The Sunday Times FT - Jacobi says discrimination against foreign investors

Jacobi Carbons Lanka, a foreign investor in the eye of a local storm over the use of raw material for activated carbon manufacture, last week defended itself against the claims and accused authorities of being 'unkind' and discriminatory to foreign investors.

Anders Skeini, owner of Jacobi Carbons, a Swedish company and parent of the Sri Lankan subsidiary, said it is unfair for Sri Lanka to invite investors, open its doors and then leave them without raw materials adding that “it is illegal because investments should be protected.”

"The government can't make laws after investments have been approved or the case will end up in arbitration in Washington on the grounds of discrimination," he said in an interview last week noting that laws cannot be imposed retroactively, such as the Coconut Development Authority (CDA) rules and regulations on the purchase of raw materials from Sri Lanka and that they plan on purchasing all of their raw material locally.

The Sunday Times FT recently reported the case where the Supreme Court barred Jacobi Carbons from purchasing raw materials locally for two weeks on a petition by local activated carbon manufacturer Prime Carbons saying that the former had violated regulations by purchasing local raw material. The case comes up on Friday.

Earlier in December Prime Carbons filed a fundamental rights case in the Supreme Court. On the same day, Haycarb Ltd, the biggest activated carbon maker, filed a writ in the Court of Appeal against Jacobi. This case is still pending. On the fundamental rights case, a settlement was agreed upon where Jacobi Carbons would operate within the rules and regulations set forth by the CDA.

Accordingly, Jacobi Carbons was to be barred from purchasing raw materials for its activated carbon plant. In February 2006, the Supreme Court ordered these rules and regulations be formulated and gazetted within six weeks. So far, they have not come into fruition, allowing Jacobi Carbons to purchase charcoal locally, causing problems and losses to local manufacturers.

Retracing the steps towards their investment here, Skeini, now in Colombo, said feasibility studies on starting his own company in Sri Lanka were conducted in October 2004 after contract negotiations with some local companies such as Hayleys Ltd fell through.

A Hayleys official, in response, told The Sunday Times FT that Hayleys was doing marketing in the US through a company called Barnaby Sutcliffe which filed for Chapter 11 Bankruptcy in the US. It was at this time that Skeini contacted Hayleys about doing marketing for them but officials at Hayleys had said they were not interested.

Skeini said the Board of Investment (BOI) was helpful in securing BOI status for manufacturing capacity of 6000 tonnes of activated carbon and was able to set up a manufacturing plant in Nattandiya. Skeini decided to set up in Sri Lanka as opposed to elsewhere because of the superior quality of the local coconut shells.

A point of contention for the local activated carbon industry is the limited availability of raw materials in Sri Lanka. In fact companies like Haycarb have imported coconut shells when raw material was scarce. The local industry feels that the BOI should never have allowed the entry of a foreign company due to this reason. However, Jacobi Carbons was granted BOI status in June 2005 and the CDA issued a letter of no objection to the BOI but did state the company would be subject to its rules and regulations.

Saliya Wickremasuriya, former Chairman of BOI, who handled the Jacobi Carbons application, said the proposal submitted to the BOI was simply to import raw material, add value locally and export. "As such, it should and would have had no effect on local manufacturers since Jacobi was going to import charcoal from India," Wickremasuriya said. He added that at the time, the BOI was contacted by one of the larger local manufacturers asking them to exercise caution. "When our officer reviewed the application, it was based on imported raw material. On that basis, we gave them approval. We didn't want there to be an adverse market impact in Sri Lanka since they (Jacobi Carbons) were going to import their charcoal from India." According to Wickremasuriya, this matter should be taken up between Jacobi Carbons and the BOI by scrutinizing the agreement and application which is part and parcel of the agreement.

Different wording

According to court documents obtained by The Sunday Times FT, gazetting of CDA rules and regulations didn't take place until May 29, 2006, over three months after the Supreme Court ruling. The wording used by the CDA in February 2006 is slightly different to what was gazetted in May. Instead of barring the purchase of charcoal in Sri Lanka, the CDA said that it will consider the licence to companies on the availability of raw material with permission also being granted upon availability.

The gazetted regulations were set to come into effect on August 1, 2006. Why did it take so long for the CDA to gazette the rules and why did the CDA delay the rules coming into effect?

Jacobi, through its lawyers in Colombo, challenged the CDA rules and regulations barring it from purchasing local raw materials in court.

"Jacobi made a 450 million rupee investment and they (CDA) made rules to say that only the foreign company cannot buy coconut here," said Skeini adding that it is highly discriminatory. On July 3, 2006, Jacobi wrote to the Minister of Trade, Commerce and Consumer Affairs stating that the "concurrence of the Minister in charge of Foreign and Internal Trade," had not been sought during gazetting as per CDA Act No. 46 of 1971.

Shouldn't the concurrence of the Minister have been sought by the CDA when the regulations were first being formed? CDA officials would not comment on this issue due to the case pending in the Supreme Court.

The Minister had sent a letter dated July 7, 2006 to the CDA, informing them of the oversight but not stating if he was supporting the regulations one way or the other. Furthermore, the Minister also sent a copy of that letter to Jacobi Carbons' legal representatives. Was this an attempt to make it easier for Jacobi Carbons to expedite their application to the Court of Appeal to postpone the gazette notification? Haycarb officials have stated that they have never received any response from the CDA or the BOI on inquiries into this matter.

The application to the BOI stated that manufacturing capacity for Jacobi Carbons would be 6000 tonnes with 2 lines (3000 tonnes each), meaning two rotary kilns and two boilers. A CDA inspection of their factory uncovered that Jacobi Carbons had installed five rotary kilns and five boilers. But Skeini says, the company decided on 5 lines for greater flexibility even though he maintains that the total output has remained at 6000 tonnes.

However, use of extra equipment changes the information listed in the BOI application. For example, power requirements will not match what was stated in the original application. When asked if the company brought any new technology into the country, a requirement to secure BOI status, Skeini replied that his company is engaged in certain value addition processes but was unsure if Haycarb was undertaking them.

Haycarb, in response, said this is untrue adding that Jacobi Carbons had no manufacturing experience before setting up factories in Sri Lanka and therefore, brought no new technology into the country.

Haycarb said Jacobi appointed I.K. Bede Johnpillai as its local director. Johnpillai was the head of the security firm Kay Jay Securities that supplied security staff for Haycarb and has no experience in this field. "This appointment tends to create a reasonable suspicion that Jacobi has been and is attempting to obtain confidential information with regard to Haycarb's operations and use such information to compete in the market," Haycarb said in documents filed in its own case.

When the CDA said they were going to formulate their rules and regulations, why did Jacobi Carbons not inquire into what those regulations would be? Wasn't the CDA established to protect the local industry and therefore, shouldn't they be allowed to formulate rules and regulations in order to ensure this?

Asked about the shortage of raw materials in the country, a complaint voiced by the local activated carbon industry, Skeini said charcoal availability is seasonal, this year being a particularly good one.

During shortages of charcoal, Jacobi Carbons imports the raw material.

Competition good

Skeini said, "The more competition there is for the raw material, the prices go up and it is better for the coconut industry." But Hayleys Group chairman Rajan Yatawara, in a recent letter to the BOI, says that Jacobi stockpiled and bought more than a year's supply by paying US$300 per tonne, US$100-150 more than anywhere in the world.

"The intentions are clear. By writing off consequent losses in the first year, they send less strategically funded local competitors to the wall and retrenchment will be greater than the employment created.

Having thus gained a monopoly both of markets and raw materials prices, they can recover the loss in a year by price dictation on both, moreso the latter. No profit will be retained in the country, instead remitted overseas tax free," he said.

He said Sri Lanka exports raw materials at low cost. "Why doesn't the government stop exporting raw materials when value addition is somewhere else?" he questioned. Industry officials say there are only one or two individuals supplying a limited amount of charcoal to France, somewhere between 3000 to 5000 tonnes per year.

A lot of people protested because instead of sending charcoal in raw form, it can be exported in a value added form, generating more income to the country. However, one official said that the amount being exported does not significantly impact an already depleted local supply.

Skeini said by blocking Jacobi Carbons from purchasing charcoal, the government is losing cess payments from the export of activated carbon. Moreover he insists there is excellent availability of coconut shells in Sri Lanka but around half of it goes for domestic consumption.

D.J.U. Purasinghe, Chairman of the CDA, said that he is trying his best to resolve this matter by safeguarding the local industry as well as the investor.

He added that he needs proper support from all the manufacturers in order to resolve this issue. "When we are in a crisis, we should all get together," he said. According to Purasinghe, the CDA has started the collection of unutilized shells for purchase by the industry.

Skeini says he has given the CDA tens of millions of rupees to start such an initiative even though the CDA hasn’t taken him up on his offer, a claim that was denied by Purasinghe saying the CDA never receieved money from Jacobi Carbon.

"The two parties are fighting each other so as a corrective method, I will have to look at the scenario and think of an answer for collecting unused shells," he said. Local manufacturers have told the CDA that around 14,000 tonnes of charcoal have to be imported to supplement the shortage of local supplies.

"For me to resolve this, I must try my best to collect that amount at least. I have to be fair in this agenda. I'm very concerned about the local industry," Purasinghe said.