Controversial
business tycoon Harry Jayawardene, now in the spotlight after a major
Customs raid-is taken to task by the Board of Investments for violating key
clauses of the agreement under which one of his companies, Lanka Dairies (Pvt)
Ltd, was set up.
Lanka Dairies which markets the popular "Daily" milk is allegedly making a great deal of money by using the more economically priced imported powdered milk instead of more expensive local fresh milk, thus violating a key clause in the agreement. One metric ton of imported milk powder costs about USD 1,800. To manufacture the same quantity locally will cost USD 2,300. In addition, Lanka Dairies, reportedly saves millions of rupees in investment in collection centres, bowsers and the large farm which it had agreed to set up in the country.
Three milk food companies have secured BOI approval to buy local milk and produce inter alia Ultra Heat Treated (UHT) and pasteurized milk. The three companies are: Lanka Dairies (Pvt) Ltd, a subsidiary of Lanka Milk Foods and the Stassens Group; Daily Lanka (Pvt) Ltd, a subsidiary of New Zealand Milk Products; which is a member of the Anchor Group and Tropifrut. Lanka Milk Foods and Stassen are headed by Mr. Jayawardene who is also the chairman of AirLanka.
Both Lanka Dairies and Daily Lanka have found it difficult to use local milk to manufacture their products. In contrast Tropifrut is using locally procured milk to produce a high quality UHT product under the brand name "Rich Life."
The BOI in an inspection of Lanka Dairies, recently found that the company used powdered milk imported to produce Lakspray to make the well known "Daily' milk. This runs against the B.O.I. agreement which requires it to utilize only locally procured fresh milk.
Lanka Dairies, claims the 250 ml pack of flavoured milk, popular among children, is a long lasting Ultra Heat Treated (UHT) milk. The product is marketed in four flavours - chocolate, vanilla, strawberry and banana. However contrary to a B.O.I. agreement with Lanka Dairies, the milk is not locally produced fresh UHT milk but powdered milk which undergoes a dilution process.
BOI Deputy Director General M.P.T. Cooray, who is in charge of investments told The Sunday Times Lanka Dairies was using a portion of collected milk together with imported powdered skimmed milk to produce "Daily". The company claimed it was compelled to do that as it did not yet possess the capabilities to heat the local product at 140 centigrade which is the required standard to produce UHT milk, he said. This is in direct violation of a B.O.I. agreement with Lanka Dairies whereby it was stipulated that only locally produced milk will be used. The company imported 200 million rupees worth of equipment and started production without installing the equipment necessary to heat the local milk to the required temperature.
Lanka Dairies in its defence has informed the BOI, that it was unable to use the full quantity of local milk collected due to the high bacterial content in fresh milk. The company claims it is compelled to manufacture UHT milk by using milk powder imported by its sister company, Lanka Milk Foods (CWE) Ltd to utilize the plant to its full capacity. Surprisingly, the company was apparently not aware of the problem of high bacterial content when it applied for the BOI concessions saying it would promote local dairy farming. However, in a strange twist to this episode another local company, Tropifrut Ltd, is successfully manufacturing UHT milk "Rich Life' using local fresh milk.
B.O.I. officials are now scheduled to assess the situation at Daily Lanka Ltd, which is a subsidiary of the New Zealand, Anchor Group. Daily Lanka Ltd also signed an agreement with the B.O.I. which contains identical terms and conditions to that signed with Lanka Dairies (Pvt) Ltd.
Daily Lanka Pvt Ltd, manufactures "Newdale Yogurt" and "Zap", a liquidized flavoured version introduced into the local market a month ago. The product is not UHT produced but cultured milk made from a combination of whole and skim milk.
Daily Lanka will soon market pasteurised milk "Meadow Fresh" which the campany's Managing Director asserts is produced from locally procured milk. It is however not UHT milk but would require refrigeration. It will be marketed at Rs. 48 a litre.
Daily Lanka Managing Director Aidan Coleman says it is difficult to produce quality UHT milk in Sri Lanka as high levels of bacteria form between the collection point and getting the product to a centre. Daily Lanka too has no dairy farm but instead collects 1,200 litres of fresh milk daily from 154 farmers. He says all these farmers are within an hour's distance from several cold room centres, which he says help reduce the level of bacteria.
Mr. Coleman appeared puzzled when asked how Tropifrut was effectively marketing UHT milk minus bacteria and other problems. Daily Lanka however seems to have overcome any initial qualms about using locally procured milk and instead is now, according to Mr. Coleman, utilizing the entire 1,200 litres of fresh milk collected to produce pasteurized milk and yogurt.
BOI Chairman Thilan Wijesinghe told The Sunday Times that no special concessions would be awarded to any milk food company. All companies, he said were given the same concessions and would be dealt with in the same manner if found to be acting in contravention of the terms of their agreement.
Meanwhile Trade Minister Kingsley Wickremaratne has said that locally produced milk food will be supplied to the security forces and rehabilitation camps in the north and east. The Minister made this comment at a meeting to discuss the situation created by the private sector backing out from buying fresh milk from local farmers.
BOI Deputy Director General M.P.T. Cooray, in his letter to Lanka Dairies (Pvt) Ltd, has stated that the company has violated key clauses of the agreement with the B.O.I., signed on March 30, 1994.
The letter dated 13.10.97 to Lanka Dairies (Pvt) Ltd. refers to an inspection by the Monitoring Department of the B.O.I. which discovered that Lanka Dairies is using imported milk powder for production of UHT milk. The BOI has stopped the duty free facilities given to import tetra paper to pack the milk until the company rectifies the deficiencies.
The company has acknowledged to the BOI that it is collecting around 3000 litres of locally made fresh milk and sells it in the same form to the Coconut Triangle Milk Union and MILCO. The fresh milk is collected using bowsers imported on a duty free basis.
B.O.I. officials in their inspection report say few documents are maintained at the Welisara factory with regard to the amount of fresh milk collected or stored at the factory making it difficult for the BOI to verify information submitted by Lanka Dairies.
There exists little evidence or proof, the B.O.I. asserts, to indicate the movement of milk bowsers in and out at the gate. Lanka Dairies claim that an average of some 20,000 cases of "Daily" milk packets per month are sold by it to the value of Rs. 7.4 million.
The ownership of the land and building of the project is not in the name of the enterprise as required by clause No. 6 of the agreement signed with the B.O.I. This factory has been constructed adjoining to its main factory of Lanka Milk Products (CWE) Ltd. The entire land has been leased out by Lanka Milk Foods (CWE) Ltd from the Government for 50 years.
Lanka Dairies, meanwhile, according to the inspection report has invested Rs. 230 million though accuracy of this value the BOI said, could be ascertained once the audited financial statements are finalized by them. This differs from the annual report of Lanka Milk Foods whereby it is claimed Lanka Dairies has invested Rs. 300 million in the project.
Now here begins another story. In September last year by order of the board at Lanka Milk Foods (CWE) Pvt Ltd, a circular was sent to all shareholders stating that the board of directors has decided in terms of a policy decision to close down the milk powder packing plant at Welisara, Ragama as it was, they said, causing financial loss.
This was after a certain section of the workers at Lanka Milk Foods (CWE) Ltd. went on strike on 8.5.96. Some 40 persons of the employees were reported to have gone on strike. The management had purportedly written to the Commissoner of Labour informing that on account of the duties imposed by the Government it would no longer be viable to run the Lanka Milk Foods (CWE) Limited packing plant at Welisara, as it was solely dependent on the import of milk powder for its income.
V.P. Vittachi, Chairman of Stassen's Group on September 30, 1994 said the company has launched a B.O.I. approved project to process UHT liquid milk. The board of directors then gave assurances to shareholders that the company would be turned around and continue as a profit making enterprise. In a circular to its shareholders the board stated that it has taken into consideration the fact that the government is formulating a master plan to be self sufficient in milk by the year 2003. Therefore a decision has been made to support the local milk producers in preference to the importers of milk powder, thereby developing the dairy industry and manufacture products related to liquid milk.
When the Lakspray packing plant was closed, an entire consignment of Lakspray was sent to the armed forces. This the Army later rejected.
On September 2, 1993, the Stassen's Group made an application to the BOI that Lanka Milk Foods (CWE) Limited of Welisara, for and on behalf of the Lanka Dairies, be given approval to set up/conduct and operate a business for dairy development which would include inter alia the production and marketing of pasteurized milk and UHT milk using locally produced milk.
According to the BOI agreement with Lanka Dairies (Private) Limited, signed on March 30, 1994, production and marketing of the said product could only begin after at least Rs. 50 million is invested and the processing plant will utilize only locally produced milk; further that artificial insemination to produce cattle and to provide cattle to farmers should be undertaken as well as establish cattle feeding plants, and provide pasture lands for grazing of cattle; to establish facilities for the collection and transport of milk to the processing plant; to set up a dairy farm with 600 herd of cattle.
BOI inspection officers assert that these conditions have not been adhered to by Lanka Dairies (Pvt) Ltd.
The agreement further stipulates Lanka Dairies shall be entitled to import free of Custom duties, machinery, equipment and packing material for the production and marketing of pasteurized milk and UHT milk using locally procured milk.
This controversy had emerged as the Sri Lankan dairy industry is facing a crisis with local producers stopping local collection due to their inability to compete with cheaper imported milk.
Some of the major milk collectors and producers in Sri Lanka are Nestles, Milco, Kotmale, NEL Farms and the Coconut Triangle Milk Union (CTMU).
MILCO has three milk processing plants at Ambewela, Colombo and Digana. MILCO used to collect some 170,000 litres of fresh milk a day. However, this has now dropped to about 145,000 litres.
Nestle's which has two plants at Pannala and Polonnaruwa used to collect an average of 125,000 litres of milk a day. Nestle's too is now collecting less as it has found it difficult to sell some of its products.
Kotmale collects some 20,000 litres a day but only uses 12,000 to 15,000 litres. The balance 5,000 or so is re-sold to Nestles' and Elephant House.
CTMU makes a daily collection of some 13,000 litres of milk but processes only some 3,000 litres. It supplies Nestle's with the balance. The CTMU used to purchase the entire 3,000 litres of fresh milk that Lanka Dairies was collecting. CTMU now says it no longer purchases this quantity of fresh milk as the market is flooded with cheaper imported milk. Walter Perera, General Manager of CTMU said daily advertising and milk imports had killed the local milk industry.
CTMU has stopped purchasing the entire consignment of fresh milk collected by Lanka Dairies as both Nestle's and Milco which is supplied by the CTMU, refused to re-purchase the said 3,000 litres.
A Livestock Development and Rural Industries Ministry official said Lanka Dairies under the B.O.I. agreement secured land in Haputale a year ago to begin processing of local milk. However, he said what had or had not been accomplished so far at Haldummulla, Haputale, was not known.
Lanka Dairies says it has opened one dairy farm at Haldummulla. This on a strict interpretation, is allegedly in violation of the BOI agreement as the said location is registered as a tea project for Stassens (Pvt) Ltd.
The BOI has given Lanka Dairies (Pvt.) Ltd., 12 months to put its house in order to conform to the term of its agreement with the BOI.
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