VZCZCXRO0826
RR RUEHLMC
DE RUEHLM #0394/01 0681026
ZNR UUUUU ZZH
R 091026Z MAR 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 5614
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RUEHKA/AMEMBASSY DHAKA 9947
RUEHIL/AMEMBASSY ISLAMABAD 6916
RUEHKT/AMEMBASSY KATHMANDU 4991
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RUEHBK/AMEMBASSY BANGKOK 3155
RUEHKP/AMCONSUL KARACHI 2157
RUEHCG/AMCONSUL CHENNAI 7489
RUEHGV/USMISSION GENEVA 1872
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000394 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
STATE FOR SCA/INS AND EEB/TRA/OTP 
STATE PASS USTR, DOL/ILAB FOR TINA MCCARTER 
SINGAPORE FOR FAA 
E.O 12958: N/A 
TAGS: ECON EIND ETRD EAIR EINV KCOR CE
SUBJECT: SRI LANKA: ALLEGATIONS OF IMPROPRIETY IN CONNECTION WITH 
NEW STATE-OWNED BUDGET AIRLINE 
REF: A) COLOMBO 263 B) COLOMBO 324 
 
¶1. (SBU) SUMMARY AND COMMENT:  The Government of Sri Lanka plans to 
launch in March 2007 a state-run airline aimed at providing low-cost 
travel for migrant workers and tourists to the Middle East and 
India.  The budget carrier, called Mihin Lanka, has elicited 
criticism from politicians, the press, and the airline industry. 
The recently sacked Minister of Ports and Aviation has charged the 
President with circumventing procedural and financial regulations in 
the process of creating the airline.  Public criticism may have 
caused the President to back away from allegedly planning to deal 
free shares in the venture to himself and close family members and 
political allies.  Even so, the venture hardly appears to be in the 
public interest:  First, the plan to use civil service pension funds 
to start the new venture is risky, as the South Asia region's budget 
airline market is competitive and the GSL has a poor track record in 
running airlines.  Second, if the venture succeeds in building 
market share, it will come at the expense of Sri Lankan Airlines, 
which is still 51 percent government-owned.  End summary and 
comment. 
CONTROVERSIAL BUDGET AIRLINE TO BE STATE-OWNED, NAMED FOR PRESIDENT, 
RUN BY FAMILY AND FRIENDS 
¶2. (U) The Government of Sri Lanka (GSL) is planning to launch a 
state-run airline aimed at providing low-cost travel for Sri Lankan 
migrant workers and tourists to the Middle East and India.  The 
budget carrier, apparently conceived and advanced by close advisors 
to Sri Lankan President Mahinda Rajapaksa, is to be called Mihin 
Lanka, after the President (short for Mihindu, which is the Pali 
name for Mahinda).  The non-transparent way in which the President's 
coterie has advanced the airline has elicited extensive controversy. 
 
¶3. (U) GSL officials say Mihin Lanka will begin operations this 
month.  (Mihin Lanka offices at the airport and Colombo are now 
open, but a targeted launch of February 4, Sri Lanka's Independence 
Day, came and went with no official explanation of the 
postponement.) On March 5, the airline secured a provisional license 
to fly after overcoming technical problems that temporarily delayed 
its maiden test flight.  Its initial flight from Colombo 
Bandaranaike International Airport to India was a requirement for 
the airline to get an "air operating certificate" from Sri Lanka's 
Civil Aviation Authority (CAA).  The certificate gives Mihin Lanka 
clearance to operate and handle all aspects of a commercial flight 
using a leased Fokker-27 aircraft.  At this time, the airline does 
not own any aircraft. 
¶4. (U) The GSL is billing Mihin Lanka as the country's only national 
airline.  (Note: This is odd, because the government still has a 51 
percent majority Sri Lankan Airlines; Emirates Airlines owns 43 
percent, and the remaining six percent is owned by Sri Lankan 
Airlines employees).  This no-frills carrier is designed to cater to 
local migrant workers traveling to the Middle East, and to tourists 
to and from the Indian sub-continent.  The government says Mihin 
Lanka will also function as a cargo airline, transporting goods 
produced by small and medium scale producers.  The venture plans to 
directly or indirectly create 500 jobs, including positions for Sri 
Lankan Air Force personnel who want to move into civil aviation. 
¶5. (U) The airline is to be a fully government-owned company 
utilizing state funds.  The initial capital contribution is 
estimated at around 500 million Sri Lankan Rupees (approximately USD 
4.6 million), with an estimated total cost set at Rs. 1.5 billion 
(approx USD 13.8 million).  The government initially intended to tap 
the state-run Foreign Employment Bureau and the Employees' Trust 
Fund for start up capital in the venture.  After a strong public 
backlash supported by negative media reporting against using public 
funds, the government may be seeking financial backing elsewhere, 
but has not publicly identified possible alternate sources. 
¶6. (SBU) Critics argue that the carrier's lack of transparency stems 
from its leadership - a handful of politicians and advisors close to 
the President.  According to a Civil Aviation Authority gazette, the 
Board of Directors of Mihin Lanka will be composed of Defense 
Secretary Gothabaya Rajapaksa (the President's brother), Finance 
 
SIPDIS 
Secretary P.B. Jayasundera, Air Marshall Roshan Goonetilake, and 
 
SIPDIS 
Presidential Coordinating Secretary Sajin de Vass Gunawardena. 
Gunawardena, who has been appointed "Accountable Manager in charge" 
of the airline, has been linked to a number of past allegations of 
financial impropriety involving government procurement. 
AVIATION MINISTER'S OPPOSITION COSTS HIM HIS JOB 
¶7. (U) On February 9, President Rajapaksa sacked Minister of Ports 
 
COLOMBO 00000394  002 OF 003 
 
¶1. (SBU) SUMMARY AND COMMENT:  The Government of Sri Lanka plans to 
launch in March 2007 a state-run airline aimed at providing low-cost 
travel for migrant workers and tourists to the Middle East and 
India.  The budget carrier, called Mihin Lanka, has elicited 
criticism from politicians, the press, and the airline industry. 
The recently sacked Minister of Ports and Aviation has charged the 
President with circumventing procedural and financial regulations in 
the process of creating the airline.  Public criticism may have 
caused the President to back away from allegedly planning to deal 
free shares in the venture to himself and close family members and 
political allies.  Even so, the venture hardly appears to be in the 
public interest:  First, the plan to use civil service pension funds 
to start the new venture is risky, as the South Asia region's budget 
airline market is competitive and the GSL has a poor track record in 
running airlines.  Second, if the venture succeeds in building 
market share, it will come at the expense of Sri Lankan Airlines, 
which is still 51 percent government-owned.  End summary and 
comment. 
CONTROVERSIAL BUDGET AIRLINE TO BE STATE-OWNED, NAMED FOR PRESIDENT, 
RUN BY FAMILY AND FRIENDS 
¶2. (U) The Government of Sri Lanka (GSL) is planning to launch a 
state-run airline aimed at providing low-cost travel for Sri Lankan 
migrant workers and tourists to the Middle East and India.  The 
budget carrier, apparently conceived and advanced by close advisors 
to Sri Lankan President Mahinda Rajapaksa, is to be called Mihin 
Lanka, after the President (short for Mihindu, which is the Pali 
name for Mahinda).  The non-transparent way in which the President's 
coterie has advanced the airline has elicited extensive controversy. 
 
and Aviation Mangala Samaraweera, who had opposed the Mihin Lanka 
arrangement (ref A).  Rajapaksa did not appoint a replacement for 
Samaraweera, instead keeping the Ports and Aviation portfolio for 
himself.  On February 17, Samaraweera, who had also served as 
Rajapaksa's Minister of Foreign Affairs until he was removed in the 
January 28 cabinet reshuffle, sent a letter to the President listing 
a series of grievances (ref B).  In this, Samaraweera stated his 
strong disapproval of the Mihin Lanka project due to the planned use 
of public funds and the rushed approval process that circumvented 
normal administrative and financial regulations. 
LAUNDRY LIST OF IRREGULARITIES SUGGESTS IMPROPRIETY 
¶8. (SBU) Since its conception, Mihin Lanka has appeared to evade a 
number of Sri Lanka's standard business start-up regulations, many 
of which former minister Samaraweera outlined in his public letter: 
 
-The President's October 2006 budget proposal for FY 2007 did not 
mention Mihin Lanka despite plans to use public money to capitalize 
it. 
-Presidential advisors submitted a memorandum to the Cabinet for 
endorsement of the airline only hours before the cabinet meeting at 
which they sought approval of the venture. 
-No capital appraisal report was conducted on the venture. 
-The Board of Investment (BOI) allegedly approved the airline 
proposal in less than 24 hours. 
-The Civil Aviation Authority had already short-listed three budget 
airline operations prior to Mihin Lanka, but put further processing 
of their license applications on hold until after Mihin Lanka 
launches. 
DUBIOUS BUSINESS MODEL: STEAL THE OTHER GSL AIRLINE'S CUSTOMERS 
¶9. (SBU) Aviation industry insiders told Econoff that if Mihin Lanka 
succeeds, it would only be by cannibalizing passengers from Sri 
Lankan Airlines' most profitable routes - those to India and the 
Middle East.  They add that the government's plan to launch the 
airline by wet-leasing a single plane makes little economic sense, 
as the high cost of a crew- and maintenance-included wet lease is 
unlikely to be covered by ticket sales in the low-cost travel 
sector.  Finally, the local aviation market is skeptical of Mihin 
Lanka's prospects simply because the GSL had such a poor track 
record for many years running Sri Lankan Airlines, before bringing 
in Emirates Airlines as an operating partner. 
¶10. (SBU) Comment:  Civil Aviation Authority officials and 
representatives of Airport and Aviation Services Ltd. appear less 
than enthusiastic about the Mihin Lanka venture.  In fielding Post's 
queries, they seemed cautious and uncomfortable, repeatedly stating 
that they were not aware of many key operational details.  Post also 
notes that local media coverage of the Mihin venture no longer 
 
COLOMBO 00000394  003 OF 003 
 
¶1. (SBU) SUMMARY AND COMMENT:  The Government of Sri Lanka plans to 
launch in March 2007 a state-run airline aimed at providing low-cost 
travel for migrant workers and tourists to the Middle East and 
India.  The budget carrier, called Mihin Lanka, has elicited 
criticism from politicians, the press, and the airline industry. 
The recently sacked Minister of Ports and Aviation has charged the 
President with circumventing procedural and financial regulations in 
the process of creating the airline.  Public criticism may have 
caused the President to back away from allegedly planning to deal 
free shares in the venture to himself and close family members and 
political allies.  Even so, the venture hardly appears to be in the 
public interest:  First, the plan to use civil service pension funds 
to start the new venture is risky, as the South Asia region's budget 
airline market is competitive and the GSL has a poor track record in 
running airlines.  Second, if the venture succeeds in building 
market share, it will come at the expense of Sri Lankan Airlines, 
which is still 51 percent government-owned.  End summary and 
comment. 
CONTROVERSIAL BUDGET AIRLINE TO BE STATE-OWNED, NAMED FOR PRESIDENT, 
RUN BY FAMILY AND FRIENDS 
¶2. (U) The Government of Sri Lanka (GSL) is planning to launch a 
state-run airline aimed at providing low-cost travel for Sri Lankan 
migrant workers and tourists to the Middle East and India.  The 
budget carrier, apparently conceived and advanced by close advisors 
to Sri Lankan President Mahinda Rajapaksa, is to be called Mihin 
Lanka, after the President (short for Mihindu, which is the Pali 
name for Mahinda).  The non-transparent way in which the President's 
coterie has advanced the airline has elicited extensive controversy. 
 
mentions any of the earlier controversy around the airline.  In 
fact, coverage disappeared entirely for about two months, and only 
resumed this week with brief and uncritical coverage of the test 
flight described in para 3. Many Sri Lankans view the Mihin Lanka 
venture as a sign that the populist and socialist President 
Rajapaksa may be tempted to practice crony capitalism if he can 
avoid press, opposition, and regulatory scrutiny. 
BLAKE