Financial Times

Last week’s disturbing headlines in newspapers was a virtual ‘what’s on in Sri Lanka’ for anyone visiting the country and to probably think twice before investing or doing business here.

Who would want to invest in a country with headlines that read- “Failed state”, “Navy gunboat downed’, ‘Peace or War?’ and so on? Thursday’s LTTE attack on navy gunboats escorting a troops’ carrier was the worst incident since the ceasefire began in 2002 and triggered alarm bells that the country could be headed towards a war no one wants; at least not the peace-loving public.

Are we going down the 1983-2001 road of destruction again? There have been calls for chambers of commerce, industry and trade to get their act together and create public awareness on the need for avoiding a costly war. Both the LTTE and the government must be urged to stop fighting. The ceasefire agreement for all purposes doesn’t exist. The Sri Lanka Monitoring Mission (SLMM) is a toothless mechanism merely issuing statements, warnings and blame. Nobody cares any longer for statements that don’t result in action. What’s the use of the SLMM saying the sea belongs to the government when it cannot ensure – as an umpire in the peace game – that it belongs to the state and no other group? The head of the mission himself said the ceasefire agreement exists but there is no ceasefire. That’s a serious indictment on the monitors and calls for an urgent need for their role to be re-defined instead of acting as mere spectators.

So where do we go from here? There are some large business groups that have flourished even during the height of the war due to strategic management and coming to grips with reality; making companies work in a war-environment and not letting that affect the business. If one needs lessons on resilience and how to survive in a war-ravaged country, take a cue from small businesses in Jaffna and other conflict areas that have struggled but firmly kept their heads above water.

It’s the medium and small companies that would suffer the most if war breaks out – in a way it already has, for the military is not going to watch while it gets ambushed by the LTTE. Attack by the Tigers in the future will be followed by retaliatory strikes by government forces using all the firepower at its disposal.

The annual reports season is already on and most of the annual general meetings are being held by June 30 with company reports going out to shareholders.

This time the ‘moans and groans’ from the business community would be much more than the usual plea for tax breaks, an even tax regime and a level playing field, among others.

The private sector is set to raise a lot of concern about the political and security situation and how it would hurt businesses particularly sectors like tourism.

Ceylon Guardian, the country’s oldest investment group, in its annual report last week raised a very critical issue – the need for the government to allow the private sector and investment trusts to invest overseas within certain limits. Ceylinco Group chief Lalith Kotelawala has repeatedly raised this issue in the past on the need for Sri Lankan companies to invest overseas particularly in the context of globalisation and the necessity to raise the profile of local companies.

In the current context of an uncertain investment environment where it’s anybody’s guess as to what would start first – peace talks or a protracted war (instead of the low intensity battles that are taking place now), the Central Bank needs to look at this request more seriously and allow overseas investments for local companies. On the other hand the bank’s dilemma would be that in a war-like situation, export proceeds might shrink and allowing money to flow out could create balance of payments problems.

That’s why – and for many other valid reasons – the government needs to do some hard bargaining with the LTTE for both sides to get back to the negotiating table. Sri Lanka simply cannot afford another war.

By Abeynanda Dias

Tea plantations in Sri Lanka are categorised under two types of management systems – estates (large plantations) and small holders. Out of a total of 181,000 hectares, 58 percent comes under the management of large plantations whilst the remaining 42 percent falls into the small holders category.

A study of the statistics of the national production level of tea reveal, that the large plantation sector contributes 38 percent (1,370 kilos made tea per hectare), while the small holders contribute 62 percent (2,607 kilos made tea per hectare), achieving a national yield of 1,006kilograms per hectare.

Threats to large plantations

The cost of tea production in the plantation sector in Sri Lanka is one of the highest in the world with the national intake per tea plucker being very low mainly due to the retention of low yielding old seedling tea and degraded tea land.

Of the total cultivated tea extent 81,592 Ha, 30 percent is uneconomical, yielding below 1000 kg/ Ha. per year. The slab next to this uneconomical extent, which is 1001 to 1300 kg/Ha. may also fall into the stage of unproductive land by 2010 resulting in approximately 51 percent of the land becoming uneconomical, in the corporate sector if the situation is not properly addressed and if action is not instituted.

Three state organizations (JEDB & SLSPC) and Elkaduwa Plantations Ltd manage 9500 Ha. of tea lands out of which approximately 2,500 Ha are yielding below 500 kg/Ha where the average expenditure for maintaining these areas is around Rs. 170,000 to 200,000 per Ha. per annum, which works out finally to a figure of Rs. 500 million resulting in a severe impact on the three organizations’ in their productivity and viability, as the average yield levels of the three organizations are below 1,000 kg/Ha.

While there has been a progressive increase in low grown tea production by the stakeholders due to continued demand from the Middle East and CIS countries, there has been only marginal growth at high and mid elevations.

Re-planting in the high and medium grown estates has not kept pace resulting in the corporate sector re-planting stagnating at a point of 0.70 percent against the required industrial standard of 2 percent, thus creating a massive backlog of uneconomical and marginal tea lands.

It is thus clearly seen that the large plantation sector is fast heading into a severe crisis situation due to the high cost of production, which results in their inability to invest on development programmes for the future sustainability of the industry.

This in turn will create a serious impact on the massive work force of approximately 300,000 people and their dependents numbering to as much as 1.2 million.

Resurrection of marginal tea lands

Viewed in the above perspectives, regional plantation companies, JEDB/ SLSPC and Elkaduwa Plantations are at cross roads, looking for alternative strategies to put the prime agro assets of the country back on track.

It is now increasingly evident that improving both land and labour productivity is the preferred strategy for the sustainability of plantations.

The traditional estate model/combining large holdings, corporate ownership, high capital base and large labour force needs to be replaced by the small holding or out-grower system, where weaker areas could be gradually shifted to the workers for their effective participation and thereby convert these areas to be more productive land for the continuation of the industry.

The need for resurrecting the conventional estate system, which has been introduced by the British is gradually becoming inappropriate to meet the present demands of the corporate sector of the tea industry. The present management should move away from direct production and concentrate on processing, trading and marketing while the field activities should be entrusted to the out-growers and perhaps worker co-operatives where the land and labour productivity are reportedly higher.

Replanting costs

The regional plantation companies were fortunate to obtain foreign funding, since from the time of privatization until up to 2003, whereas the JEDB, SLSPC and Elkaduwa Plantations were not fortunate to obtain these funds. The areas that were covered by the donor funding is as follows:

The projects were as follows :

However even the regional plantation companies will find it extremely difficult to cope with replanting costs in future, as the plantation development project has identified social welfare and infrastructure development as the major project components.

Scarcity of employment opportunities

In the corporate sector, large extents of uncultivated lands could be cultivated, depending on its suitability. This would eventually generate employment, finally eradicating poverty, improving the status of social welfare. The diversification programmes will provide further openings to enhance agricultural practices and finally develop human resources with skills development towards productivity thus achieving to growth and innovation in the plantation sector with worker participation.

Workers and poverty line

The negligence of the estate community and thereby the lack of guidance about the changing world have plunged them into deeper levels of poverty in financial and moral terms. Therefore, the introduction of the out-grower system has three major benefits for the worker and the management.

The first objective would be to increase efficiency of workers, utilizing them for better practices of land use by offering a reasonable number of days for work, so that they are entitled to all statutory dues which are presently being enjoyed by workers (such as statutory dues and other benefits).

The second objective would be achieved by providing the workers (future out-growers) land for a reasonable period of time. ie. a minimum 30 years and treat them as lessees of the land, for them to develop the land and earn an income from it (the present regional plantations companies are on a lease term of 53 years). The philosophy behind the concept is to motivate the out-growers to look after their land well, as it would be their main livelihood.

This will create a situation where if they managed the resources well they will be able to earn a considerable income, which will be higher than their income earned as daily paid workers. Therefore, they will tend to work harder, since, they have freedom to produce more and more which will improve their livelihood, security and thereby the third objective will be achieved.

The integration of estate workers with the neighbouring villages would be important to maximize the productivity of these neglected lands.

On the other hand, there is an increased demand for uncultivated lands in the periphery of the estates by the villages to undertake cultivation, depending on the suitability of the land, which will enhance their self-employment.

The introduction of the out-grower system to the tea industry is a novelty which goes beyond the traditional corporate management system of tea plantations, however it would not be an easy change initially in designing and implementing this concept. Therefore taking perceptions and the opinion of the trade unions and other stakeholders of the industry into serious consideration is a very important factor before the implementation of this concept. Under a pilot out-grower system introduced at Elkaduwa Plantation in 2005, where 500 worker families were provided with approximately 01 Ha. of land each, there were financial gains to the workers and a major reduction in the losses to the management as well.

The maximum extent given for an out-grower must be limited to 1 Ha. for a minimum period of 30 years with a royalty payment of the land at Rs. 1/- per kilogram of green leaf harvested by the worker.

The land selected for the out-growers are areas consisting of approximately 5,000 tea bushes per Ha., which will produce approximately 600 kg/ MT per annum, meaning approximately 200 kg of green leaf per month. With the prevailing market rate of approximately Rs. 27 per kg of green leaf, this will generate an income of about Rs. 5,400 per month per family. In addition, a family of two workers will be offered work at 15 to 20 days per month on the estate, which would result in an earning of Rs. 7,000 per month. The final earning per family involved in the out-grower system would therefore be around Rs. 12,000 per month (out-grower income + earning from estate work).

Assistance from the management to the out-grower is as follows:

In conclusion, it is important to understand that the out-grower system does not purely mean that the marginal tea lands will be only maintained by the out-growers; they will in fact be encouraged to infill/re-plant these lands with the ultimate motive of converting these lands into high yielding fields within a period of approximately 10 years.

(The writer is Director of the Plantation Management Monitoring Division at the Ministry of Plantation Industries and a former CEO of Elkaduwa Plantations Ltd and a former Director General of the Sri Lanka Tea Board)

Ceylon Guardian urges regulators to allow overseas investments

By K. Kenthiran

The Ceylon Guardian Investment Ltd, the country’s oldest investment group, last week urged the government to allow listed investment trusts (like Ceylon Guardian) to invest overseas within limits, primarily in the SAARC region, in order to improve the quality of returns to Sri Lankan shareholders.
The company said it plans to source funds regionally in the near future as well as look at opportunities to invest overseas when regulations permit. Ceylon Guardian also urged regulators to create an enabling environment to encourage more IPOs that could lead to a share owning democracy here.
Israel Paulraj, chairman of the company, in its latest annual report, said they were encouraged by the increasing number of IPO’s which improved the quality of investment opportunities available in the Colombo bourse.
“We urge regulators and policy makers to create an enabling environment that will encourage more corporates of a high calibre to seek listing, in order to broad base share market activity and create a share owning democracy,” he said adding that the share market is a source of capital for new projects and as such a catalyst for promoting entrepreneurship in the country whilst also helping to attract much needed foreign investment.
The Ceylon Guardian Group, a subsidiary of Carson Cumberbatch Company Ltd, posted after tax profits of Rs. 276.4 million for the year to March 31, 2006, down from Rs. 575.7 million in the previous year. However last year’s profit included an exceptional item of Rs. 452 million, from the sale of Malaysian plantation land. In the current year profit growth on operational activities after adjusting for the exceptional activities saw an increase of 123.4 %.
The earnings per share (EPS) of Rs. 10.68 for the year showed an impressive growth of 123 % compared to that of Rs 5.22 earnings per share it earned a year ago.
“We believe that the capital market can become a great leveler in modern society where greater retail ownership of shares would not only have a trickle down effect on raising standards of living but will also build a share owning democracy where Sri Lankan savers support Sri Lankan entrepreneurs to build a strong vibrant economy together,” Mr Paulraj noted, adding that listing of state owned entities will also contribute immensely to the process of capital market development since still large volume commercial activity in the country is controlled by the state.
During the year under review the company made several strategic investment decisions to boost its profits. Core activities focused on investing in stocks of good companies at reasonable prices to realize in long term.
Mr Paulraj said a dedicated investment management unit under Guardian fund management limited was set up during the year under review and the task of portfolio management was delegated to this unit by the mangers.
The GFM’s primary task was to establish structured management system and process including audit and compliance measures to manage the portfolio within the strategic framework set by the board of directors.
During the year under review the company also suffered heavily by provision made in respect of the Sathosa Retail outlets investment. The company’s investment in Sathosa Retail Ltd via international Grocers Alliance Limited amounting to Rs. 51 million failed to deliver the promises initially anticipated at the time of investment.
The company was compelled to make provision in the accounts thereby reducing the current year’s profit by the same amount.
This is a one off effect on the bottom line profits of the company.
The directors of the company have recommended a first and final dividend of 15 % on ordinary shares for the year ended March 31, 2006, which will be declared at the annual general meeting, scheduled to be held on May 30.

Management tips at The Sunday Times Biz Club

Ramal Jasinghe, CEO of Asian Alliance Insurance,will share some important tips on management and a practical approach to managing organizations when he addresses the monthly meeting of The Sunday Times Business Club.

The meeting will be held on Wednesday, May 24 at 6 pm at the Pavilion of the Trans Asia Hotel which is the club’s main sponsor. Co-sponsor of the event is Lion Brewery. Jasinghe, a veteran in the field of marketing with over 20 years of experience and having held senior positions in companies such as Union Assurance and Union Carbide, has extensive knowledge and experience in managing organizations today.

In addition to his role as CEO of Asian Alliance Insurance, he serves in the Council of the National Chamber of Exporters and the National Chamber of Commerce, and has been an Executive Committee Member of the Sri Lanka Institute of Marketing for many years.

Mount Lavinia hotel gets PATA grand award

The Mount Lavinia Hotel recently won the PATA Grand Award for Education & Training for its Youth Trainee Programme.

It was timely recognition of the hotel’s many projects aimed at changing the perceptions of a large segment of Sri Lankan society which once viewed tourism and tourism related employment in a negative light. The recognition becomes unique as the hotel celebrates 200 years of its original building this year, a statement from the hotel said. Over the past decades the Mount Lavinia Hotel has trained young men and women in the low to middle income families in rural areas of the country.

Poor dividends from the best companies

Minority shareholders in quoted companies are being marginalised because people seem to think that the only return from stock market investments is the capital gains, if any. But no one looks at it as a long term investment in order to get adequate and regular dividends.

A Colombo Stock Exchange newsletter published last year says that if the directors of a company think it is better to invest in another company, they need not declare dividends. I think this is a very irresponsible statement.

In the Inland Revenue Act, Section 62 permits the assessor to declare a dividend if he thinks the distribution is inadequate. Although it was applicable to only private companies earlier, it was made applicable to all the companies in a recent budget speech. In that section, they say that determining what funds are available for distribution, they must exclude any amounts used to purchase existing businesses.

There is an inadequate declaration of dividends among existing quoted companies. Many companies although declaring dividends, have the capacity to declare more, rather than channeling the funds into reserve accounts. Most of the time, this money is being used for private purposes or to take over other companies.

They have created a cosmetic effect on the shareholders by declaring dividends although not enough.

After examining many financial statements I saw the potential of the businesses to declare more dividends. The businesses have not grown in capital; rather in size through takeovers.

For example the Distilleries Company of Sri Lanka Ltd in its interim statement for six months ended 30th September 2005 disclosed a final ordinary dividend of 50 percent for the year which ended on March 31, 2005 amounting to Rs.150 million being only 50 cents per one rupee share.

The company’s initial issued capital was Rs.300 million and even by the end of 30th September 2005, it is still at Rs. 300 million.

The company recorded Earnings Per Share of Rs 7.42 as disclosed in the statements. This shows the potential of the company to declare more dividends than 50 cents when Earnings Per Share show Rs 7.

This is similarly done by other companies such as Hunters, Hayleys, Aitken Spence & Co. Ltd, etc. According to my knowledge, these companies have the potential to declare more than the amount declared which is unfair to the shareholders. However not all companies fall into this category of insufficient dividend payment.

Nestle is a company declaring maximum dividend to its shareholders. Recently it declared a dividend of a high percentage which is a very good dividend.

The Colombo Stock Exchange was built to create a shareholding democracy and it is important for the companies to act in the best interest of their shareholders.