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Shell quits Sri Lanka gas business amid state price control

Sri Lanka’s government is buying back Royal Dutch Shell's stake in the part privatized gas company, Shell Gas Lanka. Shell’s decision to sell follows long running quarrels with the Government over the price at which the company could sell gas in the country. The $63 million sale returns the LP gas business in Sri Lanka to 100% state ownership.

President Mahinda Rajapakse’s populist government had been at loggerheads with the oil and gas giant over the price at which gas is sold: the government has been insisting gas be sold at less than international market prices.

The wrangling culminated in a recent directive by the Supreme Court of Sri Lanka that gas should be re-priced bi-monthly for the local market.

"We had so many issues with the company," Minister Rambukwella said of Shell.

"The Trade Ministry had no control in pricing and had to go to court several times on price changes. So in that backdrop, this is a good move," he said of the decision.

Mr. Rambukwella said after the take-over the government will ensure that gas will be sold at a "reasonable price", noting that it would be cheaper in the coming months.

He also stressed that the government now holds management and decision making powers with this purchase, mentioning that the government has begun taking over State properties privatized by past successive governments for the benefit of the people of the country.

More generally, the buyback of Shell Gas Lanka is in line with the ultranationalist and protectionist agenda laid out in Mahinda Rajapakse's election manifesto, in which he pledged that the government would be the guardian of the rural Sinhala people, protecting them against hardships.

Sri Lanka's state-run Ceylon Petroleum Corporation, Ceylon Electricity Board and even the Indian-owned Lanka Indian Oil Corporation are running losses due to state price controls.

In effect, the government can again force gas prices to stay below the market price, making it affordable for the Sinhala electorate who earlier this year returned President Rajapakse to a second term, as well giving him a majority in parliament.

However, while the Government feels this policy of price-setting and reversing privatisation - nationalisation - is the best way to protect the Sinhala electorate, it flies in the face of the IMF’s free market demands.

The IMF has long argued that the best way for a country to enhance economic growth is for the markets to operate completely free of state interference, allowing demand and supply alone to set prices.

The role of government, in the view of the IMF, should be absolutely minimal in order to allow markets to function at their most optimum and grow efficiently.

The Rajapakse regime however is adamant the Sinhala population is protected from global prices, the difference between these and local prices being subsidies by the state.

It remains to be seen how the IMF will react to the purchase, especially given that the government has suggested it may place the loss-making company back on the market.

Sri Lanka is currently benefiting from an IMF loan that is released in installments, providing the government continues to withdraw from price controls and undertakes other economic reforms to stimulate the private sector. The bail-out package, worth $2.6 billion, was granted to Sri Lanka shortly after the violent and bloody climax of the island’s ethnic war in early 2009.