7th April 1996

Profit motivates private sector

The private sector should determine its priorities and goals, have an independent vision, develop an action plan and use economists to improve their profitability. These four requirements for the private sector to play a lead role in the economic growth were elaborated by Dr Howard Nicholas, one of the key speakers at the Tenth Annual Sessions of the Sri Lanka Association of Economists. He stressed that growth was an important goal for private sector firms and that the economy's own rate of economic growth was an important determinant of private sector growth.

Profit, Dr Nicholas stressed, is the driving motivation of the private sector and if the government is serious about the private sector' s lead role, then it must be clearly understood that making profits is a key thing. It was the basis of capital formation and motivating drive for entrepreneur ship and private enterprise. Unfortunately, Dr Nicholas said, profit is looked upon as a dirty word. This he implied is a contradiction. You expect the private sector to take the lead role in the economy and perform its functions without making bigger and bigger profits.

Dr Nicholas stressed several important sub themes. Sri Lanka's private sector can grow only if it was geared to exports. The private sector he urged should gear itself to exports. Otherwise their growth dependent on the domestic market is likely to be very modest. He urged the private sector to have its own action plan and lobby as a united front with governments and use economists to assist in predicting economic developments at least at the micro level.

An important contribution at this seminar was the profile of the private sector drawn by Ranjith Fernando. He pointed out that while Sri Lanka's private sector was responsible for a very large portion of the country's output, only 20 companies had a capitalisation of over Rupees One Billion. This he contrasted with the picture of NICs where large companies dominated the scene and contributed heavily to the national product.

A low equity base, short-term perspectives, outdated technology and low competitive ability, he said characterised our private sector. Private firms were more intent on obtaining political favours and deal making rather than lobbying for government policy changes. He pointed out that the private sector cannot be blamed for these weaknesses which were a reflection of historical developments and the political and economic context in which private sector firms operated.

The high rate of taxation and the high degree of uncertainty were responsible for both the low equity and short-term perspectives and outdated technology. The educational system and the state dominated economy for many years were responsible for a lack of business orientation. He noted that there were now signs of improvements in these directions with changes in the economic environment.

The discussions at these annual Sessions of the Sri Lanka Association of Economists brought out a host of ideas which require more in-depth study leading towards a statement of policy recommendations. For far too long the rhetoric of the private sector playing the lead role, or to use the cliche being the engine of growth' has been brandished about. But what is required is for the government to hasten the conditions which it must provide for the private sector to play its lead role: the economic framework, bureaucratic efficiency, economic and social infrastructure and a pro-active role supportive of private enterprise are essential. On the other hand the private sector must be willing to accept the challenges of a competitive economic system, modernise its mechanisms to improve productivity, enhance their bargaining strength with the government and improve their internal efficiency. The discussion on the theme 'How the Private Sector should play the Lead Role in Economic growth' requires continuous discussion and dialogue so that a framework conducive to private sector growth could be ushered in soon.

Export processing village formed

By Asiff Hussein

A new export processing village (EPV), Tissamaharama EPV was recently started assisted by the Export Development Board (EDB).

The Tissamaharama Export Processing Village has already been incorporated as an EPV (Peoples) company. A board of directors representing the producers has also been elected.

Officials of the EDB, Stassens Exports, Director Zaki Alif, the EPV's Link Exporter and Hambantota District Parliamentarian Chamal Rajapakse, will function as Advisory Directors.

One thousand two hundred rural women have thus become shareholders of this new export-oriented company.

EPV projects Director L.S. Tillekeratne said one of the main objectives of the new EPV was to reduce the high unemployment rate of rural youth in the Hambantota District.

The following three projects have been undertaken by the EPV.

* Manufacture of reedware tea packs using local raw materials such as 'thala' and 'galleha' for export of tea in consumer packs by the link exporter to established buyers in Japan, Germany and Australia.

* Processing and export of cashew kernels to export markets in Europe.

* Cultivation of organic cashew to ensure constant supply of raw cashew for export.

Mr. Tillekeratne said the reedware project has already been implemented with around 900 rural producers already working. Another 300 are undergoing training. A minimum of 1000 rural producers will find employment under this project, earning around Rs. 1500-3000 per month.

"The cashew processing project envisages the processing of over 1000 tons of raw cashew per annum producing 200 to 300 tons of processed cashew per annum.

The bulk of the cashew will be purchased from Chilaw and Puttalam Districts and the balance from Matara and Hambantota Districts."

"The estimated capital cost of this project is Rs. 30 million (Rs. 21 million working capital and Rs. 9 million for machinery and equipment). The project hopes to employ 500 youth" said Mr. Tillekeratne.

Steps have also been taken to mobilize around 300 farmers in the Hambantota District to cultivate organic cashew with financial assistance by the EPV for the conversion of their cashew plantations to organic cashew. Mr. Tillekeratne added that the farmers will be able to earn a premium price for their produce by supplying these to the cashew processing project.

EPV incorporated under the Companies Act, comprise shareholders, usually rural producers, who elect their own Board of Directors in order to guide the company. The EDB not only assists in the implementation of EPV's but also co-ordinates its activities with various link exporters who undertake to export EPV products.

The first EPV was set up in Dambadeniya in 1981. This project manufactures reed tea packs for export. Following this, 35 other EPV's were set up between 1981 and 1986 covering several other product categories. Today, however, only four operate. The Dambadeniya EPV has been restructured by the Trade Ministry recently. The EPV is now fully operational and continues as a successful project. It has over 2,800 producer shareholders and an annual turnover of Rs. 18 million. It also has substantial financial reserves.

Coming months crucial

MARKET FOCUS
By Alam Yusuf

As expected fund managers and institutional portfolio managers were in full swing, transferring portfolios before the 31st March financial year end. Due to this reason, daily market turnover increased to respectable levels of Rs. 50 million, and the market artificially stabilised on March 29th. But the very next day's turnover experienced the expected slide.

The coming months are crucial. The offensive to capture the remaining parts of the Jaffna peninsula, by the security forces is already in operation. Repercussions of this offensive may also be felt in Colombo, which could have adverse effects on the economy.

Local government elections are to be held in May, resulting in increased government expenditure at short notice This could increase Treasury Bill interest rate higher than expected rates in the coming months.

Inflation which is also expected to increase this year, would result in a devaluation of the rupee, in the second half of 1996, to the level of Rs. 56 per US dollar. This could work against foreign investments in Sri Lanka with foreigners preferring to hold on to their dollars rather than converting to rupee investments like buying shares.

In the period under review more transfers were observed than any real investments coming in. Foreign investors even though they appeared to be net buyers seemed to be comparatively small in percentage.

With some top ranking foreign funds losing heavily in the local market for the past two years, there seems to be a wait-factor prevailing, concerning future investments.

The electricity disruption during trading hours seems to have also affected the investors and brokers rhythm to some extent, with lethargy and low productivity being the norm.

The power cuts affect industry and trading organisations at a crucial time of the day and trading of some of their companies quoted on the stock exchange will be affected.

To round up the period under review, the market ASI dropped about 5 points. Local investors and High Net worth individuals are waiting till the end of the month to come into the market. Retailers were seen selling shares for the coming national New Year. The oncoming holiday syndrome was witnessed even this week.