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Debt Vs. Equity – A Case for More FDI and Private Ownership

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By Chandu Epitawala

Since the unprecedented crisis in the country in 2022, many people (experts as well as laymen) have weighed in on what ails Sri Lanka in terms of its governance and macroeconomic failings and missteps which eventually led to the collapse of the economy, the currency and default on its debt. Many have also commented/highlighted the brain drain or migration of trained/skilled minds that is taking place or even accelerating. I like to dwell on a slightly different aspect/cause or focus on the same issue of the economy and its remedies purely from a Finance standpoint which I find not discussed widely enough in media and public/private fora.

As any student of Finance will tell you, studying for a Degree in Finance will lead you to three main career paths. Regular Banking (mostly specializing in Debt), Asset or Fund Management and Merchant Banking or Corporate Finance. I will attempt to look at Sri Lanka’s economic crisis and its possible solutions more from the vantage point of the Merchant Banker or purely from a financing point of view.

What are the essential or fundamental elements of a Country (or a Company) for it to efficiently or competitively function and thrive in a globalized economy? (Sri Lanka, in general, and the government entities/SOEs in particular, sadly lacks all these elements in varying degrees.)

A set of Physical Assets (investment)

A group of People (human capital/Expertise/Know How)

A governance/management Structure – Entrepreneurial Drive/Spirit

A Plan/Skill/Ability to sell/export/market the output (goods or services)

I will mainly focus on the challenge of how to put together the essential Public Infrastructure Assets (or restructure existing set of Assets/SOEs) to revive economic activity and fuel growth, as that’s the one which requires the bulk of financing. When one refers to Finance, what does that entail?

A set of Public Assets required to run a Country efficiently generally includes highly capital-intensive public infrastructure such as Roads/Highways, Sea Ports, Airports, Bridges, Power Generating/Distribution infrastructure, Irrigation Infrastructure, and Storage/Logistics Infrastructure etc. etc. I like to highlight the fact that this type of infrastructure requires some Government (State and Local) involvement, at least at the initial stage as investment (finance) required are quite high, involves macro/national or strategic planning, land acquisition, very long gestation period etc. However, the principles of financing such Projects are no different to Corporate Finance. In fact, at the country level, one may have even better options, such as borrowing at concessional rates or getting equity participation from multilateral agencies (Ex. IFC etc.)

As any Accounting, Banking, or Economics student would point out, at the simplest/elementary level, a set of Assets (which gets recorded in a Balance Sheet) can be financed only in one of two ways; Equity/Own Capital or Debt/Borrowed Capital. (However, many hybrid combinations and sophisticated variations are available, but that goes beyond the scope of this Note). Following is the basic equation of a Company Balance Sheet.

TOTAL ASSETS = DEBT (Borrowed Capital) + EQUITY CAPITAL (Ownership)

At the national or macro level, Sri Lankan capital accumulation/formation or total Savings (individual and corporate) in the Banking system is around 17% of the GDP. For Sri Lanka to achieve an 8% real annual growth rate, the Country needs around 30% of GDP in capital investment (including private investments in factories, housing, etc.) every year, including in Public Infrastructure, mostly undertaken by the Government. This leaves a significant 13% or so of GDP (nearly $6-8 billion every year) gap/shortfall in Financing required to fuel the annual growth required to provide adequate employment opportunities etc. This capital can only come from outside the Country or from the Savings of foreigners or citizens of other countries. Either we can borrow (Debt Financing) this Capital or try to attract Equity (FDI). From a macro perspective, it would be highly unwise to borrow in entirety such amounts from foreign sources even if can. The way to get out of our current predicament of unsustainable levels of government debt is aggressively canvassing for equity capital (foreign or local) in exchange for ownership transfer of government-owned Assets, thereby rebalancing the macro-level Capital Mix or Structure.

In Finance, there’s an important concept called the Optimal Capital Structure (where the Weighted Average Cost of Capital is the lowest). Any balance sheet must have the right mixture/balance of Debt and Equity to balance the above equation. It is not desirable to have too much Debt (borrowed capital) or Equity (own capital).

Debt in itself is not a bad thing as long as one knows the following;

How much to borrow (as a % of the Balance Sheet and certainty/riskiness of Turnover/Income)

On what terms (rate, repayment schedule, collateral required etc.)

How or Where to deploy the funds (in productive activity that gives a better return etc.)

Equity (FDI) is usually better (especially in the SL context, where we have borrowed too much on unfavourable terms and are now unable to repay). It should be welcomed, but ownership of those Assets will not be held by locals (ownership of the existing set of Assets need to be handed over to the investor/new owner), which in Sri Lanka appears to be a controversial and divisive topic due to lack of proper understanding of basics of Finance. In other words, purely from a Financing standpoint, it would have been much better if Sri Lanka (or any other country in our situation) were to get $3 Bn in FDI in exchange for ownership in a Sri Lankan SOE than the EFF Facility (debt or borrowing) from the IMF. The bulk of the foreign reserves of the country should be equity (FDI, Remittances, Tourism Receipts and Export Proceeds) and not borrowed dollars/euros. That would have warranted lighting firecrackers and celebrations. (Admittedly, IMF Program, with its monitoring mechanism, sends other important positive signals to the international community of lenders and investors and governments)

I want to state here a wise quote apparently made by the late Mr Upali Wijewardena; ” the ownership of a set of Assets is not important. What is important is having access to or the users of those Assets”. This rationale/logic would apply equally to corporates or individuals. The reason is ownership comes with investing/blocking a sum of money (which always has opportunities elsewhere or opportunity cost), and if Sri Lankan taxpayers (or anyone else for that matter) can have access/users to a business, service, infrastructure without doing the investment ourselves/utilizing our own equity funds, why not? Do we care who owns a business/set of assets?

I would take Hambantota Port (HIP) as an example which drew much condemnation and protest from sections of the Sri Lankan public against Foreign Investment/Ownership to illustrate the point. There should be no argument that the Chinese Investor has far better worldwide connections/network, port/logistics management expertise and deep pockets to continuously invest and improve the HIP and surrounding infrastructure than Sri Lanka Ports Authority or GoSL. The GoSL oversees the Security of the Port, Customs duties, and Immigration.

Only the commercial aspects are handled by the Chinese investor. SL exporters and importers have access to or are the users of a modern, efficient Harbour. I do not see any reason for Sri Lankans to complain (other than on the terms of the Sale, which is a done deal). From a Finance standpoint, it’s essentially a Debt Equity swap. SLPA (or GoSL) balance sheet, Debt came down, and ownership or management control on a lease was transferred to the Chinese party for 99 years. That Asset (or set of assets) cannot be removed from our sovereign soil and thus comes forever under the SL Ports regulator. What’s more, any income/profits derived from an efficient operation can be taxed, and the SLPA/GoSL charges fees/levies.

Many other examples, such as Sri Lanka Telecom (SLT) and Lanka Indian Oil Company, can be given from our own country. Numerous examples can be given from all over the world, especially India, Malaysia etc. Remember, unlike when loans are taken when foreign equity is committed to the country, the periodic forex outflow from the country is part of the dividends paid out to the owning/controlling entity, and that is only when the business is profitable/thriving.

Ownership of Assets/Businesses change hands all the time on a daily basis (Ex. The Stock Markets) in the real world, and that is nothing to fear. Companies regularly make in-house or outsourced decisions/choices. Individuals are often called upon to make own, hire/lease/rent choices. In fact, anyone who understands the basics of Finance should welcome equity financing (as opposed to excessive debt financing) and welcome more and more FDI giving up government or private ownership (along with risks, challenges such as finding export markets/clients, maintenance/upkeep and other headaches) and enjoy the benefits (users and access) of efficiently run, thriving business operations (Power, Energy, Ports, Telecom, or whatever) by foreigners or even aliens functioning from our soil and servicing our people and paying their due taxes and fees.

If Sri Lanka were to fully open up the country and create the necessary conditions, such as maintaining the rule of law and policy consistency, to attract/welcome foreign equity capital (FDI) and foreign human talent/know-how/expertise ( Entrepreneurial, Managerial, Technical and Creative) like had been aggressively done and still being pursued in Dubai and Singapore and many other places like Panama, Malaysia, Thailand etc., Sri Lanka can not only come out of this crisis but also somewhat mitigate or even reverse the ill effects from the brain drain that is taking place. I

t would be a grave mistake to assume we Lankans have all the requisite talent/expertise to run globally competitive businesses or can do everything better. Believe it or not, though those who are born and bred in Sri Lanka may be eager to migrate to the West looking for greener pastures, there are many in the West (and in other countries) with specific skills/talent/expertise we badly need, and with capital we lack who would consider moving here (or merely investing here) on a long term basis if the right conditions as mentioned above are created and available. Again, nothing for locals to fear as such opening up only would create vibrant, thriving businesses and an economy which in turn creates many employment and other opportunities for locals from which locals will gradually learn and acquire the know-how/expertise over time, not to mention the potentially large tax revenues for the government.

To reiterate, from an economic and financial point of view and indeed a commonsense point of view, Ownership/Control is unimportant. Enjoy the access and users while allowing the government to foster competition, regulate and tax these entities/businesses and pass on the benefits or redistribute such revenues to the public/masses by enhancing and expanding free health care and education, welfare programs and the like.

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Eastern University and the making of a culture of peace

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by Jehan Perera

There is an important change in the way peace is being understood in Sri Lanka. The notion that peacebuilding is not simply the responsibility of governments, politicians and peace organisations, but is also a responsibility of educational institutions, appears to be permeating the consciousness of at least a section of the academic community. This was visible on International Peace Day at an event held at Eastern University by the Faculty of Health-Care Sciences. The event was unusual not least because the medical and nursing faculty of the university had decided that peacebuilding was relevant to its academic and professional responsibilities.

Peacebuilding has too often been treated as something undertaken after conflict, when the fighting has stopped and the immediate task is to rebuild relationships between communities. But peace cannot be sustained by governments and peace organisations alone. If it is to become long lasting, the values and practices of peace have to become part of the institutions through which a society educates its younger generations. Universities and other educational institutions are therefore important to peacebuilding. They are among the places where the foundations of a culture of peace can either be built or neglected.

The experience of the Faculty of Health-Care Sciences at Eastern University provides a practical example of what this can mean. Led by its Dean, Prof Thillainathan Sathaananthan, the faculty organised an event which went beyond the ordinary academic scope of a medical faculty. University academics are experts in writing project proposals and applying for research grants. On this occasion, the members of the Faculty of Health-Care Sciences used those skills to apply for a UNESCO grant that they won to conduct an International Peace Day event. The significance lies less in the Rs 200,000 grant than in the decision to use the university’s institutional capacity and resources to invest in peacebuilding. The event at Eastern University needs to be understood as more than a successful university programme. It represents a possible paradigm shift in peace thinking.

Institutional Commitment

The Peace Day event obtained the support of the university administration, including Vice Chancellor Prof P Peratheepan, and reached out to secondary schools in the vicinity to mobilise their attendance. The event itself was meticulously organised. There were cultural items including traditional and modern dance and song in the three languages, performed by combinations of solo, duet and multiple singers, dancers and actors drawn in part from nearby secondary schools. There was a panel discussion by senior academics on the general theme of peacebuilding and how to prepare for it. A discussion among the students followed, where each student spoke on behalf of a religion that was not theirs. This is significant because peacebuilding cannot remain an idea discussed by specialists at conferences. It has to become part of the way institutions educate and prepare people for life in a plural society.

The Faculty of Health-Care Sciences at Eastern University has provided a model through its Peace Medicine course modules that were introduced to the curricular as a compulsory core course over 10 years ago. Two senior academics, Dr Kuveriel Eliyas Karunakaran and Dr Thillainathan Sathaananthan, have written a book on “Peace Medicine- A Health Care Concern” that was published five years ago. Its Peace Medicine Module integrates principles of medical ethics, compassion, equity, social justice and community engagement into health education and practice. In his introduction, former Vice Chancellor of Eastern University, Prof T Jayasingam noted “This book is an introduction to a theme which had already been operating in the Faculty of Health Care Sciences as a course.”

Doctors, nurses and health workers know better than anyone the harm that war and violence does. They are the people who treat the wounds and trauma that violence leaves behind. In a hospital, a patient is not asked what their religion or ethnicity is before they are treated. Health care is one of the places where peace is practised every day. The Faculty has therefore found a way of connecting its professional responsibilities with the wider social responsibility of peacebuilding. The question is whether this experience can be replicated throughout the country, at universities and at other educational institutions, so that peacebuilding becomes part of the consciousness of education itself. If that happens on a sufficient scale, it can begin to generate a culture of peace that becomes increasingly difficult to reverse.

Local Action

The Eastern University event corresponded closely to the United Nations theme for this year’s International Day of Peace, “Invest in Peace – For Everyone, Everywhere, Every Day”, which honours the “everyday architects of peace”, people driving local action, laying the groundwork for stability and building lasting peace from the ground up. The emphasis on investment is important. An investment means that something is put in: time, courage and resources. There is no more violent conflict in Sri Lanka today. But the absence of war does not automatically produce a culture of peace. The factors that fed the country’s conflict have not disappeared from the world. Racism, corruption and the violation of laws and human rights are the raw materials of conflict. So too are unresolved grievances, discrimination and the failure to recognise the suffering of others.

A country that does not deal with its past does not escape it. The past can return in the next generation. This is why the experience of Eastern University needs to be replicated countrywide, both at universities and at other educational institutions. The objective should not be to turn every academic discipline into peace studies. Rather, peacebuilding needs to become part of the consciousness of education itself. Eastern University shows that a medical faculty can develop Peace Medicine. A law faculty can examine the relationship between justice, rights and peace. Faculties of education can prepare teachers to work in diverse communities, while the humanities and social sciences can examine the different narratives through which communities understand their histories. Every institution can find its own way of making peacebuilding relevant to what it teaches.

Sri Lanka has had many declarations, pledges and programmes in the past. What matters is whether these produce changes in behaviour and institutional practice. Peacebuilding requires confronting difficult issues rather than avoiding them. It requires respect for different identities, but also engagement across those identities. It requires dealing with grievances in the present while also addressing unresolved issues from the past. It requires truth, accountability, reparations and guarantees of non-recurrence. It requires people to learn that the rights of another community do not diminish their own rights. The International Peace Day event at Eastern University was evidence of a change in the way at least some academics in a part of the country deeply affected by war are thinking about their responsibilities. Peace needs to be invested in and the most important investment will be in the minds of those who will inherit the future.

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Quality assured education commodities

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by Ahilan Kadirgamar

I have always noticed the little paper tags that are inside the packaging of some products that say quality assured or quality control. I often wonder who might have checked the product and stamped that tag, but I also forget the tag soon enough. Decades later, when I entered academia, I was taken aback by the emphasis placed on quality assurance in our universities. It is not something that could be forgotten and done away with; the entire university system is obsessed with quality assurance.

Beginning with the staff induction programme, quality assurance is drilled into the newly recruited lecturers. It is the norm, not seen as doing any harm and only trying to improve quality. It is accepted as given, and not questioned. Quality Assurance Cells and Committees are omnipresent and hover above the Departments and, at times, even the Faculty Boards. Quality Assurance reviews are feared by the Deans and Vice Chancellors. University life itself seems secondary to the rule of quality assurance. What do we make of this system of quality assurance and what are its implications for our university system?

Corporate speak

Universities globally have been going through major changes with neoliberal education policies. In many countries, universities increasingly became corporatised to be run like businesses in the 1980s. As state support for universities declined, cost cutting became the norm. They started hiring adjunct or part-time staff. Many public non-fee levying universities around the world began to charge fees. Decade by decade, tuition fees became more and more exorbitant, forcing students to take student loans. The total student debt in the United States now stands at close to US$ 2 trillion; which is about 20 times the GDP of Sri Lanka. As the higher education landscape transformed in the West, university administrations began to recruit Presidents, Vice Chancellors and administrative officials with corporate backgrounds and experience.

Such corporatisation of universities in the West has since been imported into countries like Sri Lanka, introducing a new corporate vocabulary, including quality assurance, graduate competencies, programme outcomes, intended learning outcomes, etc. University teaching has become secondary to documenting so-called outcomes. The teacher-student relationship, the environment of the lecture hall and even administering the university have been over-determined by the processes of ensuring quality. How did such major changes come about in such a short time? Indeed, academics of just two generation ago, would never have heard of these terms and processes in the Sri Lankan university system.

World Bank Trojan horse

Since the early 2000s there have been a number of World Bank projects that have drastically changed the character of Sri Lankan universities. Quality assurance as a central agenda within universities, and many other changes to the working of our universities, came through these World Bank initiatives. The Improving Relevance and Quality of Undergraduate Education (IRQUE) project and Higher Education for the 21st Century (HETC) project were two such earlier projects that set up the Quality Assurance and Accreditation Unit (QAAU) under the University Grants Commission (UGC) and established systematic quality assurance reviews for state universities. The public often thinks these are grants from the World Bank to modernise our universities. However, they are not grants but loans.

The most recent such project, Accelerating Higher Education Expansion and Development (AHEAD) is a US$ 100 million loan from the World Bank implemented from 2018 to 2023, which consolidated the quality assurance structures from the earlier projects. Furthermore, these projects are implemented with tremendous arrogance, prioritising their implementation over all other concerns in the universities, when the project over six years for example accounts for just one fourth of our budget allocation for universities this year.

The AHEAD project drastically changed course curricula, sought to increase student enrolment in science, technology, engineering, mathematics (STEM) disciplines, commercialise the university research agenda and create university-business linkages. All of this was pushed to supposedly help us face development challenges. We have heard the ideological attack on our universities and even students claiming they are “unemployable graduates”. These changes to our higher education system were supposedly going to create jobs and increase employment.

The irony of the AHEAD project is that just as it was ending in 2023, apparently after having reached its targets, the Sri Lankan economy was collapsing. The World Bank often gets the direction of causality wrong. It is the economy that creates jobs for graduates, and not the training or kind of graduates that create jobs. It is decades of World Bank policies, and those of its ideological twin the IMF, that have led to such high youth unemployment, not only in Sri Lanka but also in many other countries in the global South.

Sri Lanka entered an IMF agreement in March 2023 and started a new Country Partnership Framework with the World Bank in June 2023. These programmes have little to say about, and actively discourage, government initiatives that aim to create an industrial policy or an employment creation policy. Instead, they push for austerity measures, which not only restrict the allocation for education among other sectors, but also end up contracting the economy to the detriment of increasing employment. Their goal is the commercialisation of higher education, to make universities into businesses and run them like factories.

In this context, the ideology of quality assurance is powerful. The International Organisation for Standardisation (ISO), whose different standards are necessary for marketing, is the institution that came up with the concept of “quality assurance”. It promoted quality assurance as a process of identifying defected products. Therefore, when the World Bank promotes this conceptual framing, our students are, in fact, seen as products on the assembly line, with quality assurance processes aiming to prevent the release of defected products from the university system. For the US$ 100 million we borrowed for the AHEAD project and the many more million dollars in similar World Bank projects, there is no evidence of increased employment of graduates.

Commodity fetishism

Over a century and a half ago, Karl Marx critiqued the economic analysis prevalent at that time that associated some inherent or monetary value for commodities without considering the social relations that underlie the production of those commodities. Marx called this commodity fetishism. Furthermore, he theorised that such commodity fetishism was also a reason for the alienation of human beings from the world. If our labour and what we produce is seen devoid of the social relations that underlie them, we lose our connection with the people and the world. In this process we become alienated from what we produce and the world.

We are now in a world where our students themselves are fetishised as commodities for the market. Universities are no longer communities concerned about knowledge and human growth, but mere factories producing commodities, which have to be produced without defects to be marketed. In this way, quality assurance has become the cause for the alienation of students, academics and our universities themselves, from the larger relationship with our economy and society.

Our university system does need reform. It is grossly underfunded and not providing the financial support and facilities for our students. Universities have become hierarchical spaces without the academic freedom and democratic ethos necessary for producing knowledge. Academics and students need to engage more with their communities to make their learning and research meaningful, not to mention their contribution to and integration with society. However, when it comes to even questions of governance and regulation of the universities, such concerns are merely reduced to improving quality. In our contemporary times, this singular focus on quality assurance, as opposed to addressing the larger structural issues, is crippling our universities. There may be no way out, but to put back quality assurance where it started, those little tags on goods, to perhaps be noticed but quickly forgotten.

Ahilan Kadirgamar is a political economist and Senior Lecturer, University of Jaffna.

(Kuppi is a politics and pedagogy happening on the margins of the lecture hall that parodies, subverts, and simultaneously reaffirms social hierarchies)

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Thailand’s biggest new global star …

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The entertainment scene, globally, is agog with excitement, and, why not!

Yes, a new global star has emerged … from Thailand, and she hit the headlines by winning America’s Got Talent.

Rattikarn Amloy, known to millions by her stage name Nene Royal, was crowned the winner of America’s Got Talent (AGT) Season 21 at the live finale at Pasadena Civic Auditorium, California, taking home the USD 1 million grand prize.

The 16-year-old rocker, from the holiday island of Phuket (I’ve been to Phuket, courtesy Tourism Authority of Thailand), has struck a power chord around the world, and is the first Thai national ever to win the hit NBC show.

She beat nine other finalists, including runner-up magician Geno Ploeger, after a blistering final performance.

Nene’s story is pure rock and roll fairy-tale. She says she picked up a guitar at age seven, fell in love at the first chord, and taught herself mostly by watching videos online. That dedication earned her a music scholarship to Kajonkiet International School Phuket.

Her audition at America’s Got Talent — a swaggering, shredding rendition of The Cranberries’ classic ‘Zombie’ — exploded online, amassing over 200 million views across AGT’s platforms, more than any act this season.

She kept wowing: ‘Hysteria’ by Muse, then ‘Black Hole Sun’ by Soundgarden which earned her Spice Girl Mel B’s Golden Buzzer, sending her straight to the live shows.

For the final, she unleashed ‘Seven Nation Army’ by The White Stripes. Judge Howie Mandel shouted: “You should win. Give her the million, America.” Mel B praised her “mysterious, mystical stage presence”.

And for the grand finale, she lived every teen rocker’s dream — performing on stage, alongside US rock giants Linkin Park.

When host Terry Crews announced her as winner, the teenager collapsed to the stage floor in tears. “I’m very happy and you know I’m emotional right now,” she said.

And Thailand erupted. Her school held watch parties, posting: “You did it, congratulations, champion. We are so proud of you.”

Even Prime Minister Anutin Charnvirakul sent a personal congratulation. He had earlier hosted Nene at Government House in July, where she played guitar while he sang a Thai rock song. His office said her talent “brought pride to Thai people.”

Corporate Thailand also rallied behind her — Charoen Pokphand Foods, owned by billionaire Dhanin Chearavanont, even rented a giant billboard in Times Square, New York, to cheer her on.

With her blistering guitar solos, rock-ballad shrieks and fearless spirit, little Nene Royal has just become Thailand’s biggest new global star.

What’s more, this amazing teenager will be bringing her powerful vocals, guitar skills and signature rock-metal style to the stage, as opening act, before one of the world’s biggest rock bands, America’s Avenged Sevenfold, in Singapore, on 13 October.

Unfortunately, we are still to see a local artiste, grab the spotlight, on a global scale … like Thailand’s Nene.

Yes, they do shine, but mostly on social media, and that, too, with the aid of AI (Artificial Intellegence).

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