13th July, 1997

Cement production sees steady future

Local cement production would grow in the next few years with foreign investors also showing interest in starting up new projects, an equities research house has said.

The Lanka Cement and Kankasanthurai Cement Works (KCW) in the Northern peninsula which closed in 1990 are now being evaluated by foreign investors,” Mercantile Merchant Bank Ltd. (MMBL) said in a research report.

“A reason why foreign investors are interested in rehabilitating the existing plants and quarries in the North is because new mineable, lime-rich land has been reserved under the new mining Act,” MMBL said.

Investors could quickly enter the industry through the acquisition of a plant or part of an existing company.

A Pakistani with technology capable of making cement with limestone containing a high magnesium content was also hoping to set up a plant in the Central Province.

Though limestone should have less than 5 per cent of magnesium containing compounds for conventional processing methods, available limestone in the Central Province contains 10 to 18 per cent of magnesium, requiring a different manufacturing process.

A site has been developed in Galle for a cement grinding plant by an investment consultant who is currently looking for investors, MMBL said.

A Chinese company was also conducting technical studies to set up a cement plant in the Sabaragamuwa Province.

Though the country now needs 2.1 mn metric tons of cement a year (approx. 150,000 metric tons a month), less than half the requirement is produced here.

Puttalam Cement company the only integrated cement works (which makes cement from limestone) is estimated to have 26 per cent share of the market with a capacity of 475,000 metric tons a year.

Two grinding plants which use imported clinker to produce cement accounts for a further 24 per cent.

Tokyo Cement which is now expanding has a capacity of 240,000 tonnes. The other grinding plant is the former state-owned Ruhunu Cement now owned by the Yashoda group.

An estimated 28 per cent of the market is also served by the Mahaweli Marine plant which bags cement imported in bulk form at the Colombo harbour.

The now unused Lanka Cement and KCW plants also have the capacity to produce 1,000,000 and 274,000 metric tons a year.

“Both Lanka Cement and KCW are situated close to the Kankasanthurai harbour and less than 2 kilometres away from their lime quarries,” MMBL said.

“The limestone in that area is close to the surface and of high quality.”

At the moment Lanka Cement was simply importing bagged cement. Other large importers included the Yashodha group, Jafferjee Brothers and Expo Lanka Ltd.

An import duty of 10 per cent restricted importers from price cutting, but local manufacturers also had another significant advantage.

“Users seem to be price insensitive,” MMBL observed. “They prefer the higher priced, higher quality domestically produced cement over the imported cement.”

MMBL says the quality of local cement which could withstand more than 30 kilo newtons per square foot was much higher that the minimum standard of 23 kilo newtons.

Cement is estimated to cost up to 13 per cent of a construction project. Last year Sri Lanka’s Rs 60 bn construction industry grew by only 3.4 per cent down from 4.9 per cent the previous year.

With economic growth picking up construction is expected to grow by 6 per cent and cement demand by 10 per cent in the next five years.

Pampering private business

T hese days when privatisation is viewed as a panacea for inefficiency in the public sector there is an underlying current of thought that all public enterprises are inefficient. There may be good reasons for this based on the Sri Lankan experience. Conversely many tend to think that private enterprises are efficient. In fact there are no inherent reasons why a private enterprise must be efficient as much as there are no grounds to think that all public enterprises must be failures.

In fact there are a large number of private enterprises all over the world which are inefficient or become inefficient. The big difference between inefficiency in public enterprises and inefficiency in private business is that the latter cannot continuously survive.

Public enterprises, on the other hand, can be kept going, however inefficient they are and however much they make losses, by the government pumping in money to keep them going. The public purse is often taxed to uphold inefficiencies in government business undertakings.

In Sri Lanka we have private enterprises which are very efficient ones well as ones which are failures. Sometimes well run business enterprises turn out to be monumental disasters later on. Most readers would remember the country had three big engineering companies which were doing very well. All three are no more. No more in the sense of their being engineering giants and profitable ventures. On the other hand, small businesses beginning very modestly as family businesses have become large export companies. There are private businesses run at varying levels of efficiency today.

In a capitalist system the profitability of an enterprise keeps changing owing to international factors, competition within the country in the same trade, changes in consumer preferences and a number of other reasons. A private business organisation has to adapt itself to these changes and make the best of the economic environment. If it fails it has to shut down, if it succeeds it makes profits, thrives and probably grows.

There is one aspect of this public-private enterprise debate which must be brought out and settled. It is that private enterprises must work out their own systems and ensure their profitability. It they fail it is not the responsibility of governments to prop them up. It is true the workers in such enterprises suffer so often owing to no fault of theirs. But it is not the business of governments to either take over such enterprises or subsidise them.

Although large failed private enterprises may create problems in a particular locality or for a large number of persons, it is not the function of government to keep such enterprises going. We have unfortunately several experiences where the government had pumped in money or taken over such enterprises in the past. We feel this same trend is coming back where failed privatised ventures are concerned.

It is the business of those who buy a pubic enterprise to run it efficiently and make profits. But the government to step in and take them over is to negate the principles of privatisation.

Particularly in a democratic country there is a temptation for politicians to take the side of workers in such a failed enterprise and to keep it going. But such actions are at the cost of the general public who have to bear the burden. Besides the public cost of such action this approach gives bad signals to private enterprise itself.

Private entrepreneurs will often look to opportunities to hand over their firms if they fail. This can take away from them their own strong motivation to do well. Besides this there is a danger that private firms may be run down due to their management and directors taking benefits for themselves.

Such irresponsible corporate behaviour must be punished rather than give way to a government take-over. Workers of private enterprises must also know that their continuity in their workplace depends on the success of the business they work for. That would also add a degree of responsibility.

What we cannot afford today is to mix private enterprise with public enterprise culture. There must be a clear distinction that the responsibility for private enterprise lies with the managers and owners of private companies.

One last word. The whole pre-occupation with privatisation has also tended to rob the country of the possibility of making public enterprises efficient. The principles of private management can also be applied to transform public enterprise into efficient entities managed in the same way as efficient private enterprises.

Some public enterprises have been some of the most efficient business organisations. Singapore Airlines is a clear example. It may be difficult to find an example in Sri Lanka. Nevertheless to run down public enterprises merely because the position today is to privatise them sometime in the future is socially irresponsible.

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