• Rising from rubble 
• An election budget 
• Iridium commercial launch today 
• Auditors query Blue Diamonds 
• Business and the North-East War 
• Royal Paulowina answer to Lanka's energy headaches 
• Interest rates inching up 
• CSE now full member 
• Liquor retail sector needs reform 
• Mind Your Business 
• Export sector smothered 
• New UK accounting standards 
• Brokers take the hot seat 
• Industrial Relations Forum 
• Seminar on "Labour Law in Sri Lanka" 
• Shipping
• Company News

Rising from rubble

An election budget

By Mel Gunasekera

This is likely to affect government revenues, as the means for providing concessions to the public appear limited, analysts said. 

"A vote winning budget at this stage would be disastrous," an analyst said. Such measures are popular in the short term, but disastrous in the long run, he said. 

"With elections expected next year, there is a possibility that the budget will be more people friendly," says Amal Sandaratne, economist Jardine Fleming HNB Securities. 

Next year's budget is expected to tackle the problem of fiscal slippage. 

The government foresees 1998's fiscal deficit exceeding the targeted 6.5 per cent to 7.5 per cent due to escalating defence expenditure and shortfalls in revenue collections. 

"Given expenditure and revenue numbers, it's difficult to foresee tax cuts as is normal in a populist budget, to keep the voter base happy in an election year," Dr. Anush Amarasinghe of SG Crosby Securities said. 

"A budget that will prepare Sri Lanka for the challenges ahead rather than an election budget would be ideal," Nandakumar Nair of John Keells Stockbrokers said. "The Asian crisis has not affected us too badly, but 1999 will be a difficult year. With an overall worldwide recession expected next year, the impact of the Asian crisis being felt at present is expected to be more pronounced next year", he added. 

Most analysts predict the deficit to exceed 8 percent for the full year. 

To contain the deficit, the 1999 budget should include revenue-enhancing measures such as reduction in tax exemptions, and an acceleration of privatisations, Dr. Amarasinghe said. 

However, with the appropriation bill showing a 6.2 per cent rise in expenditure for 1999, cuts are unlikely given the possibility of an election early next year. 

"We hope there would be a commitment to fiscal discipline which will allow the maintenance of the present low interest rate regime," Sandaratne said. The possibility of privatisation proceeds providing a boost to the government coffers appears to be somewhat restricted given that most privatisation targets have been tapped. 

The remaining big possible targets for privatisation such as insurance corporations and petroleum may take time and prove much more difficult. 

A collapse in the capital markets slowed down the governments targeted privatisation proceeds this year. The target was around Rs. 8 bn but the government has so far received only around Rs. 5 bn, an analyst said. 

However, the listing of 10.5 per cent of Sri Lanka Telecom which was due to occur this year, is likely to occur next year and could generate proceeds of around Rs. 4 bn, says Sandaratne. The previous years have seen the government curtailing infrastructure spending in order to keep the deficit in check. 

It is unlikely that the government can resort to this route this year, as there is lesser possibilities of private investment taking up the gap through BOO/BOT projects. 

In the context of stagnant foreign investment climate due to East Asian crisis, its critical to maintain a low interest regime to pep up local investment flows and confidence. 

Agriculture, industry to get top priority By Chamintha Tillekeratne Agriculture and industry are expected to get top billing in the 1999 budget a Cabinet source told the Sunday Times Business.  Learning from past mistakes the government is expected to boost domestic agriculture and industry next year.  On the cards are tax exemptions for new industries, concessionary finance, tax reductions for vehicle imports and low rates for leasing of land, the official said.  New local ventures and new joint ventures with foreign partners will be entitled to these benefits.  Concessions on farming equipment, and subsidies on seeds, are listed as top priorities, he added. Farmers will also be given incentives to grow paddy and vegetables out of season, he said.  Government is also expected to make improvements to public transport, but government servants' salaries and pension will remain the same.  A reasonable reduction of construction work and more privatization of government establishments and lands is on the cards.

Iridium commercial launch today

SLT is objecting as GMPC (Global Mobile Personal Communication) systems like Iridium offers international calls to their customers. 

SLT has the monopoly on international voice till year 2002. "By licensing Iridium, it's a violation of our international monopoly," a top SLT official said. 

"We are prepared to strike a deal with Iridium and other GMPC (like Globalstar and ICO) provided that Iridium gives us the licence to operate their system till the year 2002," she said. 

As a service provider, SLT will be able to set tariff, so that it won't eat into SLT present international market, she said. "We are unable to proceed with this issue as it is still in the hands of the telecommunication regulator," she added. 

A Telecommunications Regulatory Commission (TRC) official said since GMPC is designed to operate in the absence of a network, its difficult to say whether it's a system that comes under the Telecommunications Act. 

It is difficult to say as the satellite system being used by Iridium is licensed in the USA. While, the gateway system is licensed in India. 

The permission for the commercial launch was given since Sri Lanka has agreed to the allocation of the radio spectrum to the GMPC at the World Administrative Radio Conference in 1992. Hence, Sri Lanka is obliged to make available a spectrum (radio frequency) to operate GMPC system. 

Auditors query Blue Diamonds 

Trading in Blue Diamonds Jewellery shares were suspended on the Colombo Stock Exchange last week at the company's own request. The high flying shares, which once traded at around Rs. 50.00 had lost their lustre going for a mere Rs. 1.00 last week. 

The company had entered into an agreement with Energen International Limited, a Ceylinco Group Company to develop solar chimney technology to generate power. 

In the course of this work, Blue Diamonds Jewellery had purchased technological rights for Rs 229 mn, which would later be sold to Energen International Ltd. at a price still to be determined. 

"We were unable to verify the future economic use of the same and are thus unable to ascertain whether the future benefits expected to be generated by this acquisition will exceed its cost to date," the auditors said, qualifying their audit opinion. 

In all, the company held an investment of Rs 287.5 mn in Energen Holding Company Ltd., whose only significant asset, the auditors said, was technological rights purchased amounting to US$ 35 mn. 

Even the auditors of Energen Holding Company Ltd. had qualified their opinion saying that the future use of the technological rights could not be verified by them, Blue Diamonds Jewellery auditors, KPMG Ford, Rhodes and Thornton & Company added. 

In the financial year ended March 31. 98, turnover plummeted to Rs 248 mn from Rs 569 mn a year earlier. 

"The Asian Financial crisis followed by the turmoil and difficult conditions in almost all markets had led to a serious decline in sales coupled with price cutting," Deputy Chairman and Managing Director D. R. Senanayake told shareholders in the annual report. 

"The previous trend of a gradual decline in the market for diamonds and jewellery had changed to a sudden collapse in many markets. In times of financial turmoil, declining stock markets and general economic uncertainty, jewellery products are among the first to be affected." 

There was a net loss of Rs 98.7 mn for the year. 

Business and the North-East War

Although there is no assurance that a bi-partisan agreement would resolve the problem, without one, there is very little chance of achieving peace. 

The business community was always aware that their own profitability and bottom line were being seriously eroded by the war. Considering the resolution of the problem a political one, they have coped with it by risk-aversion, curtailment of investments and no doubt, taking lower returns on their investments. 

Over time the business community has reconciled itself to the problem and found ways and means of surviving and no doubt flourishing as well. May be the present initiatives are based on a realisation that even such an approach would not suffice for their survival. 

The huge military expenditures and the inevitably high rates of taxation, apart from the inability to attract foreign investment and the unavailability or lesser profitability of several economic activities, make it imperative that an early solution be found. 

The immediate strategy is no doubt to bring pressures on the main political parties to come together rather than make political capital of each other's positions on the war. 

Most nations faced with a crisis of the proportion this war has generated would have adopted a bi-partisan approach. The recent bi-partisan approach of British political parties on the Irish question is a good example of this. 

In contrast, our main political parties have failed to find such a common ground. We hope the present initiatives would enable a bi-partisan approach to be adopted. Such a bi-partisan approach is a pre-requisite for peace. It is a necessary condition but by no means a sufficient one. 

It is indeed a difficult task to find the political formula acceptable to both the majority and minority communities. Given the long history of the conflict and the prevailing suspicion and lack of confidence in each other, such a solution is not easy to forge. 

There has to be a spirit of give and take, the building of confidence among communities and a real acceptance that Sri Lankan society is a pluralistic one. In such a pluralistic society there is a need for different communities to accept their differences while living in amity. 

The one lesson that the events of post- independent Sri Lanka should have taught us is that conflicts and animosity among us has often turned into violence and has been to the detriment of all. Peace, on the other hand, provides opportunities for economic growth, greater security and prospects for a better quality of life. 

This must be uppermost in the minds of those looking for a solution. Compromises and agreements which lead to a solution will be to the advantage of all communities. One pertinent question remains to be asked. If the initiatives of the business community fail, do they have a means by which they could bring greater pressure on the political parties to resolve the problem? Unless they have such a strategy in mind, and perhaps disclose it, it is likely that the political leaders will continue to treat the initiative less than seriously. 

They may say that they are for a common solution but take no steps towards it. The crux of the issue then is whether the business community can bring pressures to compel political parties to look at the problem in a bi-partisan way because their own political future may be adversely affected if they fail to do so. Politicians have their eye on votes, just as businessmen have their eye on profits. 

Royal Paulowina answer to Lanka's energy headaches

By Asiff Hussein

It has today become evident that the Short-Rotation-Coppice system for wood-fuel thermal generation of electricity shows much potential in addressing the country's energy needs. 

This promising concept elaborated by Ray Wijewardene and P.G. Joseph in their paper 'Growing Our Own Energy- Complementing hydro-power for sustainable Energy and Rural Employment in Sri Lanka' envisages the of dendro (tree-fuelled) establishment thermal power plants to utilize the wood biomass obtained from regularly harvested firewood for producing electricity. 

The Short-Rotation-Coppice system entails the cultivation of fast growing coppicing varieties at high density (of about 1 metre spacing) which are then lopped off when about a metre in height thereafter to produce profuse coppices – a growth of branches radiating from and around the stump. 

These coppices are allowed to grow to about 3 to 4 metres in height and 2 to 3 cm diameter when they are lopped away and dispatched to the generating station. These coppices could be harvested twice a year. 

This method has been shown to be successful in obtaining viable fuel-wood for thermal energy generation in the west and there is no reason why it should not work in Sri Lanka as well, especially in a context where there exists over a million hectares of unutilized scrub and chena lands. 

In fact, the Asian Development Bank and other monetary organisations have emphasised the need for short-term re-afforestation of land and the use of fuel-wood for the generation of thermal power in the rural areas. A Rs. 36 million trial wood harvesting project for dendro thermal power generation is presently under way and will be employing Paulownia besides a number of other fast-growing varieties. 

The project which is a collaborative venture between the Ministry of Science and Technology, the Forest Department and the Energy Conservation Fund will involve an overall area of 36 hectares in 12 locations in the wet, dry and intermediate zones of the country. It has been proposed that state lands be leased to the public to set up and manage the plantations if the trial project proves to be economically feasible. 

Although there exist a number of fast-growing coppicing varieties such as glyricidia, leucaena and felcipium, the ideal species suited for the purpose would appear to be Paulownia which was but recently introduced into the country. Paulownia has been shown to have twice the growth rate as that of other fast-growing timbers such as glyricidia. 

This high yield timber crop named in honour of Princess Paulownia of Russia (1795-1865) is believed to have originated in East Asia and has been cultivated in China for well over 2500 years. 

Planter Wilhelm Balthazaar who was responsible for the introduction of the species to the country through his company, Growfast (pvt) Ltd, a member of the Pickle Packers Group of Companies, contends that Paulownia is the ideal timber crop for dendro thermal power generation as it grows rapidly. He pointed out that this species could be harvested for commercial use in its fifth year of growth, as opposed to other comparable varieties which take 10 to 20 years. 

However, what is most desirable about the plant is its prolific coppicing capability making it ideal for the production of biomass fuel for thermal generating plants. According to Mr.Balthazaar as much as 30 metric tons of fuel-wood could be obtained annually from a hectare after the first year. He observed that as many as 10,000 plants could be planted in a hectare at a metre's spacing for purposes of firewood. 

Other benefits include a strong root structure with as four times as many roots as its counterparts, making it ideal for erosion control, especially in landslide- prone areas and areas bordering roadways and rivers with high levels of erosion. 

The tree also has the unique characteristic of producing four times as much oxygen any other comparable variety. The mature leaves which are about 16 inches by 8 inches in size are also a valuable source of nutritious fodder for livestock. Mr.Balthazaar said that a small scale commercial nursery has already been set up at Lower Hemingford Estate, Parakaduwa for the purpose of growing trials and propagation of approximately 3000 saplings during the first year of operation . 

Planting material in the form of root cuttings from Australia and seed from the USA were imported in 1996-1997. Trial blocks of saplings are presently under cultivation in seven major plantations including Horana, Agalawatte, Kotagala, Kahawatte, Dambahena, Kelani Valley and Pussellawalla plantations, noted Mr. Balthazaar. 

Financial assistance towards the promotion of the scheme is being provided by the German Agency for Technical Co-operation, GTZ. 

Dendro thermal energy and its potential 

Dendro thermal energy has been shown to be the fastest growing source for thermal generation in Europe and the USA. It however holds far greater promise in tropical regions with year-round sunshine helping rapider growth of the fuel-wood crop. 

It is especially relevant to Sri Lanka today in a context where there exist no more hydro power generating sites available for exploitation which are environmentally benign and where more environmentally detrimental options for electricity generation such as coal-fuelled plants are being considered. 

Messrs Wijewardene and Joseph contend that a hundred 3600 hectare fuel-wood plantations (with generating capability of 10 MW power each) spread appropriately throughout the scrub and chena lands of the country could supply as much as 5000 Giga-Watt-hours of electrical energy to the national grid-the equivalent of the country's present annual consumption of electricity. 

They estimate that the likely costs of electricity generated from a 10 MW dendro thermal power station is around Rs. 2.80 to 3.00 per Kilo-Watt hour which compares favourably with the Rs. 3.03 per KWh in the case of a 10 MW coal-fuelled station. And the Rs. 2.80 per KWh in the case of a 10 MW diesel / residual –fuelled station, both of which are very likely to escalate with the further depreciation of the Rupee. 

The turo scientists note that vast areas of marginal lands could be utilized for the purpose. They estimate that 500,000 hectares of scrub and chena lands which represents less than a third of the existing 1.6 million hectares of such lands in Sri Lanka (ie.600,000 hectares of scrub land and 1,000,000 hectares of chena lands) could yield 10 million tons of fuelwood to produce 10,000 GWh of electricity annually, which is nearly twice the known hydropower potential of the country. 

It would also mean saving Rs.15 billion in foreign exchange which would have otherwise been spent for the purchase of fossil fuels for generating a similar quantity of power. 

It is estimated that the cost of imported fossil fuels will absorb much of Sri Lanka's foreign exchange earnings in the next 10 years leaving very little for other vital imports such as for food and transport. There is likely to be a positive response from the rural sector as there exists a strong financial motivation for growing the fuel-wood. 

Messrs Wijewardene and Joseph estimate that 3 hectares given to a rural family to growing fuel-wood as a cash crop could, conservatively, produce 60 tonnes of fuel-wood annually which at a price of 1500 per tonne could represent an annual income of Rs.100,000. 

They observe that if the farmer were to choose to intercrop the land with other farm products, his gross income could well rise to Rs.130,000 annually or a little over Rs.10,000 a month They estimate that the scheme could provide very remunerative employment for about 150,000 rural families, which if estimated at five persons per family, would represent as much as one- twentieth of the present population of the country. 

It has also been observed that such employment would be taking place in a healthy rural environment rather than the factory-based pattern characteristic of the western industrialized nations. It has been proposed that these energy plantations be managed on a 'nucleus plantation' basis, where a centrally managed plantation of some 250 hectares would be providing 'stewardship' responsibility for a further 2500-5000 hectares of satellite, small-holder plantations around it, each comprising about 3 hectares. 

It is also proposed that this nucleus plantation arrange the supply of seedlings and plantation management guidance while also organising rotational harvesting and collection of the mature coppices as well as their supply to a central, dendro-thermal power station. By this means the country could avail itself of dendro thermal electrical energy within just two years of planting the energy crop under the Short-Rotation-Coppice system. 

Further, unlike costly hydro-power schemes like the Mahaweli programme, the proposed project will not require huge foreign investments and loans. Besides the scheme is also the most environmentally benign of all existing thermal power generation systems since the forest plantation cover that will come up as a result will be more than sufficient to absorb whatever carbon dioxide emissions that are likely to be generated in the combustion of the fuel-wood. 

Fossil-fuelled plants, on the other hand, invariably result in a surplus of carbon dioxide being passed on to the atmosphere, thus posing a long-term environmental threat, especially in a context where there exists insufficient forest cover to absorb such emissions. 

The cultivation of a fast-growing species like Paulownia for timber purposes is also the only means by which we can urgently address the country's diminishing forest cover resources. 

Whereas Sri Lanka had about 70 per cent of its land area under forest cover at the turn of the century this has today declined to about 23 per cent. This issue is especially sensitive since there exists a strong link between population growth and deforestation in Sri Lanka as it is primarily an agricultural country. 

Thus there exists an urgent need not only for a halt to the further exploitation of our forest reserves, but also for short-term re-afforestation. Paulownia is here also the best bet. For instance, the tree is capable of a growth of 10-20 metres within as little as 5 to10 years and have a girth of over 21 inches diameter in just 4 to 5 years. 

As many as 400 trees could be planted per hectare at 5 metres apart and harvested every five years for quality timber. It has been shown that a yield of 0.36-0.60 cubic metres of straight timber could be achieved by this method within a five year period. Fast –growing timbers are not tender as most believe. Taking Paulownia as example, we find that its wood of about 6 years is comparable to wood obtained from a 20 year=old Lunumidella, an 18 year=old Eucalyptus or a 12 year old pinus strengthwise. 

The wood which is renowned for its colour, texture, lightness and easily machineable qualities is ideally suited for construction and furniture manufacture and is widely cultivated in Japan for these purposes. 

However, leaving aside the timber aspect of the crop which should be left to the private sector for commercial exploitation, it can only be hoped that the state would embark on dendro-thermal power generation in a big way once the trial wood harvesting project is over. 

There is no reason why this well-conceived scheme which shows great promise in solving our environmental and employment concerns and which has been so ably demonstrated in other industrialized nations should not work here. 

Interest rates inching up

An Asia Securities survey of financial institution's savings and fixed deposit interest rates indicate that average fixed deposit rates have risen by around 10 basis points during the past three months. With risk free (and tradeable) Treasury Bills (TBill) still however yielding higher rates of return than bank deposits, a further rise in bank fixed deposit rates over the next few months is on the cards, a top research firm said. 

In this regard some finance company officials feel that this would affect their lending operations. 

The 3m and 12m TBills are currently yielding 12.57 per cent and 13.06 per cent respectively, compared with just 10/12% offered by the major commercial banks for their 12m FD's. Finance companies usually have to borrow at higher rates compared to this to attract customers. This would mean that their lending rates too would go up, making it unattractive for the borrower, a recent Asia Securities report said. 

With interest rates traditionally peaking during the fourth quarter and easing off in the first quarter, short term deposit growth and subsequently mobilising longer term deposits at a relatively lower rate is expected during the first half of 1999. 

Any significant deposit mobilistaion via 12m FD's is meanwhile likely to require a sharp increase in rates. 

While any rise in bank deposit rates will naturally increase the commercial banks and finance companies funding costs, forecasts have already assumed that deposit rates would rise during the second half of 1998. 

Any increase in deposit rates is also more than likely to be matched by higher lending rates, thus reducing any margin erosion. 

The more serious issue for the commercial banking sector is however likely to be their exposure to the plantation sector in the wake of the Russian rouble crisis, particularly vis-à-vis their bill discounting operation. 

While Russian bills have not been discounted following the recent de facto devaluation of the rouble, obtaining payment on behalf of bills already being held is likely to prove difficult. 

Depending on the availability of adequate security, this may indeed necessitate significant incremental provision in the commercial banking sector. 

Although bank officials were reluctant to disclose the exact levels of exposure ahead of their release of their interim results, there is a clear increased element of downside risk to profit forecasts in this sector.The financial sector on the other hand has mixed feelings on this issue. "The reduction in the Central Bank over-night repurchase rates reduced and the FD interest rates inching upwards would end in a higher rate of interest," a finance company official said. 

Other finance companies say that it is not a cause for concern as it happens traditionally. "Even if the interest rates do go up, it would not be as high as in the 80's," an official said. 

Finance companies like other financial institutions move with the TBill rates, but a little higher to attract customers. 

According to an official, lending rates go up slowly, "Fine tuning and gimmicks such as interest up front, etc. can always be used. People will borrow if they want to. Some time back when interest rates were 18-20 per cent, people still borrowed," he said. He said that it all depended on the demand and supply for funds. 

CSE now full member 

The CSE is being represented at the General Assembly by the Chairman, CSE Rienzie T. Wijetilleke and the Director General of the CSE Hiran Mendis. 

The FIBV is the World Federation of Stock Exchanges and is the trade organization for regulated securities and derivative markets worldwide. Its purpose is to support the development and promotion of organized and regulated securities markets. 

The FIBV has currently 51 full members, which includes the world's leading and developed stock exchanges, 15 affiliate members and 32 corresponding emerging markets. 

Liquor retail sector needs reform

"This is making a mockery of the retailing system the legal liquor manufacturing sector depends on, to distribute its produce," Chairman Distilleries Company of Sri Lanka (DCSL), V P Vittachi told shareholders. The effective performance of the retailing sector is important for the collection of state taxes. The Treasury now gets a revenue of almost Rs. 15 bn from the liquor sector. 

He said a substantial portion of licences should be granted to established commercial establishments and manufacturers. 

The authorities can easily identify genuine licencees by requesting the manufacturing companies to submit the sales statistics corresponding to the production. 

He reiterated that the ad hoc selection and appointment system of liquor licences is doing substantial harm to one of the major areas of state revenue. 

In the financial year ended March 3198, DCSL made a turnover of Rs. 9.2 bn, an increase of 8 per cent over the previous period. 

A reasonable growth was recorded in the volumes sold which is encouraging considering the continuous reduction in beer and soft liquor prices facilitated by tax reductions, Mr. Vittachi said. 

Commenting on the government ban on liquor advertising, he said it is unclear exactly what the government hopes to achieve. 

Liquor advertisements are limited to brand differentiation and the introduction of new products. 

Mind Your Business

by Business Bug

On hold

Speculation is rife about what the good professor will bring forth from his Budget box, what with speculation being rife that there will be a snap Presidential poll early next year. 

Among the many rumours doing the rounds is one that the prices of fuel-petrol, diesel and kerosene - will be reduced. 

Of course, the Law of gravity - what goes up must come down - does not apply to economics and others dismiss this 'rumour' saying what really happened was that a proposal to raise prices has been put on hold. 

Correct forecast

The greens kept away from the 'do' saying they were boycotting the profesor and with that went all hopes of a consensus between the two major parties. 

At the outset itself two bosses of two blue chip companies foresaw all this and told the others weeks ago that the idea will never work, we now hear. So much for intuition. 

Not fast enough

The initial enthusiasm was very high and the queues were almost never ending. 

And this was a shot in the arm to an unexpected quarter - the other chicken outlet down the same road. 

Customer's at the newest place, tired of waiting in long queues switched over to the 'other place' and the latter never had it so 'finger lickin' good. 

Who said that too many cooks spoilt the soup? 

More Business * Export sector smothered * New UK accounting standards * Brokers take the hot seat * Industrial Relations Forum * Seminar on "Labour Law in Sri Lanka"