, including two foreign 
investors (neither American), are facing significant 
losses as the government has not allowed price 
increases or has not paid previously agreed subsidies 
in a timely manner despite increased world prices. 
Currently, firms importing and supplying liquefied 
petroleum gas and petroleum oil are embroiled in a 
dispute with the government on these issues.  After 
intense lobbying, the government approved a partial 
price hike with respect to LPG on January 31. 
Investors in Sri Lanka face difficulties with 
contract implementation and a general failure on the 
part of certain GSL officials to grasp ordinary 
economic and business realities.  Post continues to 
make efforts to educate GSL officials and prompt them 
toward enhancing the country?s investment climate. 
End Summary. 
 
¶2.  (U) Government control of the price of petroleum 
oil and LPG has resulted in major financial crises 
for companies doing business in these sectors. 
Petroleum oil is subsidized by the government, which 
abandoned early last year an automatic pricing 
formula that allowed price increases in line with 
world market prices.  The government does not 
subsidize LPG, but LPG companies need approval from 
the Consumer Affairs Authority (CAA) to increase 
prices.  As a result, companies in oil and LPG are 
required to sell their products below market value, 
and the petroleum oil companies have not been paid 
their subsidy in a timely manner. 
 
PARTIAL SUBSIDIES PAID, BUT DISPUTE OVER CONTRACT 
TERMS 
 
¶3.  (SBU) The Lanka Indian Oil Corporation?s (LIOC) 
subsidy bill due from the government stood at Rs 7.34 
billion (USD 73 million) at the end of 2005. 
According to K. Ramakrishnan, Managing Director of 
LIOC, the company received Rs 500 million (USD 5 
million) in subsidy payments in January.  Previously, 
the company received Rs 700 million (USD 7 million) 
in 2005.  Recently, newspapers quoted Treasury 
Secretary P.B. Jayasundera saying the government 
 
SIPDIS 
would honor all legitimate dues owed to LIOC.  (Note: 
A government study done in 2005 has ruled that 
subsidies would be paid only if the company suffered 
a loss.  We understand the Attorney General?s office 
agrees that these are the terms of the GSL?s contract 
with LIOC.    End Note.)  Ramakrishnan, confirming 
these reports, told the Embassy that the government 
has promised to pay part of the subsidies but has 
refused to pay amounts in excess of losses suffered 
by the company.  According to him, the LIOC has tried 
to impress upon the government the need to earn a 
return on capital and pay dividends to the 
shareholders for the company to continue in business. 
 
¶4.  (SBU) LIOC is a publicly listed company, with 75 
percent equity from Indian Government-controlled 
Indian Oil Corporation Ltd and 25 percent equity from 
the public and foreign institutional investors.  The 
company has been unable to declare a dividend due to 
losses and the share price has plummeted.  Analysts 
believe that due to bilateral pressure, the LIOC will 
eventually be paid at least most of what it is owed, 
but the timing is unknown. 
 
LPG PRICE INCREASE PERMIT DELAYED - SUPPLIER MUST 
SUBSIDIZE NATIONAL LPG DEMAND 
 
¶5.  (U) Meanwhile, Shell Gas Lanka (SGL) is also 
facing problems due to the failure to increase LPG 
prices.  After much haggling, and SGL?s threats to 
curtail supplies, the government moved to increase 
the price of LPG sold by SGL by 13 percent on January 
¶31.  SGL, an arm of the Royal Dutch Shell Group which 
holds a 51 percent stake of the company, is the 
 
COLOMBO 00000186  002 OF 002 
 
 
largest LPG supplier with 86 percent market share for 
cooking gas.  The balance of shares is held by the 
Government. 
 
¶6.  (SBU) Mahesha Ranasoma, Director of Shell Gas, 
told EconFSN that the company was facing a crisis due 
to its inability to increase its price.  According to 
Ranasoma, as a result of recent world gas price 
hikes, the price of LPG needs to be increased by 
about 23 percent, from Rs 850 per 12.5 kg cylinder to 
about Rs 1,050 for the company to break even.  The 
February 1 increase takes the price to Rs 960 per 
12.5 kg cylinder, which reduces the magnitude of 
SGL?s accumulating losses.  Shell has reported 
accumulated losses of about Rs 742 million (USD 7.4 
million). 
 
¶7.  (SBU) While the LPG price is determined by the 
Consumer Affairs Authority (CAA), the Minster of 
Trade and Commerce (under whom the CAA falls) is 
directly involved with decision making, given the 
sensitivity of these items to the economy.  The 
Minister has previously threatened to import gas at 
lower prices.  Last weekend, Ranasoma told newspapers 
that SGL is willing to make available its facilities 
for government use, if the government could import 
LPG at a lower cost.  CAA chairman, Wijesinghe told 
EconFSN last week that CAA is conscious of the need 
to maintain a positive investment climate.  However, 
indicating the limited role of CAA in these issues, 
he said he is currently acting only as a facilitator 
in negotiations between the companies and the 
Minister.  Meanwhile, local company Laugfs Gas, the 
other player in the LPG industry, has protested as 
the government has not yet acted on their request for 
an increase. 
 
¶8.  (SBU) COMMENT:  These issues highlight 
difficulties faced by investors doing business in Sri 
Lanka due to populist economic policies of the 
government, and the failure of top government 
ministers and bureaucrats to understand basic 
economic, financial and business issues (especially 
the need to honor contracts).  The subsidies have not 
only caused problems for investors, but also have 
increased the financial burden on the government 
budget.  The Ambassador continues to use his public 
speaking engagements, and meetings with Ministers and 
other officials, to explain the price, quality, 
quantity trade-off that subsidies require.  While 
there is a basic failure to understand this principle 
among some Government officials, some newly-appointed 
senior officials understand or are getting the 
message.  We hope to continue to work with them in 
developing Sri Lanka?s investment climate. 
 
LUNSTEAD