Restructuring the country’s plantation sector and restoring its former glory
Due to the crisis the plantation industry is currently facing, here are some suggestions on how we feel the industry could be resurrected.
Prior to nationalisation:
1. All plantations in the country were owned by Sterling Companies, Rupee Companies or by private individuals/families both in Sri Lanka and abroad.
2. Plantations were managed by Agency Houses or by the proprietors themselves.
3. All decisions on the plantation, such as development taken by the owners were greatly influenced by the views of the Estate Superintendent who was considered the “man on the spot” and the person who would have to ultimately implement the decision.
4. Therefore the plantation industry at that time was a “well-oiled machine” running at optimum efficiency besides being the main stay of the country’s economy and the largest generator of employment, both direct and indirect.
Post nationalisation era:
1. Nationalisation of plantations commenced with Stage 1 of the Land Reform Act in 1972 which covered the proprietary owned plantations in the country. While extents of some of these plantations were released for public purposes such as village expansion, the other extents were handed over for management to the Up-Country Co-operative Estates Development Board (USAWASAMA) and other district co-operative societies. With the Usawasama and the other district co-operative societies not having an iota of knowledge on plantation management, the once well run estates were ruined with totally incompetent individuals appointed as Project Managers to administer these estates.
2. Agency House managed plantations were nationalised under Stage 11 of the Land Reform Act in 1975 and after a brief period of the estates continuing to be managed by the Agency Houses as “Statutory Trustees”, these estate were handed over to the Sri Lanka State Plantations Corporation (SLSPC) and the Janatha Estates Development Board (JEDB) in around April 1976.
3. After the United National Party came into power in 1977, all estates which had hitherto been under the Usawasama and other district co-operative societies were also handed over to the SLSPC and JEDB.
4. The then President of Sri Lanka, J. R. Jayewardene, realizing the importance of the plantation industry and the political interference that existed within the industry, brought the SLSPC and JEDB under his direct purview by creating two new ministries, namely the Ministry of State Plantations and the Ministry of Janatha Estates Development, and assuming the functions of Minister in both these ministries. The Secretaries of such ministries were the incumbent Chairmen of the SLSPC and JEDB.
5. However while Mr. Jayewardene did all that he could to make the industry prosper and the life of the working planter more comfortable, his efforts were not totally successful as political interference continued even though to a lesser extent. We wish to categorically state that the only politician who has supported the working planter to the hilt was none other than the late General Ranjan Wijeratne, both during his terms of office initially as Chairman of the SLSPC and thereafter as Minister of Plantation Industries, due to him having been a planter himself as well as the Chairman of the Ceylon Planters Society, Chairman of the Planters Association (PA), Chairman of the Agency Section of the PA and also a Director of an Agency House.
Privatisation:
1. As the plantations were proving too much of burden to the state, a decision was taken to initially privatise the management of plantations after creating Regional Plantation Companies (RPCs) under the Companies Act of 1987 and thereafter to consider the granting of the “leasehold rights” of such RPCs for a period of 53 years by the sale of 51 per cent of shares of these RPCs to the private sector.
2. Accordingly, 22 state-owned RPCs were created by the Plantations Restructuring Unit (PRU) and following competitive bidding by interested companies, the management of these RPCs were handed over in June 1992, to the successful bidders (Managing Agents – MA), for a period of five years. A 23rd state owned RPC (Elkaduwa Plantations Limited) was created in July 1993 and its management too was handed over to a MA.
3. Some estates of both the SLSPC and JEDB in the Matale and Kandy districts which were considered unviable were retained by these organizations. The land on these RPCs however continue to be owned by the state.
4. With the government deciding to grant the “leasehold rights” of these RPCs for a period of 53 years by the sale of 51 per cent of the shares of these RPCs, the initial RPCs to be so divested were those who had recorded profits during the period they were privately managed. The 51 per cent of the shares of these “profit making” RPCs were offered to the MAs at the par value of Rs. 10 per share thereby resulting in these MAs purchasing 51 per cent of the shares of these RPCs for around Rs. 102 which entitled them to the “Leasehold Rights” of such RPC for a period of 53 years. The only criteria in offering these RPCs on this basis were “profits” and not considering whether such “profits” had been derived through the reduction of inputs, stripping of assets, market conditions that prevailed, etc,
5. In respect of the RPCs that had not recorded profits, the “leasehold rights” for a period of 53 years by the sale of shares of these RPCs, were offered on the stock exchange. These shares sold for sums well in excess of the par value of Rs.10 (other than probably Madulsima Plantations) with some even going up to around Rs. 30 a share!
6. Therefore from that stated in (04) and (05) above it would be seen that the “non-profit making” RPCs sold at a higher price per share than the “profit making” RPCs!
7. The management of Kurunegala Plantations Ltd (KPL), Chilaw Plantations Ltd (CPL) and Elkaduwa Plantations Ltd (EPL) were taken back from the MAs by the state on expiry of the initial management contracts and together with the SLSPC and JEDB, continue to be managed by the state.
8. In the sale of the shares of these RPCs, the state retained one share, referred to as the “Golden Share”, which gave the state wide powers, which unfortunately do not appear to have been used where necessary.
9. MAs were entitled to a “Management Fee” (which was colossal in the case of some MAs) as well as entitled them to “second” to service any of the parent body’s employees. We must state that while some MAs have unethically (not illegally) abused these privileges resulting in vast amounts of money having been drawn out from the RPCs, others have not done so thereby showing their commitment in the management of their RPCs.
10. The MAs were also permitted to raise finances for working capital requirements, etc by mortgaging the leasehold rights of the RPCs as well as were entitled to obtain loans through both local and foreign funding institutions to meet their funding requirements, pledging as security the assets of the RPC. On perusal of the Annual Accounts of most of the RPCs, the colossal financial liabilities incurred by such MAs would be evident.
11. With all the benefits which were available to RPCs and MAs, you will today probably not find a single CEO/Managing Director of a MA who will not complain that it is impossible to continue with the management of RPCs unless there is assistance received from the state. However, despite this, as at date not one MA has handed back the RPC it manages to the state! No complaints of this nature were ever heard when the industry was doing well and we wonder whether this is a case of “privatising the profits and nationalising the losses”!
Reviving the industry:
1. There are 20 RPCs being managed presently by MAs from the private sector and three RPCs as well as the SLSPC and JEDB being managed by the state.
2. It is suggested that a “Plantation Monitoring Agency” be established to monitor the progress of each plantation entity – the RPCs managed by the private sector as well as the RPCs, SLSPC and JEDB managed by the state.
20 ‘privatized’ RPCs managed presently by MAs:
3. In respect of these 20 RPCs, our suggestions is that a comprehensive “due diligence study” be carried out by this “Plantation Management Agency” on each RPC to assess the following;
a) Whether each plantation entity has been managed in accordance with the “Indentures of Lease”,
b) Whether necessary capital expenditure has been incurred in respect of replanting, infillings, factory development, housing, etc,
c) Whether the financial liabilities incurred in respect of capital expenditure are justifiable in comparison to the work done,
d) Whether the accepted agricultural practices necessary on a plantation and recommended by the research institutes (such as draining, pruning, etc) are being carried out,
e) Whether the assets on plantations (factories, bungalows, buildings, etc) are being maintained in an acceptable manner,
f) Whether there has been any disproportionate expenditure incurred by way of Management Fees or any other charges levied by the MA,
g) Whether suitable programmes are in place to improve and develop executives, staff and workers.
The above are some items that come to mind and further items could be added if considered necessary. In carrying out the due diligence as suggested above, “profit” should not be the prime criteria as there are RPCs who have recorded profits adopting methods that have led to the detioration of the assets of the RPC!
4. Following this “due diligence” study, in respect of those MAs who are found to have managed their RPCs effectively and efficiently, we would suggest the following;
a) That their current lease period be extended to 99 years,
b) That the “lease rental” payable at present is revised, on the same criteria presently applicable, based on a re-valuation of the assets of each RPC,
c) That a cadre be established in concurrence with the MA for each RPC to ensure that there is no over staffing at all levels.
d) That a pre-determined management fee on a “per kilo” basis is payable to the MA by the RPC similar to that levied by the Agency Houses in the pre nationalisation era,
e) That each RPC pays the state, in addition to the lease rental and profit share, a “per kilo” fee to cover the expenditure of the “Plantation Management Agency” which I have suggested be established.
f) That the current “Indentures of Lease” are revised incorporating all of the above and any other clauses that need to be included.
5. Similarly, we would suggest that, after the “due diligence study”, the “leasehold rights” of those MAs who have NOT managed their RPCs effectively and efficiently should be terminated in accordance with the “termination clause” in the current “Indentures of Lease” as well as the following;
a) Legal action to be instituted against the MA to recover any expenditure incurred by the RPC in violation of the current “Indentures of Lease”,
b) All personnel of the MA seconded to the RPC are made to revert back to their substantive employer, the MA.
Here too, the above are some items that come to mind and further items could be added if considered necessary.
6. The RPCs where MAs have been terminated could be advertised in their entirety or in parts in order that those interested could submit their bids for management. Consequent to identification of the successful bidders, the following clauses also be incorporated in the “Indentures of Lease” to be signed;
a) The period of lease to be initially around 30 years which could be extended if the RPC is being managed efficiently and effectively,
b) Clauses indicated in 4 (b) to 4 (e) above,
c) That the MA provides an irrevocable Bank Guarantee to the state based on a percentage of the asset value of the RPC to be mutually agreed upon which could be encashed if the MA is found to be not efficiently and effectively managing the RPC.
Here too, any other clauses that are considered necessary could be incorporated in the “Indentures of Lease”.
Kurunegala Plantations and Chilaw Plantations managed by the state at present:
The same procedure given in Clause (6) above could be applied in respect of these two RPCs as well.
SLSPC, JEDB and EPL which are also managed by the state at present;
1. These three plantation entities contain the “unviable” estates of the former SLSPC and JEDB which were not considered suitable for privatisation in 1992.
2. Due to the poor condition of estates in all three entities, cash flows were seriously affected, resulting in each entity having colossal debts, the majority of which are EPF and ETF liabilities. While some of the liabilities have been settled with the intervention of the Treasury, there are yet considerable amounts due to be paid.
3. It would also be pertinent to state that though from around 2007 all assistance to these organisations from the Treasury ceased, since around May 2015 assistance is once again been provided by the Treasury.
4. In view of the above, our suggestion with regard to these three entities is as follows;
a) Initially the SLSPC and JEDB to be formed into two RPCs as per the Companies Act of 1983 – similar to that done in respect of other RPC.
b) Call for bids for the “leasehold rights” by way of the sale of 51 per cent of the shares of EPL, SLSPC & JEDB.
c) The initial period of lease to be not less than 25 years which would be renewed if the successful bidder manages the entity in an efficient and effective manner.
d) The successful bidder not be liable to pay any lease rental, due to the liabilities existent in each organisation, for a period of not less than five years from the date of signing of the “Indentures of Lease”.
e) In view of the (d) above, the successful bidders to meet all liabilities of the organisations within a period of 24) months from the date of signing of the “Indentures of Lease”.
f) The successful bidder to provide an irrevocable Bank Guarantee amounting to the liabilities of each entity which could be cancelled after such liabilities have been settled by him.
g) The lease rental payable after this “grace period” to be computed on the same basis as done in respect of the other RPCs – which would be on a re-valuation of assets and using the same basis as is being presently done.
h) That a cadre be established in concurrence with the successful bidder for each entity so as to ensure that there is no over staffing at all levels.
i) That a pre-determined management fee on a “per kilo” basis to be incorporated in the “Indentures of Lease” payable to the successful bidder similar to that levied by the Agency Houses in the pre nationalisation era,
j) That the successful bidder also pays the state a “per kilo” fee to cover the expenditure of the “Plantation Management Agency” which I have suggested be established.
5. We would also suggest that the valuable commercial property of the JEDB within the municipal limits of Colombo, including its Head Office at Vauxhall Lane, stores at Vauxhall Street and buildings on Darley Road, be disposed of and a part of the proceeds utilized to pay an attractive “retirement package” to the Head Office staff at both SLSPC and JEDB. The Head Office staff of Elkaduwa Plantations, which is only around 12 members, too could be included in this scheme if considered necessary.
Conclusion:
If our suggestions is accepted;
1. The benefits that would accrue to the state are that those RPCs that have hitherto not be effectively and efficiently managed will hopefully be effectively and efficiently managed, increased revenue by the revision of lease rentals on the revised valuations and the Treasury no longer having to provide finances for the functioning of SLSPC, JEDB and EPL. Further the state will realize a substantial amount by the disposal of the commercial properties of the JEDB located at Vauxhall Lane, Vauxhall Street and Darley Road.
2. The benefits that would accrue to the MAs would be an extension of the lease period to 99 years which would encourage them to undertake replanting, infilling and replacement of machinery, which will no doubt increase profitability and resulting in them realising their “return on investment” during their extended period of lease.
Our thoughts being expressed here is out of our inherent love for the industry and firm belief that even at this late stage the industry could be effectively revived. These suggestions and comments are written without fear or favour and with malice to none.
(The Mascots is a group of ex-planters from Maskeliya and Upcot regions. Its President Devaka Wickramasuriya could be reached at devakaw@sltnet.lk)