• Mind your Business
• Business community urges reconvening of parliament 
• Garbage power to solve city waste crisis
• NDB to issue preference shares 
• SL in regional corruption survey
• Ornamental fish in troubled waters
• Importance of being counted
• The rice economy : challenges in the next decade
• News
• A plea for sanity from the business community

Mind your Business

Instructions to the contrary

State stake rises

Abuse of power

No name, no poaching

This was the reason given when an IT company was asked as to why its press release named officials identified by first names only. "They may be head hunted by others," was the response.

An official statement without the full names of people mentioned in the statement is unprofessional to say the least. Hiding your key personnel or running away from the problem is also not going to solve anything!

Business community urges reconvening of parliament 

By Feizal Samath and Chanakya Dissanayake

Corporate leaders appealed to President Chandrika Kumaratunga to re-convene parliament immediately and join hands with other political parties to form a government of national unity for a period of at least three years.

Lyn Fernando, a top garment's exporter and chamber personality, said garments exports were dropping due to the US recession and the latest political developments would worsen the situation. 

As Sri Lankans took stock of the situation at the weekend, chambers of commerce and boards of directors of several companies met to discuss the crisis and the possible impact on business and the economy at large. Analysts said tourism would be the first casualty, particularly since national elections are also likely anytime after October this year.

Most people were shocked, if not disappointed by Kumaratunga's move. "She has silenced the voice of the people," said one businessman.

Chrisantha Perera, chairman of Forbes and Walker and a key tea trade personality, said political uncertainty would impact on local and foreign investment. "Most investors will adopt a wait and see attitude."

"It is disappointing that the power of parliament has been taken away without any tangible reason," he said adding that the sooner this crisis is over the better.

But analysts noted that business uncertainty is going to continue for the next six months, hurting economic growth, which is likely to wipe out earlier GDP forecasts. 

International lending agencies are also watching the situation closely. "We are adopting a wait and see approach," an official at the World Bank said.

The political crisis is also likely to affect the US $ 200 million commercial loan underwritten by the Deutsche Bank on behalf of the government to finance the budget deficit. The bank ended its road show spanning from Singapore to London last Monday with positive feedback from the investors. The pricing and the final terms of the syndication are now being finalised by the bank. The launch of the syndication is expected to be in two weeks time.

Analysts say due to the political uncertainty investors are now likely to ask for a risk premium. However, a Deutsche Bank official said the fears are unfounded and foreign investors recognise political changes as a part of the democratic system.

"The president's executive powers give us the necessary confidence despite the latest developments," he said.

Foreign investors are primarily concerned about the default risk and successive Sri Lankan governments have maintained a good credit record since independence regardless of the political situation, he added.

On the economic front, the expenditure on the August 21 referendum and any subsequent election could cost several millions of rupees. Analysts say if the government embarks on a spending binge to gain mass support, this together with the election cost could result in missing the economic targets set for 2001.

IMF local representative Dr Nadim Ul Haq warned recently that the IMF Standby agreement would be withdrawn if the government fails to maintain the budget deficit at 8.5 percent GDP.

Garbage power to solve city waste crisis

By Hiran Senewiratne

The first two plants would be constructed at Avissawella and Gampaha by June next year. The joint venture partners say it is the first time in Sri Lanka garbage is being used to generate power. 

Sri Lanka's V Com Heavy Engineers (Pvt) Ltd along with Thermsave Engineering (UK) Ltd plan to invest US $ 30 million in these two power projects. V Com Chairman Jagath Navaratne told The Sunday Times Business his company would plough in US $ 12 million while the balance will come from the British partner.

These two power projects will use garbage and refuse to churn out electricity, he added. Both power plants would require 60 tonnes of waste per day, solving to some degree Colombo's garbage disposal problem.

It is estimated that 60,000 tonnes of garbage accumulates in the capital city daily, causing a major problem to the authorities.

Mr. Navaratne said that the company plans to 'steam' the garbage at its plants, as the moisture level is very high and dry garbage is necessary for power generation purposes. The company is negotiating with the Colombo Municipal Council to supply garbage on a regular basis, he added.

The company plans to open more plants in Galle, Matara and other areas in the south and other parts of the island after the successful completion of the first two projects. The joint venture is a BOI-approved project.

NDB to issue preference shares 

The entire issue will be subscribed by the NDB. Earlier the bank was considering a debenture issue, but later decided on the equity issue to strengthen the newly formed bank's tier-1 capital base. "This signifies NDB's commitment towards the new bank," said Eran Wickramarathne, CEO NDB Bank LTD.

NDB Bank will also raise Rs 400 million through an equity issue restricted to the existing shareholders of NDB. 

The NDB board has also announced a 'dividend in specie' of 2 shares of the NDB Bank LTD for each 5 shares held in NDB, worth Rs 215 million. The announcement was made at the AGM held in March. The takeover price of the ABN AMRO was Rs 1.25 billion. 

SL in regional corruption survey

By Dinali Goonewardene

The survey which will also be carried out in India, Pakistan, Bangladesh and Nepal, seeks to ascertain public perceptions of corruption, Co-ordinator, Transparency International, Amali Fernando told The Sunday Times Business.

The public's perception of corruption in the judicial sector, health, education, police and land administration will be evaluated by means of a questionnaire now being formulated. The poll would be carried out by Sri Lanka's Social Indicator (Pvt) Ltd and is expected to commence next month. 

The regional survey is expected to pave the way for a national ranking on TI's corruption perception index. The score which usually affects business confidence, is published alongside a standard deviation indicating differences in perceptions and the number of surveys conducted to arrive at the rank. The year 2001 rankings saw Finland head the corruption perception index showing high levels of public confidence, followed by Denmark and New Zealand. Bangladesh brought up the rear with high perceptions of corruption and was preceded by Uganda and Nigeria.

Transparency International is a non-governmental organisation dedicated to increasing government accountability and curbing international and national corruption. It was founded in 1993 and is active in over 70 countries worldwide. It focuses on building systems that combat corruption, which once in place, will highlight corruption. TI's national chapters are financially and institutionally independent.

Ornamental fish in troubled waters

By Diana Mathews

These products are sent to lucrative markets to countries including the US, Japan, France, Germany and Italy but growth has been stagnant. 

Vibu Perera, Managing Director of Lumbini Aquaria, a major exporter, says there hasn't been any significant improvement in exports. "But there is definitely scope in this market," he said. 

After British Airways and KLM stopped flying to Colombo some years back, the demand for space on board other airlines has exceeded available space. The two European airliners were among the main carriers of ornamental fish. SriLankan Airlines, Singapore Airlines and Lufthansa are now the carriers of fish exports.

"We were one of the largest exporters in the industry but we are now operating on a small scale due to many problems in the industry," said Lincoln Perera at Tropical Aquarium.

He said the high-risks involved in exporting a live product and the lack of government support for the industry have resulted in some aquariums switching to other business ventures. 

Total export revenues from ornamental fish last year were Rs 592 million while export earnings up to April 2001 is approximately Rs 245 million, according to Export Development Board figures. 

Of the total exports, 70 percent is made up of marine fish while only 30 percent comprises fresh water fish. 

Industry officials say environmentalist objections to the removal of ornamental fish - because it affects coral reefs - have affected growth in the supply of particularly marine fish.

Keells Aquariums is a major exporter of ornamental fish in the country with a market share of 30 percent. "This is a difficult industry because it deals with live products," said Hemantha Perera, Director Marketing at Keells Aquariums. "As long as there is a quality product at a reasonable price there is a demand."

He said the security period required to keep the fish at SriLankan Airlines Cargo section is a major drawback to the industry. The cargo has to be kept at the warehouse six hours prior to departure, which is difficult for exporters located some distance away from the airport. 

Delays in flights also impact on the industry as a "perishable product" like fish should be delivered within a specified period of time.

Industry officials said Singapore, Sri Lanka's main competitor in the ornamental fish business, has launched aggressive marketing systems and captured the international market while Colombo was way behind. 

Importance of being counted

The estimated population of the country was 19.34 million in mid-2000. The projected mid-year population at the time of counting should be about 19.6 million. This may not be the final figure of the census. There are several reasons for this.

The estimated population for each non-census year is obtained by adding the number of births, deducting the numbers that have died and adjusting for net migration. This method was somewhat accurate in the past as our birth and death records have been fairly reliable. However, several factors have rendered this basis less reliable. There has been a lapse of twenty years, the reliability of our birth and death registration has been subject to unusual deficiencies owing to the civil war and even the figures of migration aren't accurate as there have been outflows of population from the North and East illegally to India.

Unfortunately the current census is not likely to give an entirely correct count of the total population and the country's demographic pattern. Mr. Prabhakaran is unlikely to be counted. That may not matter much. But what about his fighting comrades? Even more important is the vast area of the country where census enumerators will find it too risky to go from house to house to count people. These factors could hamper a proper estimate of the population and its distribution.

In spite of these difficulties this census of population is significant as it should capture the vital changes that have occurred in the demography of the country. Some of these changes are the shifts in population from rural to urban areas. Some areas that were classified as rural would require to be reclassified as urban. The estimate of Sri Lanka's population as consisting of 72.2 percent rural, 21.5 percent urban and 6.3 percent estate has no doubt changed.

In addition to the shifts in population owing to economic transformations there have been very significant changes in the ethnic composition and distribution owing to the ongoing war. 

The ethnic distribution in 2001 is likely to be different to what it was in 1981. There has been a considerable migration of Tamil people from the north to the south. The ethnic composition of the Colombo district in particular is likely to have changed significantly. Large numbers of Tamils have left the country for permanent residence. The unrecorded deaths of a significant number of Tamils during the last one-and-a- half decades and perhaps a lower birth rate in the war torn areas are likely to have changed the population composition and its geographical distribution.

These changes have very important political repercussions, social impacts and economic consequences. The new census figures with all the attendant deficiencies would provide a better picture of the country's population profile. The census of population 2001 is indeed a very significant event.

The rice economy : challenges in the next decade

In this feature, Nimal Sanderatne, Visiting Senior Fellow, Postgraduate Institute of Agriculture, University of Peradeniya and a reputed Sri Lankan econmist discusses a whole range of issues relating to paddy production, imports and exports, the crisis facing the farming community as youngsters opt for other jobs and the future prospects of hybrid rice.

A retrospective glance

First, the greater measure of self-sufficiency we have achieved in rice has been partly due to an increasing trend in wheat flour consumption. In the 1950s our per capita wheat flour consumption was only about 20 kilograms. Today our wheat consumption is about 50 kilograms per capita. 

As time went by there had been a substitution of wheat flour for rice. Rice consumption per capita has declined from around 107 kilograms in the 1960s to about 92 kilograms today. Within an increasing trend in wheat flour consumption, there have been fluctuations in per capita consumption of these two main cereals owing to changes in their prices.

The increasing trend in wheat flour consumption is also due to a preference for wheat flour products. This shift in consumption from rice to wheat flour has occurred internationally as well. There are three basic reasons for this shift in Sri Lanka and other rice consuming countries. These are: the desire for a varied diet in which wheat flour is not only consumed as a staple food but also for other food preparations such as cakes and pastries; the convenience of wheat flour preparations owing to changing life styles and the trend of declining wheat prices in the international market.

In the 1950s rice production increased by 65 percent owing to both an expansion of the area cultivated by 25 percent and an increase in yields by 40 percent. The 1960s saw a similar achievement. The first half of the 1980s saw an expansion in the area cultivated. Production increased by 25 percent between 1980 and 1985. After 1985 yield improvements were modest, and it even declined in certain years. Paddy production decreased from 2,661 thousand metric tons in 1985 to 2,063 thousand metric tons by 1989.

The 1990s were particularly disappointing. In the first half of the 1990s production as well as yields reached a plateau till 1995. It has increased somewhat since then, particularly in the last three years. Between 1995 and 1999 paddy production increased by only 2 percent. In 1999 paddy production reached a peak of 2,868 thousand metric tons. Yet, in the decade as a whole, production increased by only 13 percent. These facts may surprise those who are accustomed to think that we have had an enormous upsurge in paddy production in recent years.

This impression is due to two reasons. One is that there has been an increase in paddy production since the low level of production of 2,239 thousand metric tons in 1997. Paddy production increased by 6.5 percent in 1999. Yet production in 1999 was only 2 percent higher than that of 1995. The second reason for this impression is the collapse of the paddy market. Paddy farmers have had to sometimes sell their paddy at prices below the cost of production. 

Rice imports

Paddy production last year (2000) was well below the requirements for domestic consumption. Paddy production for the year 2000 was estimated at 2787 thousand metric tons, whereas consumption requirements were 3,246 thousand metric tons - a shortfall of about 14 percent. Even in 1999 when we recorded the highest paddy production ever, there was a shortfall of 11 percent in relation to consumption requirements of that year.

Current issues

In broad terms, the potential yields of paddy are in the region of 10 to 11 metric tons per hectare. The actual yield level is only about 3.7 metric tons per hectare. It is not practical to bridge the yield gap fully as a number of field level constraints have to be faced. However, this yield gap of about 60 percent is too large. It is indicative of fundamental weaknesses in the agrarian structure and agricultural policies. If rice farming is to be an economically and socially viable proposition, it is vital that the average national yield be pulled up to about 5 metric tons per hectare within the coming decade. 

There would of course be regional differences with wet zone average yields being lower and irrigated rice farming in the dry zone having much higher yields. It is realistic to propose such a rise in yields for two reasons. First, yields higher than 5 metric tons per hectare have already been achieved in some areas, and second, the Department of Agriculture has already demonstrated the feasibility of raising yield levels to over 5 metric tons per hectare through their Block Demonstration Project in several areas in the country.

However, the constraints to achieving higher yield levels are many. These include the need to improve soil fertility, proper methods of land preparation, constraints in water availability and its management, wrong cultivation practices, an extension gap which does not link research with field level practices, inadequate credit, bad post-harvest practices and unsatisfactory marketing channels at harvest times which depress farm gate prices for paddy.

Viable farming

When we put together cost of production data with the paddy price data and yields, we find that there is no way by which a farmer cultivating a hectare of paddy and having the average national yield could derive an adequate income for the livelihood of a farm family of about five persons.

According to the Central Bank's Report on Consumer Finances and Socio Economic Survey of 1996/97, a rural household of five persons required about Rs. 9,000 per month or Rs. 108,000 per year for living expenses three years ago. Since 1997 living costs have risen further. This is not an income that a paddy farmer could obtain from cultivating only one hectare of paddy. Paddy farmers have been caught up in a severe cost : price squeeze. 

The cost of paddy farming has increased, while the sale price of paddy has decreased in recent years. The estimated average cost of production of a kilogram of paddy is Rs. 8.57. The farm gate price has fallen to about Rs. 9 -10 recently. Put differently, paddy prices have not gone up commensurately with rises in costs, or even worse, prices have come down. In addition living costs have risen to make paddy farming incomes on smallholdings totally inadequate. Costs of cultivation and living expenditure have gone up, yields and prices have not. That is the crux of the issue of viability.

Farm households have three "options" outside of leaving paddy farming altogether. These so-called "options" may in fact not be available to many farmers. The three options are: a)Increase yields and thereby their farm incomes, b) Cultivate higher value crops during the off season or the Yala season, c) Seek off-farm employment and make paddy farming a part-time occupation.

Part time paddy farming is an important development that we must comprehend, if we are to design realistic and economically viable policies for raising production and productivity in paddy farming. The evolution of paddy farming into a part-time occupation has both a structural rationale as well as a push and pull factor. The structural rationale for part-time paddy farming was not evident and did not take effect as the push factor of paddy farming and the pull factor from other opportunities was either weak or did not exist at all. These push and pull factors are themselves the product of the changing nature of the Sri Lankan economy and society.

part-time occupation

The push factor consists of the inability of the farm household to make ends meet from their paddy farming. This is due to both the cost - price squeeze that I discussed earlier, as well as the increasing costs of living, especially with the added needs of a rural family. These added needs would include a more varied diet, expenditure on education of children, more sophisticated tastes in clothing and the consumerism that has gripped even rural society.

Another factor, which is not readily recognised, is that some farming areas have inadequate labour to supplement household labour during the peak periods for many reasons. 

The full time employment of persons in more remunerative occupations in or outside the cultivation area, the employment of youth in the army, the exodus of youth to the Middle East, are among the reasons for the drift of labour from rural areas and the consequent labour shortage.

There is another very significant sociological factor that underlies this phenomenon. 

Apart from the economic considerations, there is a push out of paddy farming as educated youth, even when unemployed, are averse to working as labourers or cultivating paddy themselves. By virtue of their education, even if this were only up to the GCE ordinary level, they deem it a lowly occupation. Contrary to what we may like to say about paddy farming being a way of life and our culture being based on rice farming, the stark contemporary reality is otherwise. The youth of the country do not wish to be employed in paddy farming.

There are also pull factors. Some of these pull factors are the converse of the push factors. Illustrative of this is that while paddy farming has lost its attraction as an occupation, especially for the educated, other employment opportunities, almost irrespective of the wages, are more attractive. In the context of the low incomes from paddy farming that I have referred to, these other occupations are more attractive economically as well as sociologically.

The diversification of the Sri Lankan economy, particularly in the last two decades, has also provided a number of new opportunities for employment. In the past even if some of the push factors were there, they were only a few opportunities for non-farm employment. 

The new employment opportunities are indeed varied, they include working in garment factories, retail trade, self employment opportunities like operating a trishaw, working as a driver in school vans and private coaches, small scale manufactures, etc. The diversified economy has provided new types of employment opportunities that are more attractive. And these are the factors pulling rural youth out of paddy farming.

These non-farm occupations have another attraction in comparison to farming. They provide a secure income. Therefore these avenues of employment are attractive owing to higher and secure cash incomes and cultural and sociological factors. They are especially attractive to the educated youth in the villages. We must also take note of the fact that large numbers are employed in the armed forces and in foreign employment. These push and pull factors have altered the rural labour market significantly. These factors must be taken into account when strategies for the rice economy are considered. It will be counter-productive to be sentimental and talk about paddy farming being a way of life, an integral part of our culture and romanticising paddy farming.

These developments have both positive and negative implications for rice farming. Among the positive factors is the possibility of farmers taking a greater degree of risk in paddy farming, as they have other sources of income. A farm household would be able to adopt better cultivation practices as these other sources of income, as well as access to credit arising from the other income base, reduce the prospect of capital rationing on paddy farming. The increased availability of capital resources and less risk aversion could in fact increase productivity in rice farming. These positive factors must be tempered by several negative possibilities.

Foremost among these is that paddy farming becoming a part-time occupation could lead to a phasing out of farm activity. Such a phasing out would be expedited by the cost - price squeeze mentioned earlier, labour shortages, especially at the peak periods, and the inability to find the time to devote to farming activities owing to obligations in economic activities. 

Danger

It is important to realise that this transformation of rice farming into a part-time occupation is not an isolated development in Sri Lanka. It is a phenomenon that is taking place in many other parts of Asia to a greater or lesser extent and the reasons for this happening are more or less the same factors as I have mentioned. The recent Asian Development Bank study on rural Asia for instance underscores this development as a significant change in many Asian countries.

challenges

As pointed out earlier, farmers are faced with a very serious cost-price squeeze. There is clear evidence that the majority of paddy farmers are finding rice cultivation uneconomic in the sense that incomes derived are inadequate for their basic living. This is resulting in an increasing trend of paddy farming becoming a part time occupation. This has both positive and negative impacts. This issue has to be examined objectively and its implications faced squarely.

While Sri Lanka's paddy yields are relatively high compared to other rice growing countries with similar agronomic conditions, there is a large gap between the potential yields and the realised yields. In broad terms, the potential yield is about 11 metric tons per hectare, while the realised average yield is about 3.8 metric tons per hectare. The bridging of this gap would mitigate several of the problems faced by the country's paddy farmers and the economy. This gap cannot be bridged completely, but even if yields could be increased to about one half the potential yields, there would be significant gains in national paddy output, it would enhance the viability of paddy farming to a significant extent and increase rural incomes and employment.

There are agronomic, technological, institutional and economic issues to be resolved to reduce the yield gap. The agronomic constraints to higher yields include unsatisfactory land preparation, poor soil fertility and practice of wrong cultural practices. An extension gap which does not transfer research findings and good practices to the farmer, low farm gate prices and the lack of credit are among the other deficiencies preventing the achievement of higher yields. Reducing the yield gap is the foremost issue for rice scientists, economists, extension specialists and agricultural economists to address.

New mechanisms

These do not exhaust all the challenges facing the rice economy, but they are, in my view, among the most important. The resolution of these issues requires research, objective examination of the issues and fresh thinking unbridled by past paradigms.

Most of what I have said is rather dismal. What I wish to focus on now is hopeful and optimistic. The Department of Agriculture has developed a program that could address the basic problem we are facing and thereby give relief to other aspects of the problem that I have dealt with. 

The Department of Agriculture has developed the YAYA Block Demonstration Project, which is an institutional program to ensure proper cultivation practices and ensure adequate credit and other inputs for selected tracts. It bridges the research extension gap, as well as ensures that the optimum inputs are available and utilised. By adopting this program yields have increased by nearly 50 percent on the tracts participating in the program. Such an increase in yields changes the cost of production of paddy, enhances farm income from paddy and changes the viability of paddy farming.

Let me indicate in a little more detail the features of this programme and the results obtained.

This program adopts appropriate cultivation methods for specific locations, uses quality seed with encouragement for farmers themselves to produce their own quality seed and ensures timely cultivation. A vital component of the program is soil fertility improvement and avoidance of improper ploughing practices. Other elements in the program include optimum stand density, nutrient management, weed and pest control and minimisation of post-harvest losses. 

The program is implemented on the basis of farmer organisations undertaking the improved cultivation practices in collaboration with a well-defined role for an agricultural extension worker. The program attempts to develop a "collective" cultivation of paddy in the tract with an effective supply of inputs, linkage with institutional credit schemes and ensuring the marketing of paddy.

This program has achieved yields of between 7.6 to 8.8 tons per hectare on average in the dry and intermediate zones under major and minor irrigation. Under rainfed conditions the Maha yield doubled to 6 tons per hectare. The expansion of this package could increase the average yield in major, minor and rainfed systems to 5.7, 5.4 and 3.9 tons per hectare respectively. The national yield average could be expected to increase by 30 per cent to about 5 tons per hectare. The outreach of this program at present is too limited to have a significant national impact. What is needed is a speedy expansion of the program. There should be adequate resources to expand this program over the next few years to cover around 75 percent of dry zone paddy tracts and about 60 percent of wet zone paddy areas. If this is done the national average yield could be increased by over 30 percent.

Extensions

The export of rice is considered the pinnacle of achievements, the realisation of the country's ancient glory, the hallmark of a robust economy. I wish to discuss this issue rather dispassionately. 

The earlier discussion of the country's paddy performance made it clear that generating an exportable surplus was some distance away, especially if we tilt our policies to favour rice consumption at the expense of the increasing trend in wheat consumption and per capita rice consumption increases due to improvements in incomes as well.

Apart from the issue of having an exportable surplus, there are other considerations that make it very difficult to foresee the export of a significant volume of rice. This is due to the fact that our costs of rice production are higher than the international prices of equivalent rice varieties, there is a declining trend in rice prices and projected rice prices are lower than current prices and the quality of rice produced in the country has no international demand. There is a need to improve our milling of rice to make the quality more comparable with internationally traded varieties. By and large the prospect of exporting rice is bleak at present. If we are to achieve an exportable surplus and an internationally competitive situation with respect to our rice, the thrust to increase rice production must be considerably stronger and the strategy must include components that resolve the issues of quality and price.

Hybrid varieties

Having said this, it is important that rice research should continue apace as any retardation could have serious disadvantages in the future. If our research fails to keep apace of other rice producing countries, then our international competitiveness could be adversely affected. It is also a well-observed phenomenon that new research findings and an increase in the yield ceiling tend to pull up yield levels. We must continue to develop higher yielding varieties, varieties more resistant to pests and diseases and varieties less dependent on imported inorganic fertilisers. 

Our rice research must attempt to reduce the cost of paddy production and develop cost-effective technologies consistent with the changing resource availabilities that I have discussed. This includes the need for appropriate mechanisation of cultivation to meet the emerging shortages in labour.

Conclusions

The second need is a much larger funding of research and a revamping of rice research and other related institutions while the third requirement is an enhancement of the institutional capacities serving agriculture, such as extension services, credit delivery, rice milling, processing of rice, improvement of post harvest handling of rice and marketing channels.

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