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Is the Auditor General the panacea for all our ills?

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by Avantha Munasinghe

One of the contentious issues surrounding the 20th Amendment seems to be the issue of the removal of Auditor General’s capacity to audit companies where the Government, Public Corporation or a Local Authority has a majority shareholding. Many critics seem to have picked on this issue, and most of them are resisting the proposed change. Their fear seems to be that if the Auditor General is not permitted to audit a certain government company, it is prone to be riddled with corruption and malpractices.

The audit by definition is a systematic and an independent review and investigation on certain subject matter, which in this case is the financial statements, management accounts, management reports, accounting records etc. of a company. In the case of a company, there is a statutory requirement for such review and investigation to be reported to shareholders annually. The review, is produced as an “opinion” of the “Auditor”.

Other than the shareholders, it is also customarily used by the tax authorities, banks, creditors, analysts or public for their respective decision-making and also to form their own opinion about the status of the company and its future. In all the government companies, the law required them to be audited by independent auditors, qualified to do so as specified by the Companies Act, until 2015. The 19th Amendment changed their auditor to be the Auditor General.

Auditing, just like Accounting, depends on certain commonly adopted set of principles. The audit of financial statements is normally done in accordance with International Standards on Auditing sometimes modified by local auditing standards. In Sri Lanka’s case, the Sri Lanka Auditing Standards are based on the International Standards on Auditing (ISAs) published by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC), with slight modifications to meet local conditions and needs. Thus, to begin with, whether it is the Auditor General or a private auditor, the standards applicable to the task are the same. It is the approach that is different.

There are a large number of companies in Sri Lanka whose shareholding in some way is linked to Government or quasi government entities for whom Auditor General has now become the Statutory Auditor. Some of these companies are merely an extension of government entities serving a function of the government. For example, Rakna Arakshaka Lanka Limited is a government-owned company, providing security services to government installations. Another is Ceylon Petroleum Storage Terminal Ltd., whose only customers are its parent entities i.e. Ceylon Petroleum Corporation and Lanka IOC PLC, only to whom it provides services. Such entities do not have to face competition to secure business.

However, there are also a large number of government-owned companies which do business in the marketplace competing with other local and international companies, which are publicly and privately owned. Lanka General Trading Company Ltd., Lanka Hospitals Ltd., Sri Lanka Insurance Corporation Limited and Milco (Pvt.) Ltd., are a few examples. Each of them has to compete for business with large segment of local and foreign companies which are purely driven by profit motive and enhancement of shareholders’ value.

These companies have very flexible systems and procedures. Their boards of directors can take appropriate decisions in a timely manner to make an urgent procurement or select suppliers to be more competitive and manage all their affairs just in time. They can buy their raw materials without calling for quotations if they think it is a profitable opportunity. Even a junior level executive of such a company may be able to decide a price discount to secure a sale.

The situation of a state-owned company in the marketplace in such scenarios is quite the opposite. They cannot do procurement as the situation demands. They have to dutifully follow the procurement rules, which even the board of directors cannot overrule. The officials have very little flexibility to seize a business opportunity. It is so easy for a private company to grab business from state-owned enterprises as the latter cannot be proactive. There is little surprise most such companies are loss-making and is a burden to the government and taxpayers.

The government officials and Ministers however want these quasi state organizations to be profitable or run at least without being a burden to the Treasury. The basic business model of these organizations is at a severe disadvantage to begin with. What 19th Amendment brought to such companies by way of auditing by the Auditor General was to push them from pillar to post. This is quite evident by the powers granted to the Auditor General in the National Audit Act, which even a crime investigator would envy. Some of the powers are:

(1) The Auditor-General shall…

… access or call for any written or electronic records or other information relating to the activities of an auditee entity;

… call any person whom the Auditor-General has reasonable grounds to believe to be in possession of information and documents, as he may consider necessary to carry on the functions under this Act, to obtain written or oral statements and require the production of any document, from any person, who may be either in-service or otherwise;

… examine and make copies of or take extracts from any written or electronic records and search for information whether or not in the custody of the auditee entity;

… after obtaining permission from the relevant Magistrate’s Court, examine and audit any account, transaction or activity of a financial institution, of any person, where the Auditor-General has reason to believe that money belonging to an auditee entity has been fraudulently, irregularly or wrongfully paid into such person’s account;

…require any officer of financial institutions to produce any document or provide any information relating to an account, transaction, dealing or activity of person referred to in paragraph (d) and to take copies of any document so produced, if necessary… There is a fundamental difference in the audit approach of a professional auditor and a Supreme Audit Institution such the Auditor General. In a private sector audit, the primary objective is to ensure the report’s recipient gets a true and fair view of the financial status of the company. While the professional auditor is supposed to report on adequacy of the controls in place and report any lapses to shareholders, the focus is primarily on the status of the shareholder’s investment.

The approach of Auditor General is more on ensuring the Compliance to rules, regulations and procedures. This is natural since the Auditor General is supposed to audit the manner in which a government organization has handled its allocation from the consolidated fund to provide a service to the public. The approach is, therefore, not focused on whether the organization is making adequate return on the government’s funds.

What the 19th Amendment did was to replace the professional auditor, who focused on performance of government companies by the Auditor General who is focused on compliance. The officers running such government-owned companies got a signal quite contrary to what the government officials and ministers were pushing them before. Compliance became the key. There is no better way to achieve compliance than to do nothing. The truth is in the last few years; these organization put profit motive in the back burner and wanted to escape from various audit queries raised by the Auditor General. The best way to do that is not to go that extra mile their competitors would go to make the organization profitable. Doing nothing became the modus operandi.

Some of the supporters of Auditor General’s auditing argue that his mere presence stops corruption. Stamping out corruption was the all-pervasive theme of the 19th Amendment. So many new entities were instituted under it to check corruption. Where are we today? Do we see any positive results? In the Corruption Perception Index published by the Transparency International in the year 2015, when the 19th Amendment was enacted, Sri Lanka’s scored 37 out of hundred. In 2019, our score was only 38. We rank 93 out of 198 countries, four places down. It is no secret that the public perceives state sector organizations as corrupt as ever and certainly more corrupt than any private sector organization in this country. The Auditor General has been auditing these state sector organizations for more than 200 years. If the cure against corruption is audit being done by the Auditor General, why are we in this situation today?

The truth is the Auditor General’s presence is a necessary evil in any government ministry or department, which does not have a commercial objective. His presence does ensure at least some level of corruption is made more difficult to accomplish. However, we must not come into the false conclusion that the presence of the Auditor General is the way to root out corruption. In a State-Owned Enterprise (SoE) with commercial objectives, his presence certainly does more harm than benefit.

There is a wrong perception that most public companies are loss making and, therefore, they should be subjected to an Audit by the Auditor General so that the “control” of public funds will put things right. As explained above, it is the business model and restrictions placed that is the very cause for loss-making SoEs to proliferate. If this argument is correct, we should see, out of more than 120 or so government companies, at last one which became profitable due to the Auditor General’s presence during last five years. There is none to show. In fact, this remedy will only make the patient even more sick.

Another untruth floated on the matter is that the financial statements of the government companies are not required to be submitted to Parliament unless they are audited by the Auditor General and that would undermine parliamentary financial oversight. The truth is that the entity, which is the shareholder in these companies, have to consolidate the company’s financial statements with that of the parent entity and the latter is certainly subjected to parliamentary oversight with financial statements of the company audited by a private auditor.

Another misconception is that supervision by COPE will put everything right in the public institutions. COPE’s examination carried out by set of parliamentarians, who on most occasions have no knowledge of the particular business, is not what is required to put these organizations right. In most cases it is the bad business model rather than lack of COPE’s oversight that fail these businesses.

SriLankan Airlines is a case of point. Many people say the bad procurement deals, continued losses and increased dependence on the Treasury by the airline would continue to happen if the Auditor General is not auditing the airline. It was making losses ever since it was set up with or without Auditor General as the auditor. The Airline business is one of the most competitive businesses globally. Even the largest airlines sometimes find it difficult to be in the black. The industry needs split second decisions to be made by professional management. As said before, this is not possible at SriLankan Airlines. We have seen Chairmen and Directors coming and going with every change of the subject minister. Nobody is having a long-term commitment to make it a success. Its competitors have boards, which are removed only if the airline makes losses, not if their political masters change. Without changing the business model, even if we have hundred auditors to audit SriLankan Airlines, nothing will change.

We all know that our country is suffering from a severe debt crisis. We invested on massive infrastructure projects, which were all debt financed. To balance that off, we desperately need to bring foreign equity into our economy. Further debt, while giving us temporary solace, will only aggravate the problem. The government is devising Public Private Partnership (PPP) programs to bring Foreign Investment from large global corporations. The government also needs to be in control of them. The 19th Amendment requires such PPP companies to have the Auditor General as its Auditor. Which global business entity would drop their global audit arrangements by the likes of KPMG, Ernst & Young or PwC and accept this arrangement? We can talk till the cows come home on how professional our Auditor General is and how independent he is, but the reality is that we live in a dream if we seriously want to promote PPP structures with this kind of legislation on.

The effective functioning of Superior Audit Institutions such as the Auditor General is definitely an essential requirement of a functioning democracy. However, let’s not fool ourselves – it is not a panacea for all ills.

Even in India where the previous Companies Act required the appointment of Auditors to Government Companies by the Controller and Auditor General of India, the arrangement has been questioned in the Report of the Expert Committee On Company Law, which said “The Committee discussed the application of the corporate law framework to Government companies on many occasions and took the view that in general, there should not be any special dispensation for such companies. …Therefore, the extension of special exemptions and protections to various commercial ventures taken up by Government companies in the course of their commercial operations along with strategic partners or general public should be done away with so that such entities can operate in the market place on the same terms and conditions as other entities. In particular, reflection of financial information of such ventures by Government companies and their audit should be subject to the common legal regime applicable. The existing delays are enabling a large number of corporate entities to evade their responsibilities and liability for correct disclosure of true and fair financial information in a timely manner. In this context, the relevance of the present section 619B of the Act was considered appropriate for a review.”

If the government needs its companies to compete with private sector, the way forward is to make their management more flexible. Throwing those decision-makers to the Auditor General is the last thing required to be done if we want them to compete effectively with the private sector. While the world is moving to embrace the scarce private capital by making things easier for such investors, some of our so-called professionals seem to be, while paying lip service for bringing more and more FDI, doing exactly the opposite by criticizing the removal of this disastrous piece of legislature brought in by the 19th Amendment.

(The writer is an Accountant based in New South Wales, Australia)



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A plural society requires plural governance

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The local government elections that took place last week saw a consolidation of the democratic system in the country.  The government followed the rules of elections to a greater extent than its recent predecessors some of whom continue to be active on the political stage.  Particularly noteworthy was the absence of the large-scale abuse of state resources, both media and financial, which had become normalised under successive governments in the past four decades.  Reports by independent election monitoring organisations made mention of this improvement in the country’s democratic culture.

In a world where democracy is under siege even in long-established democracies, Sri Lanka’s improvement in electoral integrity is cause for optimism. It also offers a reminder that democracy is always a work in progress, ever vulnerable to erosion and needs to be constantly fought for. The strengthening of faith in democracy as a result of these elections is encouraging.  The satisfaction expressed by the political parties that contested the elections is a sign that democracy in Sri Lanka is strong.  Most of them saw some improvement in their positions from which they took reassurance about their respective futures.

The local government elections also confirmed that the NPP and its core comprising the JVP are no longer at the fringes of the polity.  The NPP has established itself as a mainstream party with an all-island presence, and remarkably so to a greater extent than any other political party.  This was seen at the general elections, where the NPP won a majority of seats in 21 of the country’s 22 electoral districts. This was a feat no other political party has ever done. This is also a success that is challenging to replicate. At the present local government elections, the NPP was successful in retaining its all-island presence although not to the same degree.

Consolidating Support

Much attention has been given to the relative decline in the ruling party’s vote share from the 61 percent it secured in December’s general election to 43 percent in the local elections. This slippage has been interpreted by some as a sign of waning popularity. However, such a reading overlooks the broader trajectory of political change. Just three years ago, the NPP and its allied parties polled less than five percent nationally. That they now command over 40 percent of the vote represents a profound transformation in voter preferences and political culture. What is even more significant is the stability of this support base, which now surpasses that of any rival. The votes obtained by the NPP at these elections were double those of its nearest rival.

The electoral outcomes in the north and east, which were largely won by parties representing the Tamil and Muslim communities, is a warning signal that ethnic conflict lurks beneath the surface. The success of the minority parties signals the different needs and aspirations of the ethnic and religious minority electorates, and the need for the government to engage more fully with them.  Apart from the problems of poverty, lack of development, inadequate access to economic resources and antipathy to excessive corruption that people of the north and east share in common with those in other parts of the country, they also have special problems that other sections of the population do not have. These would include problems of military takeover of their lands, missing persons and persons incarcerated for long periods either without trial or convictions under the draconian Prevention of Terrorism Act (which permits confessions made to security forces to be made admissible for purposes of conviction) and the long time quest for self-rule in the areas of their predominance

The government’s failure to address these longstanding issues with urgency appears to have caused disaffection in electorate in the north and east. While structural change is necessarily complex and slow, delays can be misinterpreted as disinterest or disregard, especially by minorities already accustomed to marginalisation. The lack of visible progress on issues central to minority communities fosters a sense of exclusion and deepens political divides. Even so, it is worth noting that the NPP’s vote in the north and east was not insignificant. It came despite the NPP not tailoring its message to ethnic grievances. The NPP has presented a vision of national reform grounded in shared values of justice, accountability, development, and equality.

Translating electoral gains into meaningful governance will require more than slogans. The failure to swiftly address matters deemed to be important by the people of those areas appears to have cost the NPP votes amongst the ethnic and religious minorities, but even here it is necessary to keep matters in perspective.  The NPP came first in terms of seats won in two of the seven electoral districts of the north and east.  They came second in five others. The fact that the NPP continued to win significant support indicates that its approach of equity in development and equal rights for all has resonance. This was despite the Tamil and Muslim parties making appeals to the electorate on nationalist or ethnic grounds.

Slow Change

Whether in the north and east or outside it, the government is perceived to be slow in delivering on its promises.  In the context of the promise of system change, it can be appreciated that such a change will be resisted tooth and nail by those with vested interests in the continuation of the old system.  System change will invariably be resisted at multiple levels.  The problem is that the slow pace of change may be seen by ethnic and religious minorities as being due to the disregard of their interests.  However, the system change is coming slow not only in the north and east, but also in the entire country.

At the general election in December last year, the NPP won an unprecedented number of parliamentary seats in both the country as well as in the north and east.  But it has still to make use of its 2/3 majority to make the changes that its super majority permits it to do.  With control of 267 out of 339 local councils, but without outright majorities in most, it must now engage in coalition-building and consensus-seeking if it wishes to govern at the local level. This will be a challenge for a party whose identity has long been built on principled opposition to elite patronage, corruption and abuse of power rather than to governance. General Secretary of the JVP, Tilvin Silva, has signaled a reluctance to form alliances with discredited parties but has expressed openness to working with independent candidates who share the party’s values. This position can and should be extended, especially in the north and east, to include political formations that represent minority communities and have remained outside the tainted mainstream.

In a plural and multi-ethnic society like Sri Lanka, democratic legitimacy and effective governance requires coalition-building. By engaging with locally legitimate minority parties, especially in the north and east, the NPP can engage in principled governance without compromising its core values. This needs to be extended to the local government authorities in the rest of the country as well. As the 19th century English political philosopher John Stuart Mill observed, “The worth of a state in the long run is the worth of the individuals composing it,” and in plural societies, that worth can only be realised through inclusive decision-making.

by Jehan Perera

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Commercialising research in Sri Lanka – not really the healthiest thing for research

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Image credit University of Sydney

In the early 2000s, a colleague, returning to Sri Lanka after a decade in a research-heavy first world university, complained to me that ‘there is no research culture in Sri Lanka’. But what exactly does having a ‘research culture’ mean? Is a lot of funding enough? What else has stopped us from working towards a productive and meaningful research culture? A concerted effort has been made to improve the research culture of state universities, though there are debates about how healthy such practices are (there is not much consideration of the same in private ‘universities’ in Sri Lanka but that is a discussion for another time). So, in the 25 years since my colleague bemoaned our situation, what has been happening?

What is a ‘research culture’?

A good research culture would be one where we – academics and students – have the resources to engage productively in research. This would mean infrastructure, training, wholesome mentoring, and that abstract thing called headspace. In a previous Kuppi column, I explained at length some of the issues we face as researchers in Sri Lankan universities, including outdated administrative regulations, poor financial resources, and such aspects. My perspective is from the social sciences, and might be different to other disciplines. Still, I feel that there are at least a few major problems that we all face.

Number one: Money is important.

Take the example American universities. Harvard University, according to Harvard Magazine, “received $686.5 million in federally sponsored research grants” for the fiscal year of 2024 but suddenly find themselves in a bind because of such funds being held back. Research funds in these universities typically goes towards building and maintenance of research labs and institutions, costs of equipment, material and other resources and stipends for graduate and other research assistants, conferences, etc. Without such an infusion of money towards research, the USA would not have been able to attracts (and keeps) the talent and brains of other countries. Without a large amount of money dedicated for research, Sri Lankan state universities, too, will not have the research culture it yearns for. Given the country’s austere economic situation, in the last several years, research funds have come mainly from self-generated funds and treasury funds. Yet, even when research funds are available (they are usually inadequate), we still have some additional problems.

Number two: Unending spools of red tape

In Sri Lankan universities red tape is endless. An MoU with a foreign research institution takes at least a year. Financial regulations surrounding the award and spending of research grants is frustrating.

Here’s a personal anecdote. In 2018, I applied for a small research grant from my university. Several months later, I was told I had been awarded it. It comes to me in installments of not more than Rs 100,000. To receive this installment, I must submit a voucher and wait a few weeks until it passes through various offices and gains various approvals. For mysterious financial reasons, asking for reimbursements is discouraged. Obviously then, if I were working on a time-sensitive study or if I needed a larger amount of money for equipment or research material, I would not be able to use this grant. MY research assistants, transcribers, etc., must be willing to wait for their payments until I receive this advance. In 2022, when I received a second advance, the red tape was even tighter. I was asked to spend the funds and settle accounts – within three weeks. ‘Should I ask my research assistants to do the work and wait a few weeks or months for payment? Or should I ask them not to do work until I get the advance and then finish it within three weeks so I can settle this advance?’ I asked in frustration.

Colleagues, who regularly use university grants, frustratedly go along with it; others may opt to work with organisations outside the university. At a university meeting, a few years ago, set up specifically to discuss how young researchers could be encouraged to do research, a group of senior researchers ended the meeting with a list of administrative and financial problems that need to be resolved if we want to foster ‘a research culture’. These are still unresolved. Here is where academic unions can intervene, though they seem to be more focused on salaries, permits and school quotas. If research is part of an academic’s role and responsibility, a research-friendly academic environment is not a privilege, but a labour issue and also impinges on academic freedom to generate new knowledge.

Number three: Instrumentalist research – a global epidemic

The quality of research is a growing concern, in Sri Lanka and globally. The competitiveness of the global research environment has produced seriously problematic phenomena, such as siphoning funding to ‘trendy’ topics, the predatory publications, predatory conferences, journal paper mills, publications with fake data, etc. Plagiarism, ghost writing and the unethical use of AI products are additional contemporary problems. In Sri Lanka, too, we can observe researchers publishing very fast – doing short studies, trying to publish quickly by sending articles to predatory journals, sending the same article to multiple journals at the same time, etc. Universities want more conferences rather than better conferences. Many universities in Sri Lanka have mandated that their doctoral candidates must publish journal articles before their thesis submission. As a consequence, novice researchers frequently fall prey to predatory journals. Universities have also encouraged faculties or departments to establish journals, which frequently have sub-par peer review.

Alongside this are short-sighted institutional changes. University Business Liankage cells, for instance, were established as part of the last World Bank loan cycle to universities. They are expected to help ‘commercialise’ research and focuses on research that can produce patents, and things that can be sold. Such narrow vision means that the broad swathe of research that is undertaken in universities are unseen and ignored, especially in the humanities and social sciences. A much larger vision could have undertaken the promotion of research rather than commercialisation of it, which can then extend to other types of research.

This brings us to the issue of what types of research is seen as ‘relevant’ or ‘useful’. This is a question that has significant repercussions. In one sense, research is an elitist endeavour. We assume that the public should trust us that public funds assigned for research will be spent on worth-while projects. Yet, not all research has an outcome that shows its worth or timeliness in the short term. Some research may not be understood other than by specialists. Therefore, funds, or time spent on some research projects, are not valued, and might seem a waste, or a privilege, until and unless a need for that knowledge suddenly arises.

A short example suffices. Since the 1970s, research on the structures of Sinhala and Sri Lankan Tamil languages (sound patterns, sentence structures of the spoken versions, etc.) have been nearly at a standstill. The interest in these topics are less, and expertise in these areas were not prioritised in the last 30 years. After all, it is not an area that can produce lucrative patents or obvious contributions to the nation’s development. But with digital technology and AI upon us, the need for systematic knowledge of these languages is sorely evident – digital technologies must be able to work in local languages to become useful to whole populations. Without a knowledge of the structures and sounds of local languages – especially the spoken varieties – people who cannot use English cannot use those devices and platforms. While providing impetus to research such structures, this need also validates utilitarian research.

This then is the problem with espousing instrumental ideologies of research. World Bank policies encourage a tying up between research and the country’s development goals. However, in a country like ours, where state policies are tied to election manifestos, the result is a set of research outputs that are tied to election cycles. If in 2019, the priority was national security, in 2025, it can be ‘Clean Sri Lanka’. Prioritising research linked to short-sighted visions of national development gains us little in the longer-term. At the same time, applying for competitive research grants internationally, which may have research agendas that are not nationally relevant, is problematic. These are issues of research ethics as well.

Concluding thoughts

In moving towards a ‘good research culture’, Sri Lankan state universities have fallen into the trap of adopting some of the problematic trends that have swept through the first world. Yet, since we are behind the times anyway, it is possible for us to see the damaging consequences of those issues, and to adopt the more fruitful processes. A slower, considerate approach to research priorities would be useful for Sri Lanka at this point. It is also a time for collective action to build a better research environment, looking at new relationships and collaborations, and mentoring in caring ways.

(Dr. Kaushalya Perera teaches at the Department of English, University of Colombo)

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

By Kaushalya Perera

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Melantha …in the spotlight

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Fun mode for Melantha Perera and Allwyn H. Stephen

Melantha Perera, who has been associated with many top bands in the past, due to his versatility as a musician, is now enjoying his solo career, as well … as a singer.

He was invited to perform at the first ever ‘Noon2Moon’ event, held in Dubai, at The Huddle, CityMax Hotel, on Saturday, 3rd May.

It was 15 hours of non-stop music, featuring several artistes, with Melantha (the only Sri Lankan on the show), doing two sets.

According to reports coming my way, ‘Noon2Moon’ turned out to be the party of the year, with guests staying back till well past 3.00 am, although it was a 12.00 noon to 3.00 am event.

Having Arabic food

Melantha says he enjoyed every minute he spent on stage as the crowd, made up mostly of Indians, loved the setup.

“I included a few Sinhala songs as there were some Sri Lankans, as well, in the scene.”

Allwyn H. Stephen, who is based in the UAE, was overjoyed with the success of ‘Noon2Moon’.

Says Allwyn: “The 1st ever Noon2Moon event in Dubai … yes, we delivered as promised. Thank you to the artistes for the fab entertainment, the staff of The Huddle UAE , the sound engineers, our sponsors, my supporters for sharing and supporting and, most importantly, all those who attended and stayed back till way past 3.00 am.”

Melantha:
Dubai and
then Oman

Allwyn, by the way, came into the showbiz scene, in a big way, when he featured artistes, live on social media, in a programme called TNGlive, during the Covid-19 pandemic.

After his performance in Dubai, Melantha went over to Oman and was involved in a workshop – ‘Workshop with Melantha Perera’, organised by Clifford De Silva, CEO of Music Connection.

The Workshop included guitar, keyboard and singing/vocal training, with hands-on guidance from the legendary Melantha Perera, as stated by the sponsors, Music Connection.

Back in Colombo, Melantha will team up with his band Black Jackets for their regular dates at the Hilton, on Fridays and Sundays, and on Tuesdays and Thursdays at Warehouse, Vauxhall Street.

Melantha also mentioned that Bright Light, Sri Lanka’s first musical band formed entirely by visually impaired youngsters, will give their maiden public performance on 7th June at the MJF Centre Auditorium in Katubadda, Moratuwa.

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