• Post privatisation plantations
• New producers' price index soon
• Stock Market at a glance
• Rupee loans to fade out
• New way to monitor primary dealers
• BOI targets India
• External trade up in July
• Realism not panic nor pessimism
• Change the valuations and change the profits
• Parting words from WB rep
• Intellectual property laws to be revised by year end
• New deals at SAARC Fair
• More UK trade
• Breweries chief for moderation
• Importance of the minimum tariff
• Mahathir justifies fleet sale
• Pay now go on holiday 30 years later!
• Training Link Internationals second workshop
• SIA spent $ 300m on luxury changes
• INdustrial Relations Forum
• Machines bring dignity to thottam
• World Standards Day on Oct 14
• Clarion helps save industry Rs.100m
• Efficiency advice from BESO expert

Post privatisation plantations

Petro dollars and the apparel industry have nudged the once supreme plantation sector out to third place in the country's foreign exchange stakes.

Low yields, high cost of production and recurring labour unrest was breaking the backbone of the Lankan economy since the British rule here.

Ceylon tea accounts for about 10 per cent of the world tea production of 2700 million kgs. However our yield per hectare is lower than most tea grwoing countries notably, India and Kenya. (See chart) The challenge is to increase yields to 2000kg per hectare by 2000.

While plantation exports account for about 82 per cent of all agri exports, tea accounts for 60 of this total and 13 per cent of all exports.

Tea, rubber and coconut plantations bred a crop culture and an agri based export economy which has periodically been threatened to its very roots by natural and man made disasters.

Plantations which took root during British colonisation, has turned full circle in our 50th year of independence, once again being privatised after a long period of nationalisation and mismanagement.

'The Sunday Times Business' took off to the hills to get a first hand view of the post privatisation plantation economy. On our journey through the hills and plains of the central region, Avisawella and Ratnapura districts Business Times spoke to managers, assistant managers, workers and children in the plantations and authorities in Colombo.

Today we begin the first in a new series the post privatisation plantations…

Please see also page 10

New producers' price index soon

By Mel Gunasekera

The Central Bank will shortly introduce a Producers' Price index which would eventually replace the existing wholesale price index.

The proposed new index would measure farmgate prices at producers' level. It would not only be useful for producers, but also help calculate GDP numbers, Director Statistics Central Bank, Dr. S S Colombage said.

An IMF team is due next month to study the various indices being calculated at present. The team is also due to give input to formulate the new index, he said.

Last week the Central Bank announced the Colombo District Consumers' Price Index (CDCPI) which had brought down inflation to a single digit.

As at August 1998, the CDCPI recorded inflation at 8.5 per cent whereas the Colombo Consumers' Price Index (CCPI) recorded an inflation rate of 10.3 per cent.

In July the CDCPI registered rate of inflation of 8.5 per cent which was again lower than that of the CCPI (10.3 per cent) but higher than that of the Greater Colombo Price Index (7.6 per cent).

While the unions refer to the CCPI to calculate wage increases, the Central Bank is optimistic the CDCPI would eventually replace the CCPI.

"We hope to compile similar indices in other districts except the north and east," Dr. Colombage said.

Work on the CDCPI commenced in January 1996. "As a measure of inflation, this index will supplement the available consumer price indices, i.e. The CCPI and the Greater Colombo Price Index (GCPI) are computed by the Census and Statistics Department," Dr. Colo-mbage said.

The weights of the CDCPI are based on the expenditure patterns of the poorest 40 per cent of households (when ranked with income) in the Colombo district as revealed in the first three rounds of the Consumer Finance and Socio-Economic Survey of the Central Bank 1996/97.

The survey collected detailed data on food and non-durable expenditure from households in the island excluding northern and eastern provinces.

Price data for computation of the new index are obtained regularly by the Central Bank through its countrywide data collection system in several markets including Pettah, Moratuwa, Homagama, Hanwella and Avisawella.

Sub indices are computed for the categories of food, clothing, housing, fuel and light, transport, personal care and health, recreation and education and miscellaneous items.

The CCPI reflects the purchasing power of working class that existed in the Colombo city in 1952. The CDCPI is based on consumption patterns of consumers in the Colombo district.

Stock Market at a glance

Rupee loans to fade out

Re-issuing of Rupee loans is to be phased out and replaced by Treasury Bonds under the government's financial sector re-structure programme.

This is in line with the Central Bank's scheme to make the debt instruments more market oriented.

The government intends to borrow Rs. 92 bn this year, of which Rs. 50 mn would be raised through rupee loans and the remainder in bonds, a Senior Central Bank official said.

In 1997, a total of Rs. 48 bn was raised through rupee loans and Rs. 10 bn through Treasury Bonds.

Rupee loans are sold at par and carry a fixed interest rate. The rate is administratively determined, taking market trends in interest rates also into consideration. These loans form a major portion of medium and long-term government borrowing to fund growing capital expenditure. The loans carry a 2-8 year maturity period and are usually purchased by captive sources like EPF, ETF and NSB.

Since introduction, Treasury Bonds have become a popular debt instrument among institutions and retail investors. Bond rates are attractive and therefore easily marketable in the secondary market.

However, bond volumes are limited. Hence, institutions like the EPF, ETF and NSB continue to invest their excess funds in rupee loans.

The present maturity period for bonds is four years. The present Treasury Bond structure permits bonds to be issued up to a 6 year period. But progress has been slow due to the Central Bank's inability to discount in large volumes.

"Without the use of a scripless system we can't issue bonds with longer maturity," the official said.

The Central Bank feels the debt market is not yet ready for longer maturity periods. A proper yield curve needs to be developed before a longer term instrument could be issued.

New way to monitor primary dealers

Central Bank is to formulate a new surveillance system to monitor primary dealers. The Central Bank is seeking World Bank assistance to secure the expertise of a consultant to structure a new system, a top Central Bank official said.

The lack of resource personnel to monitor primary dealers who come under the Bank's public debt department is a key problem. The Central bank has to seek professional help outside the bank.

At present, the Central Bank's Public Debt Department has a simple system of monitoring by collecting data from the dealers on a daily/weekly basis. The bank also conducts one-to-one meetings with the dealers in addition to their weekly meeting with the dealers.(MG)

BOI targets India

By Feizal Samath

The Board of Investment (BOI) is looking at re-positioning the country to attract fresh foreign investment from countries outside East Asia which is suffering from a financial crisis and has curbed the investment potential of countries like South Korea and Malaysia.

New countries being targeted under this campaign include India, Taiwan, the Nordic countries like Sweden and Norway - where a resurgence in investment has been seen - Germany, the United Kingdom and the United States.

"We are looking at new markets which have not been hitherto pursued. But that doesn't mean we will ignore our old friends and traditional investors. We would continue to maintain good contacts with East Asian investors and build new relationships with those business communities," said Thilan Wijesinghe, chairman, BOI. "We need to be ready to offer them all the help once those economies recover."

Wijesinghe, in a wide ranging interview on foreign investment and the strategies Sri Lanka should adopt to cushion blows from the East Asia crisis, said that the BOI recently concluded a successful mission to India. In the next three months, investment teams will go to Germany, Italy, Belgium and Taiwan.

The Indian visit saw a sorting out of issues that have delayed the implementation of some approved projects. Cement leader Gujarat Ambuja is among two giant Indian cement manufacturers that are setting up plants in the south in construction that would start shortly. Tata, India's biggest group, is looking at information technology, tannery, software consultancy and plantations while Mahindra & Mahindra has also promised to increase its presence in Sri Lanka.

Wijesinghe said the East Asia crisis - which caused most economies in the region to plummet and in some cases return to an era of foreign exchange controls like what Malaysia did - has caused a slowing down in the rate of growth of exports in Sri Lanka.

He said it was necessary to enforce measures to cushion the impact and one of the critical lessons learnt from that crisis is that governments "should give their unfettered attention to managing the economic fundamentals of the country .. probably to a greater extent than what has been done in the past."

External trade up in July

Despite a 4.4 per cent decline in second quarter GDP figures for 1998, there was something to cheer about as Sri Lanka's external trade recorded a surplus of US$ 9 mn for the first seven months of 1998. This is the first surplus to be recorded in the past 30 months.

Provisionally adjusted Customs data reveals that, both exports and imports exceeded US$ 500 mn, standing at US$ 511 mn and US$ 502 mn respectively. "This is the first time export earnings have exceeded US$ 500 mn mark," Director Economic Research, R S Jayatissa said.

While the average monthly import bill was US$ 500 mn during the first six months, average monthly exports had stood at less than US$ 400 mn.

Hence, the surplus was a healthy one, arising from the growth in exports rather than a slow down in imports, he said.

Export earnings at US$ 511 mn recorded a growth of 9 per cent over July 1997. In fact the second highest monthly exports recorded over the past 18 months had been in the previous July.

Thus, a further growth of 9 per cent over July 1997, as well as cumulative growth of 8 per cent during the first seven months was particularly encouraging in the context of the adverse implications of the continuing East Asian economic crisis on global commodity and financial markets.

Top earners textiles and garments earned US$ 293 mn, over US$ 50 mn more than both the previous July (US$ 239 mn) and December (US$ 236 mn), the highest monthly earnings over the past 18 months.

Both volumes and prices were the highest on record. The 7-month volume growth was 4 per cent, prices had risen 10 per cent and total earnings stood at US$ 1,405 mn

Realism not panic nor pessimism

Sri Lanka's economic performance thus far has been quite encouraging when viewed within the global context of crises everywhere. The South East Asian economies are expected to register negative rates of growth except for Thailand, which may still grow by about 5 per cent. Even Japan's economy is in confusion and expected to decline.

The Russian financial crisis is complex and how it would put its house in order remains unclear. There are signs of destabilisation of Latin American economies as well. The ripples of these crises have now reached the stock markets of Western countries, whose economies are still resilient.

In such a context Sri Lanka's economic growth this year at only slightly less than what was originally expected is indeed a good performance. More so as ours is a trade dependent economy .

One of the fundamental reasons for the country's resilience was that there was no over-reaction to the South East Asian crisis. There was a response but not a panic. There were also healthy structural factors, which enabled us to remain resilient.

Two of the country's largest foreign exchange earnings, tea and garment exports, continued to flourish. In the case of tea, production rose and prices also remained buoyant. The garment industry was protected by both the quotas, as well as the marketing links and reputation established by Sri Lankan up-market garment producers.

Another overall factor that assisted the Sri Lankan economy was that the disruption caused by the crisis in South East Asian countries did not augur well for orderly trade relations with them.Despite this scenario, a realistic assessment must accept that there are still emerging disadvantages, which could affect the economy adversely. One of these is the fear that the Russian crisis would result in a lower demand for our teas and that our tea prices would dip sharply.

The fact that 30 per cent of our tea exports go to CIS countries, as well as the fact that the bulk of low-grown teas are marketed there, make for considerable anxiety. There are however two factors that the tea industry itself must recognise.

First, that tea is so basic a commodity that sooner, rather than later, there would be a stabilisation of the demand for tea in these countries.

The second factor is that the industry itself, which has enjoyed good times in recent years, should be able to dip into its resources and tide over the temporary turbulence. In fact, all Sri Lankan producers must ensure that when they have good times they should strengthen their resources to meet difficult periods, which are inevitable.

The biggest setback to the Sri Lankan economy has been the reduction in foreign investment. This is dramatically seen in the behaviour of the Colombo Stock Exchange, which dipped to levels witnessed at the time of the JVP insurgency. The main reason for this was the outflow of foreign funds owing to fund managers determining that their exposure to South Asian markets should be reduced drastically.

The speculative nature of stock markets accentuated the impact of foreign investors' withdrawal. However, the outflow of foreign funds from the stock exchange was not the biggest disadvantage in terms of investment.

What Sri Lanka lost most was the expected foreign investments from Asian countries which were looking for investments in other countries. Many Asian investors identified Sri Lanka as a possible location for such investment. These investments have dried up owing to the economic crisis in these countries.

Other areas of concern include tourism. Tourist traffic has declined somewhat in the last seven months compared to that of the previous year. This at a time when the expectation was that tourist arrivals would increase. The reduction in tourist arrivals is thus partly due to the lesser traffic from the Asian region.

Besides this, the countries in crisis, with the huge devaluation of their currencies offer better value to tourists. Sri Lanka has turned out to be a relatively expensive tourist destination. This is illustrative of how global conditions impinge on our own economy.Perhaps the worst is yet to come. Many observers have expressed the view that 1999 would be the year when the full blast of the global economy's slow down would have its impact on the Sri Lankan economy.

It may be best to assume this and gear ourselves to face the disadvantageous global conditions, but panic and pessimism will not help. One should neither be complacent about the current situation nor be pessimistic.Panic and pessimism does not help a country's economy to respond constructively and productively to changing external conditions. Both should be avoided to ensure that the Sri Lankan economy remains relatively resilient in a gloomy global context.

Change the valuations and change the profits

By Amal Sanderatne

David Crichton-Watt, former Chairman of Asia Capital in the 1995/96 Asia Capital Annual report:

Changes to the basis of portfolio valuation to avoid otherwise disastrous impacts on accounts of listed corporates have become an increasingly common occurrence with the continued plunge of the Colombo Stock Exchange. It is sometimes characterised as a form of creative accounting. We could call it responsive accounting - a response to temporary changes in market conditions.

Even Asia Capital which originally boasted of a complete accounting for drops in values its listed investments, changed its policy in 1997/98 and did not take unrealised losses of Rs. 122 million to its books. In the same year Asia Capital reported a profit of Rs. 220 million of which Rs. 191 million was from realised gains on sale of investments.

Accounting policies for Asia Capital in 1997/98 states, "The valuation policy of investment securities which was at the lower of cost and market value arrived at on an aggregate portfolio basis in the previous years have been changed during the year to cost".

Thus though the market value of its investments at balance sheet date was lower than the valuation it was carried at in the accounts, no provisioning had been made in 1997/98 for the shortfall in value.

Previously in the 1994/95 Asia Capital accounts, a provision of Rs. 31.9 million was made for the difference between cost and market value as of 31 March 1995. But in that year it followed an even more conservative treatment for its investments making a further specific provision of Rs. 15.1 million to reflect the fall in market value of its investments beyond the value at balance sheet date. In 1995/96 of the total provision of Rs. 6.3 million made, Rs. 4.1 million was for specific provisions made to adjust the portfolio for further falls in the market values beyond the balance sheet date.

In 1996/97 though the market value of Asia Capital's portfolio had risen above book value, conservatism prevailed in accounting for its investments and the provisions were not reversed. The directors justification for their conservatism at the time was "that in the light of the Sri Lankan stock market volatility over the past three years and recent volatility in Asian Stock Markets, no adjustments should be made in relation to the existing provisions for diminution in value of quoted investments".

Many other corporates have followed this policy of valuing portfolios at cost even if the market value of the portfolio was below it, often from the time at which market value drooped below cost. Their justification is often based on classifying securities as either investment or trading securities. Trading securities would be held at a lower of cost or market value, while investment securities are held at cost even if the actual market value is below it.

It is justified by investment securities being held for the long term and thus not requiring provisioning for temporary falls in market value. Losses on investment securities are taken only when realised. Often corporates reclassify securities that fall below cost as investment securities, to avoid taking unrealised losses into their books. The danger in this policy is that the book value stated in the balance sheets of such companies could be a significant overestimate of the actual realisable value of the companies.

In situations where the portfolio is not marked to market and where the overall market value has fallen below cost, there is a huge temptation for corporate fund managers to sell their winning stocks while not disposing of the losers however badly the fundamentals deteriorate. A sale of a stock below cost would lead to an immediate realised loss while impact of any further fall would not be reflected in the profit and loss account however much it falls. Thus fund management of such portfolios becomes constrained by historic costs rather than current and future expectations. Poor management of the portfolio is the likely result of such policy.

The changing fortunes and accounting policy of the Merchant Bank of Sri Lanka is a well known example of such policy and its effects. In 1994 the accounting policy was "Investment in shares of quoted companies are valued at the lower of cost and market value on the aggregate portfolio basis. Adjustments for fall in market value below cost if relevant is accounted for by charging the difference to the profit and loss account".

As at December 31, 1994 the portfolio value was Rs. 861 million as against a cost of Rs. 574 million. In 1994 of the Rs. 200 million Net Profit Rs. 116 million was from gains of disposal of shares. The continued fall in the stock market coincided with a change in policy in 1995. It was reported in the annual report that "During the year some of the quoted investments have been identified as long term investments. No provision has been made in the accounts for the shortfall in market value amounting to Rs. 227 million, since it is not deemed to be a permanent diminution in value in the opinion of the directors".

The Merchant Bank reported a profit of Rs. 33.7 million for the year but that sum included Rs. 41 million from realised gains on investments. In effect the bank appeared to be realising some of the capital gains which were available on securities where the market value was greater than the cost, but not provisioning for the overall fall in market value below cost. In 1996 the shortfall in provisioning rose to Rs. 477 million while the net profit was Rs. 54 million, of which realised capital gains amounted to Rs. 159 million.

Then in 1997 the Merchant Bank had the highest recorded loss in Sri Lankan corporate history of Rs. 1092 million. A Rs. 479 million provisioning for the shortfall which was finally made and the bank reverted back to its 1994 policy of fully providing for investments. The bank's chairperson Dayani de Silva said by providing for the shortfall it would provide the bank a greater operational flexibility and opportunity for reducing the holding cost of investments.

An essential problem occurring in accounting for quoted investments and income arising from it lies in the one off volatile nature of the gains that are realised in fluctuating markets. The volatility of markets results in dramatic fluctuations to earnings, which violate accounting principles of smoothing investment performance over time. Ideally analysts looking at corporates with large investment portfolios should attribute income to investments based on expected long term rate of return and not take into effect either gains or losses that occurs due to the direction of the market in any particular year.

In an attempt to smoothen investment income CTC Eagle Insurance in 1995 adopted what is known as a market value based accounting for its equity investments. It has valued quoted investments and unit trusts at market value and credit is taken in the profit and loss account for only one seventh of the net gains arising on realisations and movements in the market value of investments and the remainder is held in a capital gains reserve.

This in effect spreads the profits on appreciation over a seven-year period. However if a fall in market value of the investments necessitate provisioning which creates a negative balance in the capital gains reserve, that negative sum would be charged fully to the profit and loss account.

The net effect of different bases of accounting in a well-researched market with full disclosure of different accounting policies would be negligible as analysts could restate the accounts using policies that they prefer. In such a situation companies would have no incentive to change their accounting policies to provide stronger profit statements.

But in our market where there is dearth of analysis and market sophistication companies may feel that not marking portfolios to market in adverse conditions has benefits to their corporate images. However this fear of revealing portfolio losses could lead to fears about what else could be hidden in less transparent aspects of corporate operation. Fear and mistrust are monsters that feed on themselves. Why unleash them?

More Business * Parting words from WB rep * Intellectual property laws to be revised by year end * New deals at SAARC Fair * More UK trade * Breweries chief for moderation * Importance of the minimum tariff * Mahathir justifies fleet sale *