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THE NEED FOR INCREASED FUEL PRICES AND DIVESTITURE OF CEYLON PETROLEUM CORPORATION

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by Sanjeewa Jayaweera

In a recent TV talk show “Face the Nation”, a panel of economists mostly with experience in the private sector delivered an insightful and no holds barred discussion on the recent hike in petroland diesel prices.  The participants were Murtaza Jafferjee (Chair of Advocata Institute), Nishan De Mel (Executive Director Verite Research), Dr Anila Dias Bandaranaike (Former Assistant Governor of Central Bank) and Shiran Fernando (Chief Economist of the Chamber ofCommerce).

It was good to listen to a discussion where no attempt was made to cotton wool the perilous position of the Sri Lankan economy. It was pleasing that all panelists felt that the price increase was inevitable even if taken rather late in the day. Some of the key points they made were:

Murtaza Jafferjee said, “market forces are not allowed to operate due to government interference, which prolongs the issues at hand despite creating an illusion that everything is fine. The government is trying to solve a foreign currency solvency issue by using toolsintended to manage a liquidity crisis. We spend a net amount of US $ 3.5 billion in a year on fuel imports (when the average price is US $ 70 per barrel) which is the single largest import, and that it is vital to price it correctly.

“The revised pricing, unfortunately, does not still cover the cost of diesel. The government should have done price increases in stages. In New Delhi, the price of a Liter of petrol is Rs. 250/- (SEE TABLE 1). According to a World Bank study, the fuel subsidy benefits the richest 30% of households (here) with 70% of the benefit. He proposed that to ease the burden of higher fuel cost on the poorest segment of the population, there needs to be a cash transfer, like Samurdhi benefits to that segment instead of subsidizing all and sundry.”

His message was not to play politics with fuel prices, causing a huge hole in the economy. He was astounded that the single person income tax-free threshold of Rs.three million for a year introduced by the government in 2019 is 400 per cent of the country’s per capita income. This contrasts with countries like Singapore and Australia, both of whom have a much higher per capita income than Sri Lanka, but the tax-free threshold is only around 20% of per capita income.

Dr Anila Dias Bandaranaike said, “leadership need to make tough decisions and convince the public to undergo certain hardships to work towards a better future.” Those presently overseeing the management of the economy are out of their depth and drowning. Post-2015, when attending parliamentary oversight committees, she observed that most MP’s were absent and that many of the few who attended did not understand what was going on! She was critical of the private sector and referred to them as the NATO = No Action Talk Only! But unfortunately, she declined to comment about the role of the utterly inefficient and subservient public service of which she was part for several years!

Nishan de Mel said, “The present government reduced a plethora of taxes when it came to power, thereby significantly reducing government revenue—estimated to be around Rs. 600 billion. These measures were to act as an economic stimulus leading to economic growth. Unfortunately, no analysis has been done to determine whether these measures achieved the desired result.”

He lamented that there is a lack of economic data readily available in our country.  This prevents proper monitoring and analysis of various actions resorted to by the government and hinders future planning. He cited an example of how the Central Bank has filed a court case to prevent access to certain data relating to the bond scam. They retained expensive lawyers from private practice as opposed to those from the Attorney Generals Department. The government is resorting to local borrowing to bridge the budget deficit, and by keeping the lending rates below inflation, the government is borrowing at zero cost. Our economy is in a precarious position.

 

The Need for a Formula for Pricing Fuel

Those who have some knowledge and understanding of how the government should manage the economy have been of the view for several decades that the government needs to price the supply of fuel, electricity, gas, and many other commodities and services based on a formula ofcost-plus profit. In 2018, the Yahapalana government did introduce a price formula. They were subjected to both criticism and ridicule. With an impending election, the practice was hastily withdrawn. A document prepared as far back 2003 proposed that the fuel price formula should be based on:

CIF price (FOB + freight + insurance + evaporation losses) to which the following costs be added (port + jetty charges + customs and excise duty + financial charges + storage and terminal charges + marketing and distribution charges) to arrive at the wholesale cost.

The retail price was to be arrived at by adding the following to the wholesale cost (profit margin of 5% + retailer and dealer margin of 2.5% of the wholesale price + VAT).Fuel prices should be revised monthly to reflect changes in Singapore Platts average FOB price and exchange rates.

It was a simple enough formula to have been implemented. No doubt there would have been periods when world oil prices spiked well above US 100 per barrel, the retail price would have been high. However, we all know that no commodity or service can be provided below costother than for a short period. Unfortunately, this type of logic has escaped those who have governed our country for so many decades.

Actually, it is a case of not being able to take tough decisions at the correct time. Short-term political popularity has overridden the compelling need for sound economic management. That our country has lacked visionary leaders since Independence is evident. However, we, the masses, are equally culpable for our predicament. The quotation “people get the government they deserve” is quite apt.

In addition, high fuel prices hopefully should also act as a catalyst for car owners to adopt practices such as car-pooling. The benefits extend beyond just financial to also reducing traffic jams on our roads, pollution etc.

The Losses incurred by Ceylon Petroleum Corporation (CPC)

At the outset, I must express my disappointment that the latest CPC Annual Report available is for the year ended December 31, 2018. This reflects the overall inefficiency that pervades state institutions where the work ethic is deplorable. Many companies listed on the Colombo Stock Exchange releases their Annual Reports within 90 days of the end of the financial year. An examination of the financial statements of CPC for 2018 reveals the following.

CPC posted a loss of Rs. 105 billion, of which Rs. 82.7 billion was on account of foreign exchange rate variation and a further Rs. 12.9 billion due to interest costs. Unfortunately, even at a Gross Profit Level (Revenue less direct costs), there was a loss of Rs 3 billion. TheBalance Sheet as of December 31, 2018, reflects that CPC has accumulated losses of Rs. 325.6 billion. The net assets are a negative of Rs. 281.7 billion. Borrowings were Rs. 296 billion,although there was Rs. 110.6 billion of bank deposits, investments in treasury bonds and bank balances. Other liabilities of Rs. 313 billion included foreign bills payable for imports of Rs. 245.5 billion.

CPC is insolvent, and the Auditor General has qualified his report by stating, ” The Corporation’s ability to continue as a going concern without the financial assistance from the Government is doubtful.”

I have included a table (2) detailing the eight-year history of the performance of CPC and some essential information. The absence of the financials for 2019 and 2020 prevents me from doing a 10-year analysis. As can be observed in 2011, 2012, and 2018, CPC made a loss even at Gross Profit Level and posted a loss before tax in five out of eight years. In 2011 and 2012, the average price for a barrel of Brent crude was in the region of US $ 112, and the consequences of not adjusting the fuel price are apparent. On the other hand, in 2013, despite the average cost of a barrel of Brent being US $ 109, CPC was able to post a Gross Profit of Rs. 26 billion as fuel prices were adjusted to reflect the cost.

 

Poor Management of CPC

Given the pivotal role that CPC plays in our economy, there is a need to ensure that people of skill, proven competence, and experience be appointed to both the Board of Directors and the key management positions. I have noted from perusing the corporation’s Annual Reports that the Executive Chairman post is like a merry go round. In the year 2017, there were three different Chairmen, whilst in 2018, there were two separate Chairmen. No organization, let alone one as large as CPC, can function effectively without continuity. In addition, the calibre of people appointed to the post of Chairman is a cause for concern.

In 2017, the Minister of Petroleum appointed his brother as the Chairman. Under any circumstances, this appointment can only be deemed as nepotism. In addition, the Chairman being a former cricketer, had no relevant experience nor proven competence and maybe the skill sets required to hold this position. The infamous hedging deal that cost the country’s taxpayers a sum over Rs. 14 billion between 2007 and 2008 occurred when another former national cricketer was the Chairman of CPC. 

Do we ever learn? Another who served as Chairman in 2018 is a person whose career was in the Sri Lanka Administrative Service. With all respect, having dealt with various senior public servants in our country during my career in the private sector, I have grave reservations about their capability to hold a position that requires proven commercial acumen and expertise. A question that needs to be posed and answered by the Chairman and the Board who served the CPC in 2020 is whether they took advantage of rock bottom prices in the world market to secure our future supplies.

 

Auditor General’s Report On CPC

The Auditor General’s (AG) Report for 2017 and 2018 of CPC and subsidiary run into 29 and 18 pages, respectively.  They are a damning indictment of maintaining poor accounting records, lax internal controls, non-adherence to Sri Lanka Accounting standards, lack of evidence for audit, non-compliance with laws, rules, regulations, poor management decisions, operating inefficiencies, and transactions of contentious nature.

 

Due to the constraint of space, I shall only list a few of them, although any reader interested can access the annual reports of CPC on their website www.ceypecto.gov.lk

Differences in balances payable/receivable as reflected in the accounting recordsof CPC and other parties:

A difference of Rs. 670.93 million in the inter-company balance between CPC and the Subsidiary – Ceylon Petroleum Storage Terminal Ltd., as of December 31, 2017, increased to Rs. 2.47 billion by December 31, 2018.

A balance difference of Rs. 436.78 million observed between CPC and the Department of Inland Revenue (IRD) regarding Income Tax, Economic Service Charge, and Value Added Tax payable/recoverable.

There is a balance difference of Rs. 778.3 million between CPC and the CEB as of December 31, 2018

An amount of Rs. 2.7 billion is reflected in excess as payable to Sri Lanka Customs compared with Sri Lanka Customs’ records.

No basis disclosed or audit evidence provided for the provision of Rs. 142.92 million made on inventory items to be written off.

An amount of Rs. 4.59 billion payable to the People’s Bank on account of hedging transactions between 2007 and 2009 has been excluded from the financial statements of CPC. In addition, Commercial Bank of Ceylon Plc has filed a case at the Commercial High Court, Colombo, claiming US $ 8.65 million from CPC. The total estimated loss due to the hedging transactions between 2007 and 2009 is estimated to be Rs. 14 billion.

An estimated loss of Rs. 1.5 billion because of non-implementation of collecting a monthly utility fee from CPC- owned dealer operated filling stations and Treasury owned dealer operated filling stations from January 01, 2014, onwards.

CPC has borne Rs. 53.57 million and Rs. 259.9 million during 2017 and 2018 respectively as PAYE Tax of its employees without deducting it from their personal emoluments.

A sum of Rs. 307.8 million incurred in purchasing seven motor vehicles in 2017 without the approval of the Ministry, General Treasury and the Department of Public Enterprise.

An agreement has been entered into with Hyrax Oil SDN BHD to build a Lubricant Blending Plant on a BOT basis in May 2016. No comparable proposal has been obtained, which is the acceptable procedure. The AG’s report also mentions that they could not ensure that a properfeasibility study had been conducted for the project.

The list is much longer. The Auditor-General and his staff need to be commended for their work.  In most countries, an audit report of this nature would result in action against officers responsible. I believe most audit reports compiled by the Auditor General on state enterprises would be equally bad or even worse.

 

The Impact of fuel Prices and politicization

The Minister, in justifying the price increase said, CPC has borrowed around Rs. 600 billion from People’s Bank and Bank of Ceylon, and any further borrowing might destabilize the entire banking system.

There is no doubt that an increase in fuel prices has a ripple effect that runs across from the cost of transport to goods, resulting in hardship to some population segments. It mainly impacts the poorer segment struggling to make ends meet. The popular euphonism in Sinhalese that most opposition politicians say “gahen watuna minihata gona anna” which is equivalent to the English “from the frying pan to the fire.”

In the 2018 Annual Report, it is disclosed that CPC lost Rs. 14.7 billion due to selling kerosene below cost. The loss per litre is Rs. 56.86. The annual report states, “The subsidy on kerosene is largely misused by the transport sector when the price gap between the diesel and kerosene is more.” However, as Jafferjee said, the solution to avoid this pain is to make a cash transfer to those in the poverty net and not benefit the rest of the population.

I came across a Sri Lanka review done by the World Bank in 1996 where they say “Sri Lanka’s large array of safety nets are both costly and poorly targeted. They typically have transferred resources, albeit modest, to a large fraction of the population above the poverty line and inadequate sums to the very poor.” Unfortunately, 25 years on this statement is still applicable.

It is deplorable that politicians of both the main parties try to politicize fuel prices despite being aware of the massive negative economic impact of not pricing fuel based on the cost-plus profitformula. Their job is also to educate the public and stop childish symbolic acts of riding bullock carts, cycles and three-wheelers. The decision to import expensive vehicles for MP’s needs our unreserved condemnation. One must live hoping that action will be taken against the members of the CPC Board who in 2017 ordered seven vehicles for Rs. 307 million with no covering approval.

 

Conclusion

In my view, the need to privatize the Ceylon Petroleum Corporation is compelling. The government can maybe hold a majority stake of 51%. However, the management of CPC by an independent professional team outside government interference is a must. This is equally applicable to many other state corporations like the CEB, the National Water Board and Litro Gas.

I can imagine the howls of protest this will draw from the JVP, other left-wing parties, and trade unions. The opposition by the trade unions is understandable given that the staff cost at CPC for the year was Rs. 6 billion, which increased to Rs. 12.7 billion inclusive of the subsidiary company. As to whether the Rs. 259.9 million borne by CPC as PAYE tax on behalf of its employees is included or on top of this is anybody’s guess. The cost to company (CTC) of anan employee at CPC (excluding the subsidiary company) is approximately Rs. 180,000 per month.

The government must draw upon the success of the part divestiture and independent management of Sri Lanka Telecom and Sri Lankan Airlines under Emirates to restructure all loss-making institutions. These changes should have been implemented long ago, but as the panel of experts said in the Face the Nation talk show, it is better late than never.



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Antics of State Minister and Pohottu Mayor; mum on chemical fertiliser mistake; The Ganga – a link

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Reams have been written in all local newspapers; much comment has traversed social media and persons have been bold to call for justice on two absolutely unrestrained and yes, evil, SLPP VIPs who have recently been dancing the devil as the saying goes. These evil doers seem to be pathologically unable to control themselves and behave as human beings: heads outsised with hubris and apparently bodies often pickled with liquor.

Very succinct comments have been made on Lohan Ratwatte, one being: “a leopard never changes his spots” referring to the many crimes supposed to have been committed by him, and the other that he is a gem of a man who may make a jewellery heist soon enough. He has the audacity to say he did nothing wrong in barging into two prisons; in one to show off to pals the gallows and in the other, to brandish a gun and place it against the heads of two shivering Tamil prisoners. All done within the week when world attention was focused on Sri Lankan human rights violations directed by the UNHRC

Cass’ comment is that Lohan Rat was committing hara-kiri (minus even a trace of the Japanese spirit of self sacrifice) and taking the entire country on a suicidal mission through his inability to hold his drinks and destructive hubris and murderous inclination. Cass particularly favoured Don Mano’s summation in his comment on the unlawful prison intrusions in the Sunday Times of September 19. “Any semblance of a shabby cover-up to enable Lohan Ratwatte to retain his position as State Minister of Gems and Jewellery will not only endanger the economy by depriving the nation’s dollar bare coffers of a GSP benefit of nearly 2.7 billion dollars, but will risk putting 21 million Lankans from the frying pan into the fire and test their tolerance to the core.”

The visit to the Welikada prison by the State Minister of Prison Reform and … was said to be with some men and one woman. Identities were kept under wraps and confusion raised by making the dame a beauty queen or cosmetician. But who she was, was soon known along the vine of gossip. One report said the person in charge of the prison or its section with the gallows, cautioned Lohan Rat and tried to dissuade his advance with friends in tow since the lady companion was in shorts and them walking through where prisoners were, would cause a commotion. But no, the State Minister advanced to show off the gallows with his short-shorts wearing woman companion and imbibing mates.

Cass is actually more censorious of this woman than even of the State Minister himself. Is she a Sri Lankan, so vagrant in her woman-ness? Doesn’t she have even an iota of the traditional lajja baya that decent women exhibit, even to minor level nowadays? Is associating with a State Minister and his drinking pals such a prized social event? Shame on her! She, if people’s assumption of identity is correct, has boasted political clout and been elevated by it too. Such our young girls! Do hope they are very few in number, though this seems to be a baseless hope as social events unroll.

Pistol packing – correction please – toy pistol packing Eraj Fernando is aiding the ex State Minister of Prison Reform to deface, debase and deteriorate Sri Lanka in the eyes of the world. He is interested in land and not in gallows or scantily clad gals. With thugs in tow he trespassed a property in Bamba and assaulted two security guards. Repetition of an incident he was embroiled in – a land dispute in Nugegoda a couple of weeks ago. He was taken in by the police and before you could say Raj, he was granted bail. What quick work of police and courts.

As the editor of The Island opined in the lead article of September 20: “The Rajapaksas have created quite a few monsters who enjoy unbridled freedom to violate the law of the land.” A convicted murderer known for his thug ways was presidentially pardoned a short while ago.

The good thing is that people talk, write, lampoon, and draw attention to these heinous crimes and do not seem scared for their necks and families. White vans have not started their rounds. And very importantly the memories of Ordinaries are not as fickle as they were. Wait and see is their immediate response.

New fad – jogging lanes on wewa bunds!

Some monks and men gathered recently on the partly torn up bund of Parakrama Samudraya and had the foolish audacity to say the bund needed a jogging lane. Tosh and balderdash! Then news revealed that other wewas too were being ‘attacked and desecrated’ to construct jogging lanes. In such remote rural areas which even tourists do not visit? Is there illicit money-making in this activity? Otherwise, no explanation is available for this sudden interest in farmers’ and toilers’ physical well being. They get enough exercise just engaging in their agriculture, so for whom are these jogging lanes?

Sharply contrasting persons

As apposite to the former two, are superb Sri Lankans up front and active and giving of their expertise, albeit unobtrusively. Consider the medical men and women and their service to contain the pandemic; farmers who protest to ensure harvests are not damaged too severely by false prophets who won the day for the banning of chemical fertilisers, pesticides and weedicides. The latest blow and justification of what so very many agriculturists, agrochemists, have been saying all along – organic is good but to be introduced very slowly; without importing compost from overseas, is the Chinese import containing evil microorganisms. Experts have categorically stated that chemical fertilisers are sorely needed for all agriculture; more so paddy and tea; and if used prudently cause no illness to humans or injurious side effects.

The four experts who comprised the panel at the MTV I Face the Nation discussion monitored by Shameer Rasooldeen on Monday September 20, agreed totally on these two facts and went on to say that it must be admitted a hasty decision was taken to stop import of chemical fertilizers. We listened to the considered wise opinions backed by true expertise of vibrantly attractive and articulate Dr Warshi Dandeniya – soil scientist, of Prof Saman Seneweera from the University of Melbourne, Prof Buddhi Marambe – crop scientist, and Dr Roshan Rajadurai – media person of the Planters Association. Listening to them, Cass swelled with pride and told herself see what sincerely-interested-in-the-country’s welfare eminent scientists we have in this land of rowdy politicians and uneducated MPs. They labeled the sudden banning of chemical fertilisers and insecticides and pesticides as “very dangerous and causing irreversible harm. It is not too late to reverse the decision, even if admitting fault is not possible.”

Garlic

Oh dear! The stench! Never ending series of scams; executed or approved by politicians and all for illicit gains. Even the tragedy of the pandemic and suffering of much of the population does not seem to have curbed selfish lust for money.

Focus on the Mahaweli Ganga

Interesting and deserving of thanks. Chanaka Wickramasuriya wrote two excellent articles in the Sunday Islands of September 12 and 19 on the Mahaweli Ganga, imparting invaluable facts of the present river and its history, as for example which king built which wewa or anicut. He ended his second article by hoping the waters of the great river will feed the north of the island too: “Maybe then this island will be finally uplifted. Not just from north to south, but across class and caste, language and philosophy, and political partisanship. Hopefully driven by a newfound sanity among its denizens, yet symbolically attested to by the waters of the Mahaweli.”

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These humans are Crazy!

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Those of us who grew up reading the “Asterix” comics by Goscinny and Uderzo will no doubt remember the resonant words of Obelix, the menhir delivery man. So many times, he has observed the actions of characters ranging from Roman Emperors to Goths and made the statement “these humans are crazy” often accompanied by a few taps from his forefinger to his ample brow. These words remain a universal truth and valid even today when looking at what is going on around us.

Let’s start in Aotearoa – New Zealand with the continuing saga of the young man of Sri Lankan origin who went berserk in a supermarket and stabbed so many innocent people. Despite many assurances from the government and almost all the Kiwi friends and even acquaintances we have in this country that we Lankans are not responsible, we feel deep down inside us that we are in some way, shape or form, responsible for this person’s behaviour. Articles not only from people of my (archaic) generation but young upstanding millennials and those even younger have expressed this emotion in their own characteristic fashion. Also, we feel responsible that our network of ex citizens of the Pearl living in Aotearoa have been unable to offer any support or counselling to this person or others of his ilk.

Just as we start clawing our way out of this mire of guilt somewhat reduced by finding out just how greatly the immigration and refugee systems of New Zealand have been duped, we are now told how a currency smuggler has been granted refugee status. Now currency smuggling happens all the time, mainly due to the punitive profits taken from customers by those licenced daylight robbers the banks, but more on that later. Apparently, a currency smuggler who arrived on a forged passport, evading arrest by the authorities in the Pearl has been granted refugee status! REFUGEE seems to be the magic word as far as the NZ authorities go. Those of us who have gone through the legal immigration channels and filled reams of forms and waited years for replies are left gasping at how those worthies in the government departments of Aotearoa have one set of rules and standards for us and another completely if one puts the word REFUGEE on one’s documents.

We move on to the pearl, if I were to attempt to apologise for the “offensive actions” of members of my family (bearing my “sir” name and direct relatives) that would take up a series of tomes resembling the encyclopaedia Britannica! It may also feature my name in a few volumes as well! The current antics of a kinsman with regard to using his position and power calls for a level of responsibility, on my part. The only caveat being a request to the fourth estate to use the person’s first name. Frequent displays of a family name which some have treasured and tried to bring enhancement to, associated with behaviour of this kind, brings dismay at a level that can only be understood by those who have tried to live up to the standards set by ancestors who held high office with honour in the past. There have been many articles some ranging from biting sarcasm (unfortunately not understood by the majority) to others simply parroting what they have read on the internet. The bottom line is standby O denizens of the Pearl, this maybe just another episode in the teledrama that is Lanka under Paksa rule! There are possibilities of scripting to distract the majority and even a wider spectrum involving human rights issues in Geneva. Also, scrutinize yourselves and remember that “those who live in glass houses should not throw stones” and “let he who is without sin cast the first stone”?!

In Aotearoa, we call our Prime Minister by her first name and a PM that has gained the utmost respect of the people not to mention the world! Isn’t it time the Pearl followed suit? Of course, comments by the leader of the opposition like “Opposition Leader Premadasa said he vehemently condemned the disgraceful and illegal behaviour” reiterates the comments of Obelix. Especially when allegations and witnesses exist to “disgraceful and Illegal” behaviour by the person who uttered those very words. It may have been in a different context and “only” to do with the decimation of a national park in the Pearl but the behaviour had the same connotations. Looks like social media is the mitigating factor, as in those days, too, the fourth estate had to take care of continuing to exist and survive! Being the first party to spotlight such actions usually led to the “death of the messenger”.

As promised, back to the licenced daylight robbers of today, the banks. There is a “Robin Hood” tax in effect in some of the leading economies of Europe. The most “interesting” aspect for me being taxes on the profits of banks. The billions it could raise every year could give a vital boost to tackling poverty and climate change around the world and definitely in the Pearl. We call upon the “genius” in charge of the Central Bank as he is the “acknowledged” financial maestro of the Pearl (although he is never going to take RESPONSIBILITY for our plight) to look at this aspect if he has the cohunes to do it! But then again levels of corruption and obligations to high profit-making organisations that fund election campaigns, have to be taken into account in countries such as the Pearl.

Powerful efficient and successful economies like Germany and modern Demi-Gods like Bill Gates endorse this tax. Here is an idea for the government of the Pearl. Tax the banks on their huge profits and give some of that money back to the people without burdening an already insufferably burdened people! I fear ideas expressed in this column will meet their usual end either in the oblivion chaos and mayhem or the lack of mental fortitude that exists in the Pearl and her officials.However, one can only hope that people who wish the Pearl renewed status in the Indian Ocean region if not the world, continue to survive in these circumstances, as the village of indomitable Gauls in the face of the mighty Roman empire. We need an “Asterix” brave and quick-thinking warrior, armed with some magic portion from “Getafix” the druid. Instead, we seem to have plenty of pseudo “Getafix’s” concocting “dammika Pani” and such portions and far too many “Vitalstastix’s”- muddle-headed incompetent chiefs!

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Policy quandaries set to rise for South in the wake of AUKUS

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From the viewpoint of the global South, the recent coming into being of the tripartite security pact among the US, the UK and Australia or AUKUS, renders important the concept of VUCA; volatility, uncertainty, complexity and ambiguity. VUCA has its origins in the disciplines of Marketing and Business Studies, but it could best describe the current state of international politics from particularly the perspective of the middle income, lower middle income and poor countries of the world or the South.

With the implementation of the pact, Australia will be qualifying to join the select band of nuclear submarine-powered states, comprising the US, China, Russia, the UK, France and India. Essentially, the pact envisages the lending of their expertise and material assistance by the US and the UK to Australia for the development by the latter of nuclear-powered submarines.

While, officially, the pact has as one of its main aims the promotion of a ‘rules- based Indo-Pacific region’, it is no secret that the main thrust of the accord is to blunt and defuse the military presence and strength of China in the region concerned. In other words, the pact would be paving the way for an intensification of military tensions in the Asia-Pacific between the West and China.

The world ought to have prepared for a stepping-up of US efforts to bolster its presence in the Asia-Pacific when a couple of weeks ago US Vice President Kamala Harris made a wide-ranging tour of US allies in the ASEAN region. Coming in the wake of the complete US troop withdrawal from Afghanistan, the tour was essentially aimed at assuring US allies in the region of the US’s continued support for them, militarily and otherwise. Such assurances were necessitated by the general perception that following the US troop withdrawal from Afghanistan, China would be stepping in to fill the power vacuum in the country with the support of Pakistan.

From the West’s viewpoint, making Australia nuclear-capable is the thing to do against the backdrop of China being seen by a considerable number of Asia-Pacific states as being increasingly militarily assertive in the South China Sea and adjacent regions in particular. As is known, China is contending with a number of ASEAN region states over some resource rich islands in the sea area in question. These disputed territories could prove to be military flash points in the future. It only stands to reason for the West that its military strength and influence in the Asia-Pacific should be bolstered by developing a strong nuclear capability in English-speaking Australia.

As is known, Australia’s decision to enter into a pact with the US and the UK in its nuclear submarine building project has offended France in view of the fact that it amounts to a violation of an agreement entered into by Australia with France in 2016 that provides for the latter selling diesel-powered submarines manufactured by it to Australia. This decision by Australia which is seen as a ‘stab in the back’ by France has not only brought the latter’s relations with Australia to breaking point but also triggered some tensions in the EU’s ties with the US and the UK.

It should not come as a surprise if the EU opts from now on to increasingly beef-up its military presence in the ‘Indo-Pacific’ with the accent on it following a completely independent security policy trajectory, with little or no reference to Western concerns in this connection.

However, it is the economically vulnerable countries of the South that could face the biggest foreign policy quandaries against the backdrop of these developments. These dilemmas are bound to be accentuated by the fact that very many countries of the South are dependent on China’s financial and material assistance. A Non-aligned policy is likely to be strongly favoured by the majority of Southern countries in this situation but to what extent this policy could be sustained in view of their considerable dependence on China emerges as a prime foreign policy issue.

On the other hand, the majority of Southern countries cannot afford to be seen by the West as being out of step with what is seen as their vital interests. This applies in particular to matters of a security nature. Sri Lanka is in the grips of a policy crunch of this kind at present. Sri Lanka’s dependence on China is high in a number of areas but it cannot afford to be seen by the West as gravitating excessively towards China.

Besides, Sri Lanka and other small states of the northern Indian Ocean need to align themselves cordially with India, considering the latter’s dominance in the South and South West Asian regions from the economic and military points of view in particular. Given this background, tilting disproportionately towards China could be most unwise. In the mentioned regions in particular small Southern states will be compelled to maintain, if they could, an equidistance between India and China.

The AUKUS pact could be expected to aggravate these foreign policy questions for the smaller states of the South. The cleavages in international politics brought about by the pact would compel smaller states to fall in line with the West or risk being seen by the latter as pro-China and this could by no means be a happy state to be in.

The economic crisis brought about by the current pandemic could only make matters worse for the South. For example, as pointed out by the UN, there could be an increase in the number of extremely poor people by around 120 million globally amid the pandemic. Besides, as pointed out by the World Bank, “South Asia in particular is more exposed to the risk of ‘hidden debt ‘from state-owned Commercial Banks (SOCBs), state-owned enterprises (SOEs) and public-private partnerships (PPPs) because of its greater reliance on them compared to other regions.” Needless to say, such economic ills could compel small, struggling states to veer away from foreign policy stances that are in line with Non-alignment.

Accordingly, it is a world characterized by VUCA that would be confronting most Southern states. It is a world beyond their control but a coming together of Southern states on the lines of increasing South-South cooperation could be of some help.

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