POWER AND PROFIT: INVESTIGATING SRI LANKA’S MILITARY BUSINESSES

The end of the armed conflict in Sri Lanka saw a significantly increased level of military presence in civilian life across the country, with the military actively engaging in a variety of activities. These activities include humanitarian relief and participation in infrastructure projects, as well as engaging in profit generation through businesses and other economic ventures. This foray into economic activities and businesses by the military covers a range of sectors including hotels, restaurants, travel, leisure, and agriculture. These enterprises are spread across the country and have nationwide implications for the economy and rule of law.This report examines these implications by discussing the following concerns and issues arising from the military’s economic activities:
 The lack of information regarding the legal and administrative frameworks within which the military engages in businesses;
 Potential unfair competition and market distortion by the military’s engagement in business resulting in the crowding out of private investors;
 Lack of oversight over military businesses by the government, causing several rule of law implications regarding transparency and accountability;
 Social and economic consequences particular to the North and East as a result of the military occupying an economic vacuum.The report concludes that the military’s engagement in businesses and economic activities in Sri Lanka has led to serious consequences for the economy and rule of law. Markets are distorted, civilians are deprived of economic opportunities and state-funded or operated businesses are neither transparent nor accountable. The report recommends that these businesses be eventually managed by private or public sector entities, to ensure fair play in the market and greater transparency and accountability.This report is informed by primary data, which was collected principally in Kilinochchi and Mullaitivu but also in Jaffna, Mannar and Vavuniya, in late 2017. It involved a series of interviews with local members of the community, CSD employees, government officials and community leaders. This report additionally relies on a literature review and secondary data from a variety of sources. Much of the data was obtained from information publicly made available by government entities.

The remainder of the report is divided into four sections. Section two will introduce the range of military enterprises and attempt to place them within the framework of their respective forces. Section three will discuss the implications for the country’s economy and rule of law and examine how military business affects the market and accountability. Section four will identify the unique impact these businesses and activities have in the North and East, given the context of post-war recovery. Finally, section five will conclude and offer concrete recommendations.

2. THE ECONOMIC ACTIVITIES OF THE ARMED FORCES AND THE CIVIL SECURITY DEPARTMENT

The Sri Lanka Army (SLA), Sri Lanka Navy (SLN), Sri Lanka Air Force (SLAF) and the Civil Security Department (CSD) each have a portfolio of businesses, which are spread across various sectors. This section details these profit generating businesses, though it is important to note that it remains largely unclear how these businesses are administered or what legal oversight applies, due to the lack of information available in the public domain.

A. BUSINESSES OF THE ARMED FORCES IN THE HOTEL/RESORT SECTOR

The armed forces run a number of hotels and resorts throughout Sri Lanka. These entities appear to rely on state resources for construction and their continued operations. All of the following entities were built and are operated exclusively by the respective branch of the armed forces that owns them today, and there are no records of any private investors or corporate partners being involved in their construction or operations. Moreover, armed forces exclusively staff these hotels and resorts, which do not employ civilians.

I. THE LAYA GROUP OF RESORTS

The Laya Group of Resorts is a luxury chain of resorts offering high-end accommodation and hospitality services. As of February 2018, the Laya Group operates resorts in four main destinations: Laya Waves in Kalkudah, Laya Leisure in Kukulegama, Laya Beach in Wadduwa and Laya Safari in Yala. Each offers a range of all-inclusive packages at competitive prices. The group also operates Laya Travels; a travel agency offering services such as air ticket reservations, visa handling and securing of travel insurance.

The Laya Group operates and functions under the SLA’s Directorate of Welfare (DoW). Although the DoW has operated hotels for SLA personnel in the past , its role was significantly enhanced after the end of hostilities in 2009 with the DoW cooperating with the Government’s policy of nation-building through urban development and tourism. The resorts of the Laya Group constitute the culmination of the DoW’s implementation of this policy.

Figure 1: Laya Safari, Yala

Source: http://www.layahotels.lk/layasafari-gallery.php

Figure 2: Laya Beach, Wadduwa

Source: http://www.layahotels.lk/layabeach-gallery.php

Figure 3: Laya Waves, Kalkuda

Source: http://www.layahotels.lk/layawaves-gallery.php

Figure 4: Laya Leisure, Kukulegama

Source: http://www.layahotels.lk/layaleisure-gallery.php

II. THALSEVANA HOLIDAY RESORT

The Thalsevana Holiday Resort is a luxury beach resort on the secluded Kankesanthurai beach. Opened in October 2010, it remains one of the only luxury resorts in Kankesanthurai and regularly attracts patrons for this reason.

Though the hotel is owned and managed by the SLA , unlike the Laya Group of Resorts, there is very little information on whether or not the Thalsevana Army Resort falls within the control of a Directorate of the SLA. This is curious as the armed forces’ command structures for accounting and reporting are based on their network of Directorates. However, it has been reported that the resort is overseen by the Security Forces Headquarters – Jaffna, which is merely a regional command, and not a central administrative arm of the SLA.

Figure 5: Thalsevana Holiday Resort, Kankesanthurai

Source: http://www.army.lk/news/

III. CHUNDIKULAM NATURE PARK HOLIDAY RESORT

The Chundikulam Nature Park Holiday Resort is one of the few resorts located near the Chundikulam Birds Sanctuary, a national park near Kilinochchi. This resort opened in January 2012 and is operated exclusively by the SLA. It is more modest than other listed resorts and hotels and offers much lower prices. It is unclear which arm of the SLA oversees administration of the Chundikulam Nature Park Holiday Resort; there are conflicting reports indicating that it is administered either by the 55th Division of the SLA or by the Security Forces Head Quarters – Jaffna.

IV. MALIMA HOSPITALITY SERVICES

Malima Hospitality Services is a real-estate group that operates a number of luxury resorts, restaurants and reception/banquet halls. Since commencing its operations in 2013, it has established properties in some of Sri Lanka’s most popular destinations. The group operates five luxury resorts: Sober Island Resort in Trincomalee, Fort Hammenhiel off the southern coast of Jaffna, Lagoon Cabanas in Panama, Weligambay Villas in Weligama, and the Golf Link Hotel also in Trincomalee. It has been reported that at least one of these properties was built on lands belonging to private citizens who had been forcibly evicted.

Malima Hospitality Services is operated exclusively by the SLN. However, there is no information regarding the administrative framework within which it operates, or which arm of the SLN oversees its operations and management. Despite media reports that Malima Hospitality Services functions under the “Sri Lanka Navy leisure sector” and that the Navy Commander is the “Chairperson” of the venture , official documentation of the SLN makes reference to neither such a “leisure sector” nor its functions. In fact, the official web-portal of Malima Hospitality Services makes no reference to it being operated by the SLN.

Figure 6: Fort Hammenhiel, Jaffna

Source: http://www.forthammenhielresort.lk/gallery.html

Figure 7: Golf Link Hotel, Trincomalee

Source: http://golflinkhotel.lk/location.html

Figure 8: Weligambay Villas, Mirissa

Source: http://weligambayvillas.lk/location.html

V. MARBLE BEACH AIR FORCE RESORT

The Marble Beach Air Force Resort is a luxury hotel in Trincomalee, which is fully owned and operated by the SLAF.

Marble Beach, Trincomalee is one of the most popular beaches in the area, and has been under the control of the SLAF from the early days of the armed conflict. After the end of the armed conflict, Marble Beach was opened to the public. However, the larger strip of beach in front of the Marble Beach Air Force Resort is claimed as a private beach exclusive to the Marble Beach Air Force Resort and access to the public remains restricted.

The resort has several accommodation options and, most significantly, offers private beach access, given that the public is restricted from accessing much of Marble Beach. Therefore, the resort remains attractive due to the privacy and seclusion offered to patrons.

The resort has been defined by the SLAF as a “non-public recreational and hospitality venture,” and was funded by the SLAF “Command Welfare Fund’. This indicates that the resort’s infrastructure was built using state/military funds, especially in light of the fact that there are no reports of the participation of private entities in the venture. Furthermore, it has been reported that all revenue from this resort is directed towards the welfare activities of the SLAF.

B. BUSINESSES OF THE ARMED FORCES IN THE RECEPTION HALL/RESTAURANT SECTOR

I. EAGLES’ LAGOON VIEW AND EAGLES’ LAKE SIDE

Eagles’ Lagoon View and Eagles’ Lake Side are two banquet halls operated by the SLAF. Staffed and managed exclusively by SLAF personnel, these banquet halls are among the largest in their respective localities.

Eagles’ Lagoon View, located in Katunayake, provides a 9,000 sq. ft. fully equipped banquet hall, while Eagles’ Lake Side has a much larger fully equipped banquet hall of 17,790 sq. ft. In fact, Eagles’ Lake Side was constructed for the purpose of hosting the Commonwealth Business Forum in November 2013, and was thereafter handed to the SLAF and opened to the public. Presently, both these banquet halls are immensely popular due to their capacity and facilities.

Figure 12: Eagles Lakeside, Attidiya

Source: http://www.airforce.lk/eagles_lakeside/gallery.html

Figure 13: Eagles Lagoon View, Katunayake

Source: http://www.airforce.lk/eagles_lagoonview/Gallery.html

These two banquet halls are staffed exclusively by personnel from the SLAF. While individual officers of the SLAF are named as the “Managing Director” of the banquet halls, it is unclear as to how these two banquet halls fall within the administrative framework of the SLAF, or which arm of the SLF regulates matters such as the finances of these institutions.

II. MALIMA RECEPTION HALLS AND RESTAURANTS

In addition to luxury hotels and resorts, Malima Hospitality Services, which is operated by the SLN, owns several reception halls. These include the Club House in Uswetekeiyawa, the Ranminithenna Reception Hall and the Poonewa Reception Hall. The Club House, Usewetekeiyawa, in particular, is a prominent reception hall with restaurant and catering facilities for receptions, private occasions and conferences. Malima Hospitality Services also operates the Light House Galley restaurant in the heart of Colombo’s commercial area.

C. BUSINESSES OF THE ARMED FORCES IN THE TRAVEL/LOGISTICS SECTOR

I. AIR TRAVEL SERVICES (PRIVATE) LIMITED

Air Travel Services (Private) Limited is a limited liability company that was established in November, 2010. Although technically a separate entity from the SLA, Air Travel Services is operated by and for the benefit of the SLA. Air Travel Services offers services including the reservation of airline tickets and hotels, assistance in obtaining visas and securing travel insurances.

Air Travel Services was established by former Commander of the SLA General Jagath Jayasuriya and the President of the Army Seva Vanitha branch at the time. The company continues to work in collaboration with the SLA’s Financial Management Branch, Directorate of Welfare, Directorate of Training and Directorate of Movement. Moreover, officers of the SLA are responsible for the overall management and performance of Air Travel Services.

While it is unclear how the income generated by Air Travel Services is disbursed, the company itself has stated that it provides concessionary air tickets and special tour packages exclusively to personnel of the SLA. As such, it is evident that the profits generated by Air Travel Services, or at least a portion thereof, are channelled back to the SLA.

II. HELITOURS

Regarded as the “commercial arm of the Sri Lanka Air Force”, Helitours is a corporate entity that is managed by the SLAF. Although Helitours was established in 1972, operations were severely constrained during the armed conflict. However, after 2009, Helitours re-commenced operations.

At present, Helitours provides scheduled domestic flights to select destinations. The Helitours fleet consists exclusively of aircraft belonging to the SLAF and includes fixed wing and rotor wing aircraft. Given that Helitours is, fundamentally, an arm of the SLAF, all aircraft are piloted by SLAF personnel and all operations are conducted solely by the SLAF, with assistance from the Civil Aviation Authority.

D. BUSINESSES OF THE ARMED FORCES IN THE LEISURE/RECREATION SECTOR

I. WHALE WATCHING TOURS

Following the end of the armed conflict, the SLN commenced operating whale watching tours to the public. Given that whale watching tours were not possible during the armed conflict, the tours became very popular and lucrative.

Initially, the SLN conducted whale watching tours in military vessels. With the expansion of operations due to increased demand, the SLN introduced whale watching tours in specialized vessels, including the luxury Princess of Lanka capable of seating 250+ people. At present, the SLN operates scheduled whale watching tours in Galle and Trincomalee.

The vessels are operated exclusively by SLN personnel and there have been no reports of the SLN partnering with any private entity for the purposes of operating and managing the tours. As such, it is a wholly SLN operated enterprise. The media has reported, however, that the SLN maintains that profits are remitted to the SLN welfare fund.

While there are private service providers who compete with the SLN’s whale watching tours, there have been reports that they find it increasingly difficult to compete with the SLN, as the SLN is capable of offering lower rates and better vessels and facilities.

II. EAGLES’ GOLF LINKS AND EAGLES’ HERITAGE GOLF CLUB

Eagles’ Golf Links and Eagles’ Heritage Golf Club are two golf clubs operated by the SLAF. Located in Trincomalee and Anuradhapura, respectively, these clubs are the only properties that offer golf facilities in their respective regions.

Eagles’ Golf Links in China Bay, Trincomalee was established in January 2012, and is marketed as the “only golf course along Sri Lanka’s picturesque East coast”. It spreads over 171 acres, and provides an 18-hole golf course.

Eagles’ Heritage Golf Club, located within the Anuradhapura Air Force Base, is marketed as the “only golf course in Sri Lanka to be situated in the picturesque North Central Province”. Eagles’ Heritage Golf Club also has its own golf course and clubhouse.

Both these properties are owned and operated by the SLAF, and there are no reports of corporate partnerships or private assistance being rendered with respect to the functioning of the properties. Accordingly, it is wholly under the purview of the SLAF. Moreover, it is unclear if these properties report to any of the Directorates of the SLAF. Although the official website of the properties does allude to the existence of a “Board of Management” that controls these properties, there is no information availa in the public domain as to the constitution or framework of the “Board of Management”.

E. BUSINESSES OF THE ARMED FORCES IN THE AGRICULTURAL AND LIVESTOCK SECTOR

I. SLA FARMS UNDER THE DIRECTORATE OF AGRICULTURE & LIVESTOCK

In 2011, the SLA established the Directorate of Agriculture and Livestock (DAL). Under this new Directorate, the SLA established several agriculture and livestock farms for the dual purposes of self-sustainability and for selling agricultural and livestock products to the general public. Accordingly, since 2011, the DAL has established six large scale agricultural and livestock farms and several smaller farms, and further operates another seven farms built by the SLA’s General Service Corps.

However, even before the DAL was established, the SLA has been involved in the sale of produce to the public. In early 2011, it was widely reported that the SLA had commenced selling vegetables, which it had bought from public vendors, at prices that were lower than prevailing market prices. This was undertaken by the SLA as a means of providing relief to consumers in the wake of a sharp rise in prices of essentials in Sri Lanka at the time. It was reported that due to lower overheads such as lower transport and labour costs, the SLA was able to purchase vegetables from vendors and resell them at lower costs without bearing substantial losses.

Moreover, it has been reported that the SLA had taken steps, over the years, to further expand its farms; especially with respect to the production of vegetables and dairy products. This reveals that operations under the DAL had progressively expanded.

In 2016, it was reported that the DAL had cultivated over 100 acres of land, and had entered into a joint venture with Browns Global Farm (Private) Limited and Aththama Quality Agro (Private) Limited. Additionally, it has been reported that the SLA has been able to produce agricultural and livestock products at very low costs. There has been at least one reported instance where profits from certain SLA farms have been remitted to the SLA Welfare Fund.

Figure 9: The Karandeniya Farm, visited by Lieutenant General Jagath Jayasuriya.

Source: http://www.army.lk/news/commander-visits-karandeniya-army-farm-mic-construction-site-0
Figure 10: The Palaly Farm, spreading over 180 acres of land, with a state-of-the-art water sprinkler system.

Source: http://www.army.lk/news/palaly-farm-use-new-sprinkling-water-system

Figure 11: The Menik Farm, Vavuniya, which has also undertaken the cultivation of hybrid corn seeds, in addition to paddy, vegetables and seasonal crops.

Source: http://army.lk/news/army%E2%80%99s-manik-farm-begins-production-hybrid-corn-seeds

F. BUSINESSES OF THE CIVIL SECURITY DEPARTMENT

The CSD was initially formed during the early years of the armed conflict as a voluntary armed group known as the “National Home Guard Service’, tasked with protecting border villages. As their presence grew, the CSD commenced operations in aiding the police and armed forces with security functions. In light of the growth of the National Home Guard Service, the Rajapakse administration, by Government Gazette No. 1462/20 dated 13th September 2006, officially reorganised and reclassified the “National Home Guard Service” into the “Civil Security Department’.

The functions of the CSD as listed in the government gazette include security functions such as acting as a “supplementary force” to the armed forces and assisting the police in “protecting the law & order”, as well as more civilian functions such as “assisting social welfare functions”.

Since the end of the conflict, the CSD has grown in size and function, with 23 regional Force Headquarters and 6 training schools, in areas such as Ampara, Kilinochchi, Mullaitivu, Kanthale, Puttalam, Kebithigollawa, Anuradhapura and Weli Oya. It now has over 38,000 employees including both armed forces personnel and civilian employees (the latter comprising the majority of the headcount).

In recent years, the role of the CSD has changed further. It is no longer just a provider of development-related projects but is now also a source of employment. The CSD recruits civilians to work either on CSD farms (on activities varying from agricultural work to animal husbandry), in manufacturing projects (including the manufacture of bricks, cement blocks, electric bulbs and pottery), or as pre-school teachers.

The CSD’s presence in the Northern Province is unique, given the context of heavy militarisation during the course of the armed conflict and continuing after its end in 2009. The CSD’s Progress Report notes this unique context, reporting that Tamil civilians in Kilinochchi and Mullaitivu were actively recruited “with the purpose of creating harmony between the Sinhala and the Tamil communities’.

As part of its drive to “create harmony”, the CSD initially recruited ex-LTTE cadres and women from Women-Headed Households (WHHs), with the majority of farm employees being women. Respondents interviewed by SACLS estimated that approximately 70% of labourers on their farms were women, and most had lost their husbands. The CSD’s 2016 Progress Report indicates that most CSD employees are non-military; of this subset, 61% in Mullaitivu and 68% in Kilinochchi are women.

CSD employees work 6 days per week on farms and projects. They often make long journeys to reach their places of employment, for which the military provides no transport or travel stipend. Although security presence on the farms and projects has significantly diminished since the previous regime , one soldier is deployed to oversee each farm/project. Within the farms, respondents noted that employees are split into groups. Each group is led by a local civilian employee, but higher-level supervisors are all military personnel. All supervising and overseeing personnel are men.

The CSD’s main income-generating ventures include agriculture, animal husbandry, and the manufacture of bricks, cement blocks, electric bulbs, clay pots, fertilizer, cadjans and cane products. Revenue from these activities has been drastically increasing over the years, including after the change in regime in January 2015.

Chart 1 shows that income over three years has increased from LKR 371.5m in 2014 to LKR 821.8m in 2016; indicating a growth rate of over 200% within the span of just two years.

 Chart 1: Revenue of the CSD from 2014 to 2016

Source: 2014, 2015 and 2016 CSD Progress Reports

3. IMPLICATIONS FOR THE ECONOMY, GOVERNANCE AND ACCOUNTABILITY AT THE NATIONAL LEVEL

From five-star resorts to agricultural produce, the spread of military businesses across the country has varied implications. Although arguments have been made that the military’s engagement in economic activities is beneficial to the country, within the post-conflict context of Sri Lanka there are multiple consequences that cause concern. This section will discuss these concerns for the economy (including unfair competition, loss of livelihoods, crowding out of private investment), for the rule of law and for public accountability, all of which have repercussions at a national level.

A. ECONOMIC IMPLICATIONS

I. UNFAIR COMPETITION

The military’s intrusion into the economy creates a distortion in the market, as it is able to enjoy “economic privilege” , and thereby create an environment of unfair competition. We define economic privilege as the enjoyment of benefits “such as the use of military infrastructure, tax exemptions and favouritism in public bids’ available to companies operated by the armed forces . In using such privileges, the economic activities of the military occupy market space and crowd out private investors, which can result in a loss of livelihoods and revenue for the country.

We know this from other states. In Indonesia, military involvement in the economy over the past several decades has resulted in a business empire run exclusively by the armed forces. The increased ability of Indonesia’s military to use income outside of the government budget allowances gave it increased autonomy and led to civilian authorities being undermined. As a result, the government of Indonesia had to implement measures to reduce the military’s presence and control. Pakistan’s military runs multiple businesses and is currently the largest business corporation in the entire country. Similarly, in Egypt, where the military already had a very heavy presence throughout the country, the military was able to develop businesses using their many economic and political advantages. The Egyptian government has “enabled the military to create a vast business empire that enjoyed superior access to state land, had exceptional tax breaks, circumvented labour rights, and functioned outside of public accountability either by the parliament, government auditing agencies, or civilian courts”.

Sri Lanka is beginning to witness a similar trend of the military using its economic privilege to develop vast business enterprises that surpass and displace private competitors. The military’s encroachment into the private sector, bolstered by economic advantages particular to the military, creates unfair competition and leads to losses for the whole economy.

The military’s presence within the tourism industry is perhaps the most striking example of involvement in economic activity. With military ownership and management of resorts, leisure & recreational activities and restaurants, it is evident that the SLA, SLN and SLAF are venturing into profit-generation through activities that have no direct link to security or even national development. Furthermore, it is evident that the military is able to use its immense budget and resources to undercut market competitors due to the following significant cost-saving advantages:

a) The salaries of military personnel are included in the approved budget for the MoD and, therefore, create savings for any military-run enterprise, as the cost of labour is paid for by the state. As noted in section 2, military-run resorts and hotels are staffed by military personnel, not civilians.

b) The military have capital outlay (including buildings, vehicles, machinery, equipment and furniture) covered by their respective budget allocations that are being used for their businesses. There is no additional cost to rent or purchase necessary capital.

c) Access to existing resources and infrastructure such as land provides an economic advantage over any potential competitor who would have to incur additional costs to purchase or rent land. In the case of the Thalsevana resort, the military occupies land belonging to local civilians.

Because the military does not explicitly indicate when or where resources or budget allocations are used for economic activities, it is impossible to know the size or scale of state resources used (and the resulting cost savings). It is also possible that the prestige and authority of the military allow them to circumvent many of the bureaucratic procedures (and thereby avoid costs) that a private civilian or entity would face . Nevertheless, the following tables demonstrate significant price-cutting by military-run resorts compared to their private market competitors.

(See PDF for Table 1, 2, 3)

These figures demonstrate the ability of military businesses to offer the identical or similar services as their competitors, but charge a significantly lower price. Although the immediate economic benefits enjoyed by the military are obvious, the impact it has on competitors and potential investors or entrants to the market requires analysis.

It is possible that by undercutting competitors, as displayed in Tables 1, 2 and 3 above, military businesses create unfair competition. This in turn crowds out future investment, as the military continues to occupy space in the private sector with the ability to undercut any investors in the market. Such conditions likely act as a barrier to entry for potential private businesses .

In the case of the agricultural sector, the CSD’s operations undermine the local farming economy, where farmers are already facing low incomes. The agricultural produce from the CSD farms is sold in local markets and, as shown previously in Chart 1, the revenue and profits generated by the farms are substantial. It is reported that 98% of income generated from agriculture in 2016 constituted a profit to the CSD. Similarly, total profit from all activities represents 94% of the CSD’s total revenue for 2016, revealing extraordinary profit margins.

The CSD earns these high profits despite evidence that they are undercutting local farmers, thereby causing disruption and distortion in local markets. Respondents interviewed by SACLS remarked that CSD produce was sold at prices approximately LKR 10-15 lower than prevailing market prices, and that local farmers either struggle or are simply unable to compete. According to an official from the Department of Agriculture, price undercutting has forced local farmers out of the market, and some farmers have resorted to joining the CSD out of an inability to sustain their own agricultural businesses. This distortion of the agricultural market could be occurring across the country, as the CSD’s operations are widespread and agriculture continues to be its greatest source of income and profit.

II. LOSS OF LIVELIHOODS AND PROFIT

Distorting markets through unfair competition is not the only way military businesses affect the economy. These businesses also lead to the loss of livelihood opportunities and profits for civilians and the crowding out of potential investment.

This is best analysed in relation to the tourism sector. Tourist arrivals hit a record high in 2017, reaching over 2.1 million visitors. The trend is continuing; already, tourist arrivals are up 12.6% in January 2018 relative to 2017. This is not surprising, as the tourism industry has been one of the government’s most significant strategies for the economy, with Prime Minister Ranil Wickramasinghe having made several economic policy statements promoting the sector as an engine for Sri Lanka’s economic growth and as a mechanism to create jobs. Yet, while the government has been promoting investment and encouraging businesses to engage in the tourism industry, the military has become increasingly involved in the sector by building hotels, resorts and restaurants and providing services including air travel and whale watching, as described in Section 2. This participation by the military in the tourism sector has deprived locals from gaining employment that they would otherwise have received, had these businesses been carried out by private entities that would hire civilians. As noted, businesses run by the military – including hotels, restaurants, air travel, whale watching etc. – are staffed by their own personnel, directly unseating potential livelihood opportunities.

Furthermore, by crowding these businesses out, the profits and the tax revenue that would have been generated remain within the military and the defence establishment, and cannot be utilised by the state to be reinvested in the local economy. The military is also able to undercut local businesses due to its significantly lower incurred costs, again posing a threat to the private tourism industry that should be benefitting the local economy.

The loss of livelihood and profits experienced in the tourism sector will also be experienced by the numerous other sectors within which the military is conducting businesses.

B. IMPLICATIONS ON THE RULE OF LAW AND ACCOUNTABILITY

Beyond economic impacts, profit-generating business activity by the armed forces and the CSD present significant challenges to the rule of law. With almost no control or oversight by the central government or local government entities, increasing profits by military-run businesses raise serious legitimacy and accountability concerns. This “Wild West” landscape stands in stark contrast to the legal and administrative framework adhered to by other public corporations and state entities.

I. THE UNFETTERED DISCRETION TO ESTABLISH, RUN AND POSSIBLY EXPAND THE BUSINESSES

It is well established that vesting unchecked power to any official or entity that exercises the authority of the state is the antithesis of the rule of law. The rule of law, by its very nature, requires the exercising of power by public officials to be in strict accordance with applicable laws and regulations, and also in a manner that is reasonable, rational and in consideration of all relevant factors.

The usual practice in Sri Lanka when there is a need for public officials and entities to be vested with powers for governing or managing public affairs is for Parliament to enact legislation. Such legislation regulates the exercise of such powers by providing guidance to relevant officials and providing for oversight by a relevant minister, who forms part of the Cabinet of Ministers. The judiciary is vested with jurisdiction to enforce the fundamental rights of the people and to review executive and discretionary decisions taken by officials and entities of the state and, thus, acts as a check on the exercise of such powers.

In stark contrast to this usual procedure adopted by the state, the profit-generating businesses conducted by the armed forces and the CSD, are set up and carried out with absolutely no control or oversight.

In terms of the legal framework, the SLA, SLN and SLAF are each governed by their respective Acts. Although these Acts set out the functions, compositions, and the duties and obligations of personnel, they do not provide for the manner in which all internal operations are to be conducted. This is, naturally, to permit the military a degree of flexibility in crafting internal practices, with the consultation of the MoD and other relevant officials, based on the exigencies of the circumstances (given that the armed forces deal with national security). Accordingly, there are no provisions which explicitly prohibit the conducting of profit-generating businesses by the armed forces in any of their respective Acts.

Nevertheless, the SLA, SLN and SLF Acts do not appear to contemplate the use of armed forces for civilian purposes such as revenue generation. Only the President can call upon the armed forces by way of a proclamation or order, upon the satisfaction of certain circumstances, for the maintaining of peace and security. Accordingly, the legal framework of the armed forces does not appear to contemplate freewheeling military-run business activity.

The CSD, likewise, was established to primarily function as a “supplementary force” to the armed forces. Although the other functions required to be fulfilled by the CSD include functions such as “assisting social welfare activities”, it cannot be reasonably maintained that the carrying out of large scale profit-generating businesses is a “social welfare activity”.

Accordingly, it is evident that the Acts of the armed forces, as well as the government gazette which lists the functions of the CSD, do not provide for the armed forces or the CSD to engage in such profit-generating businesses, which are in no way related to security. Nor are internal policies or regulatory frameworks in place. This reveals that these businesses operate at the absolute discretion of officials from the armed forces and the CSD.

The implications on the rule of law are numerous:

a) As stated earlier, almost all the businesses are run solely by the armed forces and the CSD without any private partnership. Therefore, it is plain that public assets and resources – comprising land, infrastructure, vehicles and funds from the Appropriation Bill – that are vested in the armed forces and CSD by the State for the purposes of maintaining peace and national security, are used to operate these businesses. Therefore, these public assets, resources and funds, which have been periodically vested in the military by the state for the purpose of maintaining peace and national security, are presently being grossly misappropriated by the military and CSD for purposes that are completely extraneous to maintaining peace and national security.

b) Given that there is neither a policy enforced by the MoD on the establishment and management of businesses, nor a regulatory framework which exercises oversight on the businesses, absolute discretion to establish and operate these businesses is vested in senior officers of the armed forces and the CSD. As stated earlier, there is significant uncertainty regarding the administrative framework of the majority of the businesses of the armed forces and the CSD. Therefore, unidentified senior officers within the armed forces and the CSD have unbridled discretion to misappropriate public assets, resources and funds in furtherance of profit-generating businesses.

c) The Public Trust Doctrine, which has been adopted and reaffirmed by the courts of Sri Lanka, specifically dictates that holders of public power are merely custodians of such power. As such the ultimate repository of public power is the people and, accordingly, public power must be exercised for the benefit of the people. Viewing the unfettered discretion of senior officers of the armed forces and the CSD in contradistinction with the Public Trust Doctrine, it is apparent that the businesses of the armed forces and the CSD constitute a gross abuse of the public trust. This is because the said businesses operate beyond the scope of the law, with no oversight or control being exercised by the central government or local authorities so as to be accountable to the people.

d) Although the CSD is permitted to carry out civil functions such as social welfare operations, the vast scale of its businesses and their progressive growth in revenue generation reveals that the businesses of the CSD are not merely welfare operations, but large scale profitable businesses. As such, permitting the CSD to carry on these businesses results in the dual implications of 1) the CSD being permitted to operate beyond its functions, and 2) vesting unfettered discretion in the CSD with respect to using public resources, assets and funds for profit generation.

In short, it is clear that the armed forces and the CSD presently have the discretion and authority to arbitrarily use public resources, assets and funds to generate profits, without any oversight by the state or guidance by legislation. This threatens democratic governance, public accountability and the rule of law.

It has been reported that the CSD plans on expanding their profit-generating activities, and it remains uncertain whether the tri-forces also plan on expanding their businesses. Expansion will only exacerbate existing concerns.

II. VALUABLE STATE LANDS ARE USED FOR BUSINESSES WITH NO BENEFIT TO THE PUBLIC

As noted, the Public Trust Doctrine dictates that the state is the custodian of natural and national resources, and holds such resources for the benefit of the people. Any use of natural and national resources by the state must, therefore, have a public purpose or accrue some benefit to the public. Furthermore, the Directive Principles of State Policy in the Constitution dictate that material resources shall be equitably distributed so as best to serve the common good and that the state shall protect, preserve and improve the environment for the benefit of the community.

Several military-run businesses occupy important state lands, such as vast tracts of coastal areas in Kankasanthurai , beaches in Trincomalee and Mirissa , lands within national sanctuaries and large agricultural areas . Many of these lands were vested in the tri-forces and the CSD for security purposes at the peak of the armed conflict and have remained in their possession well after the end of the armed conflict.

Despite large scale profit-generating businesses being carried out on these state lands, it remains largely unknown if any profits generated by these businesses are transferred back to the state for redistribution. Moreover, the vast majority of these businesses are staffed and operated by military personnel and offer their products/services to the public at varying prices. Thus, it cannot be maintained that benefits such as income generation for the state or job creation accrue to the general public by the operation of these businesses. Although it may be argued that there is some benefit from steeply discounted services, there has been no cost-benefit analysis to determine whether any subsidised services (e.g., cheaper hotel rates or produce) yield a net public good.

Thus, at present, the military is in possession of vast amounts of lands and resources that are potentially being utilised in a manner that creates no benefit to the public, in complete violation of the trust with which the state granted custodianship of natural and national resources to the military.

III. THE LACK OF ACCOUNTING OF PROFITS GENERATED

All public entities that carry out sizable public undertakings and generate income/profits must maintain books and accounts detailing their financial affairs. In Sri Lanka, public finance is under the full control of Parliament as per the Constitution. The Constitution also provides for the Auditor General to audit the accounts of every public department, the offices of key state officials, independent commissions, local authorities and public corporations.

Generally, the state carries out businesses for revenue generation through public corporations. Public corporations are established by the state through Parliament passing legislation that creates a public corporation. The Public Corporations (Financial Control) Act No. 38 of 1971 was passed to ensure financial accountability of public corporations.

Article 154 of the Constitution and the Public Corporations (Financial Control) Act thus define the general framework for the financial control, reporting and auditing of public entities. These provisions are applicable even to public entities that do not strictly constitute public corporations.

With respect to the armed forces, their respective legislation does not contain provisions regarding financial reporting and auditing as, naturally, the military is not a profit-generating arm of the state. Nevertheless, because the armed forces are vested with public funds and resources, they publish annual statements of their income and expenditure in their respective annual performance reports. These annual performance reports generally reflect the performance of each Directorate of the respective armed forces, and indicate the income, expenditure, assets and liabilities of the directorates, if any.

Because annual performance reports reflect only the affairs of each armed forces directorate, finances of any activity conducted outside their directorates are largely omitted. As stated herein, apart from the Laya Group of Resorts controlled by the Directorate of Welfare of the SLA, it remains wholly unclear if the other businesses of the armed forces fall within the control of any Directorate. Therefore, the financial affairs of the vast majority of the businesses of the armed forces are not required to be reported and remain unspecified.

For example, the 2016 Performance Report for the SLA only reported the revenue received by tender/procurement operations. Significantly, the profits/revenue received by the SLA’s several other businesses are not reported. In a similar vein, the SLAF reported that its revenue for the year 2015 was Rs. 246 million. But it did not specify if this substantial amount of income was generated through tender/procurement operations or through its vast portfolios of profit generating businesses. The reports of the SLN are of a different form and report on the affairs of the SLN on a regional basis under broad generic headings. Thus, the SLN neither makes any specific reference to the exact nature of its affairs, nor makes specific reference or mention to any revenue/profits generated by its businesses.

It is noteworthy that the reports of the armed forces also do not indicate the percentage or value of the budgetary allocation that is directed to their profit-generating businesses. This indicates that the value or percentage of the annual budgetary allocation used to continue operating these businesses remains unknown.

As neither the Acts of the armed forces provide for accounting and auditing of any businesses, nor does the Public Corporations (Financial Control) Act apply to the armed forces, there remains uncertainty whether the accounts of the military reflect the financial affairs of the military’s profit generating businesses. Thus, while all other public corporations and entities which have sizable financial dealings produce accounts which are audited by the Auditor General, the businesses of the armed forces operate without being accountable to the Auditor General and the public.

iv. Uncertainty regarding the Disposing of the Profits Generated by Businesses

There is reason to believe that the businesses undertaken by the tri-forces and the CSD generate substantial profits. In the case of the CSD it is undisputed; the Annual Performance Report for 2016 indicated that the CSD generated a profit of LKR 774,059,787.00/- (approximately USD 4.9 million) from its businesses.

Profits are not, however, reported for businesses operated by the armed forces. Although there is evidence of the tri-forces offering lower prices/undercutting private competitors, their businesses are heavily subsidised by the state. Since all tri-forces’ businesses are staffed by military personnel who are paid salaries by the state and operate using assets and infrastructure built and maintained by the military, the overheads of armed forces’ businesses are significantly less than their competitors in the private sector. Therefore, these businesses are, in all likelihood, profitable.

Despite clear evidence the CSD earns significant profits, and apparent profitability of businesses run by the armed forces, reporting on the disposal of these profits is lax. This raises a serious concern, as it remains uncertain how profits are applied or distributed.

There is some evidence to suggest that the armed forces may have formulated their own finance directives and internal audit procedures. The SLA, for instance, has several directives in which directions are issued to offices of the SLA on the maintenance of “non-public fund accounts”. Spokespersons for the armed forces have also stated that all finances of the businesses are internally audited by military personnel.

This indicates that the armed forces, or at least the SLA, formulate their own directives on the maintenance and disposition of revenue from these profitable businesses, and have their own internal audit practices. However, this internal policy is not transparent to the general public, and there is no accountability as to how profits are distributed or remitted.

Therefore, it can be reasonably contended that a significant amount of revenue and profit accruing from profitable ventures that use public resources, assets and funds remain unaccounted for or utilised without any Parliamentary oversight. This leaves such revenue and profits to be disposed of or utilised at the discretion of officials of the armed forces and the CSD.

Given that profits generated by these businesses are, at the very least, subsidised by the state, such profits should be remitted to the state so they may be redistributed by Parliament through the Appropriation Bill, after factors such as development policies, regional investment, or public welfare have been considered. There is no indication at present that profits generated are remitted to the state, indicating that they are maintained and/or disposed of by the armed forces and the CSD.

Although the armed forces have maintained that the revenue/profits from these businesses are used for welfare and settling internal expenses of the armed forces and CSD, the lack of any reporting or accounting of profits results carries several other implications:

a) The exact value of profits used for welfare and recurrent expenditure, and any remaining total of the profits will remain unknown due to financial statements not being prepared and presented for auditing. Thus, there will be no means by which it can be determined that the profits have been used appropriately for welfare, or if they have been used at all.

b) The lack of proper accounts and financial statements also raises issues pertaining to transparency, as it cannot be determined if senior officials in the armed forces and the CSD have misappropriated the profits for irrelevant purposes or for their personal benefit.
c) Given that Parliament annually allocates funds to the armed forces and the CSD, the lack of any statement being made available to Parliament of the profits re-used by the military to cover its welfare activities and expenses will result in unnecessary allocations being made to the military. Such unnecessary allocations could be at the expense of regional development and investment in public welfare.
d) Even if it can be ascertained that the profits are used by the military to cover its welfare activities and expenditure, the fact that such significant profits are left to be used at the total discretion of senior officials of the armed forces and the CSD could lead to abuses of power or corrupt dealings. This could arise where such profits are utilised for affairs such as procurements for the businesses or if senior military officials arbitrarily decide to further expand the businesses.

Thus, it is evident that the uncertainty pertaining to the profits generated by businesses of the armed forces and the CSD has serious implications on the rule of law, as they contravene the provisions of the Constitution and permit the disposal of substantial profits at the absolute discretion of senior officials of the armed forces and the CSD.

V. LACK OF TRANSPARENCY FROM THE CSD

The CSD is relatively transparent in reporting staffing, activities, income and profit. However, there is little information available as to how the CSD can afford to pay above-market salaries to its employees.

As discussed, the CSD has reported high levels of income (revenue earned from various projects), which has increased over time despite relatively steady employee numbers with estimates of staff remaining between 38,000 and 42,000 over the last four years. Though agriculture remains the largest component of the CSD’s income, the income derived from “other” activities has become an increasingly significant portion of the CSD’s total revenue (see Table 5). In terms of profits, the CSD reports profits at similar levels to revenues, implying that the CSD encounters minimal costs when engaging in commercial activities.

(See PDF for Table 5)

Table 5 above displays a total profit that accounts for 94% of the total income, meaning that only 6% of the income earned is used to cover costs. However, it remains uncertain as to how the CSD can afford to pay civilian employees above-market salaries and still maintain extraordinary profit margins.

An analysis of the data for 2016 from Table 5 reveals that the costs (income – profit = costs) amount to LKR 47.7mn. Assuming the annual cost borne per employee amounts to LKR 360,000 (LKR 30,000 per month for each employee), it would mean that the CSD would be capable of employing only approximately 132 civilian employees. This, however, is not possible, as the CSD’s own reporting declares a staff of 37,873 civilian employees in 2016 . The CSD’s reported profits, therefore, do not seem to be accounting for personnel costs and accordingly, these costs must be borne elsewhere. According to budget allocations, the CSD’s expenditure in 2016 for “salaries and wages” amounted to LKR 5,984 mn , which again is insufficient to cover the salaries for all CSD civilian staff.

In these circumstances, serious concerns arise with respect to the CSD’s extraordinary ability to generate high profits while simultaneously paying their civilian staff above-market salaries from unknown sources of income, thereby bringing into question the CSD’s transparency and accountability.

Though not always the case, military involvement in profit-generating businesses has been reported to lead to corruption within the defence establishment and undue political influence by the military. Reports of the experiences of Pakistan , Cambodia and Indonesia , have revealed that there is a reasonable link between the armed forces conducting businesses and the marring of the professionalism of the armed forces. This, in turn has lead to increases in the incidences of corruption in both the defence establishment and politics. With exceedingly lax legal, regulatory, and administrative frameworks in place, there is a distinct possibility that the profit-generating businesses of the armed forces and CSD may lead to similar adverse consequences in Sri Lanka.

4. SOCIAL AND ECONOMIC IMPLICATIONS FOR THE NORTH AND EAST

Economic activities of the military are widespread and create impacts throughout the country. However, there are certain effects caused by the CSD in particular that are unique to the North and East of Sri Lanka.

The main question that emerges from the operations of the CSD in the North and East is; what are the consequences of the CSD recruiting a vast number of civilian employees in conflict-affected regions?
This section aims to analyse this question in light of the social and economic implications of the CSD’s enterprises.