• Confusion .. confounded!!
• Government preparing 'hire and fire' policy
• Mind your Business 
• Front-running an offence, says SEC
• 'Lanka Inc' to boost tourism
• Are we on the verge of a power crisis? 
• Reading tea leaves
• News
• Confusion… confounded

Confusion .. confounded!!

The move while welcomed by most sections of the business community, mainly the commercial banks, caused absolute confusion and panic in the market.

Bankers, industry specialists, stockbrokers and tea industry officials were cautious in their comments. They were generally of the view that Sri Lanka was always moving toward a freeing of exchange rates but unanimously agreed that the new move was badly managed.

"I am all for a free market in foreign exchange and on that basis this is a good move. But this should not have been done in a panic situation," noted Nivard Cabraal, past president of Sri Lanka's Institute of Chartered Accountants (ICL) and a United National Party (UNP) provincial councillor. That view was more or less echoed by a cross section of society last week as chaos prevailed in the market place leaving consumers wondering whether a wildly fluctuating dollar rate would add to their "already burdened" economic woes.

Until Friday, the Central Bank - apart from Tuesday's announcement giving reasons for the free float - did not intervene in the market nor provide any clues or signals to the community on ways of easing the uncertainty.

Full report ---> Confusion… confounded

Government preparing 'hire and fire' policy

Insurance Corporation to provide safety net for employees

By Chanakya Dissanayake

The workers interest would be covered through an insurance scheme by the Sri Lanka Insurance Corporation (SLIC), the sources added. This scheme is expected to provide a redundant employee with the same monthly income for a period of one year. The financial impact of the redundancies is expected to be cushioned by this scheme, the sources added. 

The sources, who spoke on condition of anonymity, conceded that the proposal was likely to raise a howl of protests from labour unions, mainly responsible for derailing the controversial Labour Charter some years back.

Labour Ministry officials said however that the Charter was being revived after Alavi Moulana was appointed Labour Minister, last November. 

Under the government's massive deregulation move, investors will be able to hire and fire labour freely without any legislative or state interference, depending on their operational needs.

The sources said that Sri Lanka's over regulated labour market is seen as a major deterrent to attract FDI's into the country. The latest proposal is expected to reverse the negative investor sentiment about Sri Lanka, which has reached crisis proportions in the wake of the planned re-introduction of the Labour Charter. The Charter, which came under fire from investors when it was initially introduced few years back, is seen as a competitive disadvantage by the investor community. According to an independent research carried out by foreign donor agencies, the labour market in Sri Lanka continues to be one of the most regulated in Asia and has created serious growth constraints to the nation.

"Some investors are experiencing bitter lessons due to the existing stringent labour laws of the country. Some disturbed investors are on the verge of pulling out of Sri Lanka to invest in other countries, where they can gain competitive and comparative advantage," a senior government official explained.

He further added that this proposal is seeking to strike a delicate balance between the workers interest promoted by the new Charter and the investors interest by enabling a more worker-friendly "hire and fire" policy.

The insurance scheme is to be initiated by the SLIC along with the Ministry of Industrial Development. The employer and the worker are both expected to contribute on a premium, on a pre-agreed basis in consultation with the stockholders of the scheme. This contributory fund would be in addition to employer/employee contributions to the EPF and the ETF.

The laid off worker is expected to engage in skill improvement, to attain the level of productivity needed to obtain work elsewhere during this one-year period.

The possibility of the worker taking undue advantage of this income security and engaging in counter productive activities is sought to be minimised by the deadline of one year. If the worker does not improve his productivity to a marketable level and obtain new employment, the income security will lapse after the time period, the sources added.

Mind your Business 

Dollar affects IT 

Though the latest decision to allow the dollar to 'float' was touted as a boon to Middle East remittances and the tourist industry, certain import-based sectors are fuming.

Among the worst hit is the information technology industry which has been forced to revise prices but at the same time guard against cut-throat competition.

As a result, some big-time players are now making representations for some kind of relief for the industry...

The TV googly

Now there is concern in political circles about this type of deal, especially since the amounts involved are massive.

Therefore, there is every possibility that a Treasury representative will be asked to sit in on these tender boards, those in the know say...

It is more interesting

And now, two institutional investors, major players in the Colombo market have devised plans to shift most of their funds from the bourse to the bank.

Needless to say, the brokers are a worried lot and some of them have made frantic efforts to stem the impending tide. 

But even then, there is little that they can do... 

Front-running an offence, says SEC

The SEC rules, gazetted in 1990, are now being revised and is in the process of obtaining parliament approval, they said. The revised set of rules attempts to strike a harmony with the revised listing rules of the Colombo Stock Exchange (CSE), introduced late last year.

Front-running was earlier identified only as an unethical practice and the (SEC) regulators dealt with it on a case by case basis. Brokers said that it is a situation where a stockbroker or a fund manager uses his knowledge about an impending order for securities by his client, to make personal profits. 

"No person shall directly or indirectly trade any securities of a company, ahead of a significant purchase or sale of securities in the same company for his client, with the intent to profit by trading in such securities thereafter", according to section 18 of the SEC's revised set of rules. 

The new rules will also enable "Shelf-Listing" of companies by the CSE. 

Shelf-Listing is an expedited process of completing the listing process for a company, which will enable the company to complete the basic criteria for the listing and to stay in a " shelf", awaiting a more favourable time to enter into the market. 

The moment the company finds the market conditions favourable, it could complete the final criteria and enter the market immediately. This listing process has been available in developed markets to encourage new companies to list.

The de-listing process for companies which presently takes 120 days, is also streamlined to be completed within 21 days, in line with the new CSE rules. It is also mandatory for the company to announce the purchase price of the shares of the dissenting shareholders at the Extraordinary General Meeting, called to announce the decision to de-list. This is to enable the shareholders to make an informed decision. The new SEC rules has also formally specified the procedure for the foreign companies to obtain a listing in Sri Lanka, officials said.

"The (earlier) 1990 SEC rules were taken from the CSE rules. The SEC does not wish to regulate areas where a high level of flexibility is needed. We have left the listing criteria to be decided by the CSE on a case by case basis," an official explained. (CD).

'Lanka Inc' to boost tourism

By Akhry Ameer

"I believe that we should be aiming to develop a Sri Lanka Inc. strategy. We need to work on a common strategy of one message by many messengers ... not many messages by many messengers," argues Renton de Alwis, the new chairman of the Ceylon Tourist Board (CTB)

Mr. de Alwis, in the first interview given to a local newspaper, told The Sunday Times Business that it was necessary to establish a new mindset to build the tourism industry and establish "a total image for the country."

"The minister (Lakshman Kiriella) has a vision..., beyond the conflict because we need to create positive vibes. You know like the stock market," he said, ten days after assuming office at the state-run agency.

Mr. de Alwis is probably one of Sri Lanka best-known tourism industry professionals to adorn this office, having spent more than 10 years abroad in senior positions at the Singapore-based office of Pacific Asia Travel Association (PATA), and undertaking assignments with the United Nations and the World Tourism Organisation.

He said the Internet has changed the way business is done and Sri Lanka needs to look at marketing tourism with this in mind.

"For example most countries are talking about not only reaching out to market segments but also dealing with one customer at a time through database marketing since we could reach out to millions of customers, as we have a lot of information about them. So database marketing becomes the order of the day. If you can capture information about the visitor who comes to Sri Lanka you can always follow-up again and ensure that the repeats are there," he added.

The tourist board chief also called for renewed thinking in dealing with present-day tourists. "The customer has also changed his ways. Today we can't talk about a Japanese or German tourist. There are the office ladies, the silvers (silver-haired), the divers, the climbers, nature lovers, heritage lovers, honeymooners in Japan and so on. We can't talk about just promotions in Japan or Germany ... we need to promote these segments". 

He believes a lot of price-cutting had taken place in the local industry due to the conflict situation and over capacity and stressed the need for improving the quality of the product. 

"What I believe I should be doing is not only working with top layers of the industry but go to the shop floor. We have to motivate them. You have to share the vision with those who come in touch with the customer", he said.

Mr. de Alwis, who has a Masters in Resource Economics, started his career at the Coast Conservation Department as manager, coastal resource development in 1978 before moving to the tourism board as research director and later, marketing director. After spells at the then-Greater Colombo Economic Commission and the advertising industry at De Alwis Advertising, he moved to PATA ending up as vice president, Asia and then undertaking international consultancies.

Are we on the verge of a power crisis? 

The implications of a power shortage this year could be very different to the scenario we had in 1996.It is not a simple issue of adequate power to run the factories, work places and feed domestic needs. A hydropower shortage has very serious financial implications for the country.

One of the important reasons for the serious balance of payments problem last year was the massive increase in the oil import bill. 

The coincidence of two factors created the crisis. On the one hand, the drought conditions required enhanced thermal power generation. Therefore the volume of crude oil imports had to be increased. This increased need of oil imports coincided with a sharp increase in prices. Crude oil prices rose to around US$ 32 to 34 per barrel.

Consequently the trade balance suffered a serious setback and made a dent in our foreign exchange reserves. The situation in our foreign exchange reserves this year is such that it cannot withstand a repetition of last year's high import cost on crude oil imports .The drain on our foreign exchange reserves cannot be withstood in the context of meagre foreign exchange reserves. On the other hand, if the foreign exchange position results in an inability to import the increased requirements of crude oil, power cuts would ensue and these could cripple industry. This in turn implies a blow to our exports and foreign exchange earnings.

Therefore there is a possibility of a vicious cycle of events that could emerge with disastrous consequences on the economy. The country's industry requires an uninterrupted supply of electricity. If the hydropower generation is inadequate then thermal generation is essential. 

The country has to find the resources to import the oil at whatever the cost. For around the last ten years there have been clear signs that we would reach the limits of hydro electricity generation. The rapid increase in annual electricity consumption implied that the country had to resort to other methods of electricity generation. Apart from the cost burden in

foreign exchange terms, there is also the question as to whether we are having the best options to supplement our hydro electricity. Would we have to enhance our power supplies at high cost?

It appears that once the power crisis of 1996 faded away the plans to generate adequate alternate sources of power did not receive the serious attention it required. There are allegations that this happened due to vested interests from within in order to purchase power at higher cost. Tenders were called for power plants many times but these were not followed up to a conclusion. It is said that many foreign bidders left in disgust. If this were true it is indeed a serious indictment on those responsible for power planning. Not only the Ceylon Electricity Board but also other agencies like the BOI and PERC.

There are also reports that the finances of the Electricity Board is in a perilous state owing to last year's high cost of power generation coupled with unpaid bills. Consequently increased tariffs are expected shortly. The increase in electricity charges, together with high interest rates and increased costs of both imported and locally produced goods are likely to raise production costs and consequently threaten our international competitiveness of exports. 

The power crisis is multi-dimensional. It has almost unbearable implications for the balance of payments and foreign exchange reserves. The low foreign exchange reserves have serious constraints on the country's ability to import the required oil imports to generate adequate electricity. An inability to generate adequate power could have serious setbacks to industry.

The power crisis that may be upon us could be a serious setback to the economy. There is a need to design an immediate contingency plan to cope with the likely power shortage this year. There is also a need to evolve a medium and short-term plan for enhancing the power supply and to implement these. It is vitally important that vested interests do not have a stake in these power plans.

Reading tea leaves

The privatisation of Sri Lanka's tea, rubber and coconut estates in the early 1990s took the country into a new era for an economy that was once driven by corruption-ridden and inefficient state-controlled enterprises.

Much has been said about the privatisation of the estates, its profitability and effectiveness but little has been written about the socio-economic impact of the privatisation process. Now comes a report prepared by the Netherlands-funded Programme Support Group (PSG) which studied and reported on this very subject. The main consultant of this 51-page document titled "Economic and Social Impact of Privatisation of the Plantations" is Mr. B. Sivaram who has sought to address all the issues relating to this topic with recommendations and proposals to improve the business and life of the community.

In this analysis, Maxwell Fernando, one of the country's top tea industry experts and a veteran broker, takes a peek into the report and its main issues while making his own suggestions as to how the tea industry should develop vis-a-vis privatisation.

The recent report "Eco- nomic and Social Im- pact of Privatisation of Plantations" is the first of its kind analysing the performance of the privatised plantation companies since 1992.

The study forms part of the research activities of the Programme Support Group, a team that provides technical assistance on social development issues to the plantation sector in general and the Plantation Housing and Social Welfare Trust in particular.

Privatisation of the estate sector was one of the boldest steps taken by the government in recent times as the plantations are of crucial importance to the Sri Lankan economy. 

Export earnings from tea alone amount to over US $ 750 million, which is 14% of the total earnings of the country. In addition, it generates employment directly and indirectly for over a million people.

The issues that led to this change, according to this document, are both economic and social, unlike earlier when socio-political reasons took precedence over commercial considerations. This measure was meant not only to improve the general efficiency by enhancing product quality and stepping up capital investment, but also to improve the general quality of the workforce and their families.

B. Sivaram who has prepared the comprehensive report for the Programme Support Group, has researched into the socio-economic fabric of the management of change, based on data obtained from the Planters' Association, the Plantation Housing and Social Welfare Trust and the plantation management companies. He has impartially addressed the various dimensions of the reform package and has been forthright in determining the exact position of the plantation sector during the six-year period between 1993 and 1999.

The 20 management companies, according to the study, manage 34% of the country's land under tea and rubber, accounting for 49% and 40% respectively of the island-wide production of the primary export products. The success of this privatisation programme will no doubt have an overall influence on the entire plantation industry, with the result the national expectations are enormous.

The report explains the reasons that forced the government to make this crucial judgment on all matters concerning the plantation sector, and finally handed it back to the private sector consequent to the nationalization of the plantation sector commencing with the Land Reform Law No. 1 of 1972 followed with the Land Reform (Amendment) Law No. 39 of 1975, the agricultural sector failed to meet the challenges required to raise productivity and competitiveness. 

The tenure during the state ownership was characterized by huge financial losses, increasing costs, and a marked decline in production.

It was to remedy these ills that the government took this courageous step. The initial decision, as is well known, was only a partial relinquishment of the two major state plantation corporations. The contracts signed in June 1992 was the first step towards full-fledged privatisation. The initial five-year arrangement limited long-term investment, but the issue was finally settled in 1995. The period of the lease was extended to 50 years with the option for further renewal.

The 20 plantation companies have, according to the report, now settled down to face the winds of change, and the results of this reorganization have been accurately documented.

Improvements to field and factory technology

The report however stresses the systematic replanting and infilling that has taken place over the past six years, the results of which could only be expected in the long term. 

Meanwhile, yields from rubber have remained more or less static, but it is 20% higher than the national average.

Improvements in factory technology were the next consequential task undertaken by the management companies. Extension of factory capacity was a necessity, but the most daunting task ahead of them has been to re-establish the image of Sri Lanka teas in world markets. 

They are very much into it now and the introduction of modern machinery with new processing management systems will over time ensure product consistency, and before long these measures taken will help to enhance the quality aspect.

In respect of rubber, the privatised companies are said to account for an impressive proportion of the country's premium grade mix, but in a global environment of depressed prices, it had hardly been possible for them to generate any profits. Yet, they continue to cater to the requirements of niche markets.

Marketing dimensions

The report highlights the need to focus attention on blending, packaging, and labelling, and branding the tea export products. These down-stream operations not only will enhance the export earnings of the country, but also provide employment opportunities as well as develop a string of feeder industries.

This subject has been dealt with in detail, and should serve as a determining factor that calls for priority action. In other developing countries, deliberations involving privatisation have invariably led to the promotion of more dynamic approaches to marketing. The essence of these changes, the report advocates, is to do away with or at least reduce the dependence on intermediary agencies with a view to reaching the ultimate consumer direct through value-addition at source, brand promotions and joint ventures.

It is unfortunate that very little has happened at the macro-corporate level in this regard. Sri Lanka's status in the world market, as an exporter of bulk tea, needs to be altered in favour of one that is associated as an exporter of high value-added teas. This crucial step forward, amidst foreseeable changes to consumer preferences and lifestyles, is essential for the future stability of Sri Lanka's tea industry.

Past trading patterns highlight a bias towards trading teas in world markets as opposed to marketing of tea. With globalization and its ensuring changes, there is an urgent need for Sri Lanka to respond to newly emerging international trends. 

Failure to do so may lead to the gradual decline of the country's export status.

The indifference so far expressed by the plantation companies towards adopting a more innovative approach to tea marketing, it is felt, is due to the priority placed on the need to put production on track initially. 

Once the production targets are achieved, they will have the resources to muster all their energies towards adopting modern marketing techniques. As of now, 10 of the 20 companies are still 100% auction oriented, and only 3 companies are actively involved in direct marketing.

Another burning issue that is freely discussed today is the implications of liberalizing tea imports. At present, specialty teas that are not produced in the country are permitted to be imported for blending to enrich Sri Lankan products. Orthodox teas that are produced locally are not allowed to be imported as a section of the tea trade and industry feel that such imports will have a negative impact on the very attractive prices currently fetched by the local teas at the market place.

An argument has been put forward by the trade that blending imported and local teas and re-exporting multi-origin teas of a diverse range of tastes and prices will result in an increase in the net foreign exchange earnings. It is further stated that there will be a series of macro-level benefits accruing to a string of auxiliary industries. These involve packaging, advertising, transport, as well as banking and shipping, thereby bringing about an overall increase in the employment potential in the tea and parallel industries.This subject has emerged as a major topic during the post-privatisation era. 

Several studies have been carried out by the Central Bank, Colombo Tea Trade and Institute of Policy Studies, but all these investigations remain inconclusive for arriving at a policy determination. Opinions among the stakeholders remain strongly divided. Pending a policy decision, the only option available to the trade is to concentrate its efforts on value addition to Sri Lanka teas and focus on the possibilities of brand development to uphold the competitive advantage derived from the image and quality of 'Ceylon' teas.

Long-term investments

The next preference has been directed towards factory development, and a greater part of it has been utilised for the purchase of new machinery. The author is confident that within a short period of time, the quality of the end product could be further refined to make a strong impression in world markets.

Investment on social infrastructure at 8%, mostly by way of donor contribution from the Netherlands and Norway, may look disproportionately low, but a considerable improvement in corporate initiative has been evident in recent years. 

Further, the recognition of increasing cordiality that has developed between the workers and the management over the years cannot be quantified in monetary terms, and this factor remains as a hidden cost.

It is however an accepted fact that there is an ongoing passion on the part of the management companies to create a wider range of infrastructures aimed at improving the living conditions of the labour force. Several more project activities to serve the working classes are in progress, and it would be completely a different theme when this subject is viewed ten years later.

Labour under privatisation

According to the ILO, there has been a world-wide stagnation in real wage levels for plantation workers. This no doubt is a complex question and a global trend, but the report suggests that this situation may have got aggravated when plantations were restructured during the early stages of privatisation.

One of the prime objectives in the privatisation programme was to make a substantial turn around in the levels of labour productivity. It will be observed that there has been a steady improvement in this regard during the six-year period under consideration. In the case of tea, the labour productivity index has risen from 2.50 to 2.91 and in rubber from 4.26 to 4.78. This works out to an annual gain in tea of 2.7% and rubber somewhat lower at 2.0%.

New avenues

The report goes further to advocate that this relationship that is essential for the long-term progress of the industry should be fostered. The government at this stage should encourage this trend by extending a helping hand as was the case earlier, with other ailing industries. This could take the form of a cessation or suspension on repayments during difficult times and absorption of accrued interest.

Today, the development of the industry is restricted by the interest factor, which is subjected to violent fluctuations. An undertaking by the government to bear any increased costs in the event of a hike will motivate the commercial banks to support further development of the industry. 

Privatisation, as noted in the study, does not call for less state intervention, but perhaps a different kind of intervention, less in production and more in accompanying legal environment infrastructure facilities and training programmes which can make private enterprise successful.

The report points out that the potential for institutional banking on estates remains virtually untapped. It is felt that the estate management and the rural banks could join hands to implement a scheme such as "save-as-you-earn" that will help mobilize capital at estate level. The funds so generated could be used to finance worker projects on the plantations.

A key recommendation contained in the report centres on the desirability of setting up a Plantation Development Fund. Such a measure, it has been stressed, will enable the privatised companies to follow a consistent path with respect to their developmental goals, particularly in the face of fluctuations in commodity prices. 

The proposed fund could, in the Sri Lankan context, encompass three areas - estate development, social development and market development. The report brings to focus the success with which similar arrangements are being successfully implemented in some of the other plantation economies.

The book has been drawn up with a vision for the future and should find a place on every plantation executive's desk. The findings are well supported with accurate statistical data obtained from the various agencies established to monitor the working of the plantation sector. This is the first document written both on the achievements and failures of the privatised plantations during the past six years. 

What strikes a person in the first instance is the impartiality in the observations and this publication presents a perfect analysis of the current situation.

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