Millennium 'bug' implications

With only 208 days left in 1999, what have IMF member countries been doing to prepare for the Year 2000 "bug" (Y2K), and how can the IMF best help them?

In recent years, the IMF has been busy helping member countries and the global financial community deal with various financial crises.

However, it has not ignored warnings that global problems are likely to arise on January 1, 2000, when computers around the world may erroneously read the new year in the standard two-digit year field as 1900.

The IMF recognizes that it has a particular interest in appraising the Y2K readiness of systems that affect macroeconomic policies directly and has been discussing the issue for some time.

On April 13, the IMF's Bureau of Computer Services sponsored a seminar for IMF staff and Executive Directors. Leading Y2K experts were invited to participate and share information on the implications of Y2K for the global economy and to offer their assessments of the likely consequences of countries' failure to take remedial action or develop contingency plans.

IMF First Deputy Managing Director Stanley Fischer opened the seminar by noting that the IMF management strongly supported the need to increase member's awareness of the risks associated with the problem, including the risks to the operation of essential services that affect the day-to-day functioning of members' economies (that is, "mission-critical" systems) and their interaction with others in the world economy.

The four keynote speakers — John Koskinen, Chair of US. President Bill Clinton's Council on Year 2000 Conversion; Edward Yardeni, Chief Economist, Deutsche Bank Securities; Tim Shepheard-Walwyn, Chairman of the Global 2000 Coordinating Group; and Lou Marcoccio, Research Director of GartnerGroup -offered both general and country-specific information and were united in their view that the macroeconomic impact of Y2K could be devastating if countries do not take the time remaining in 1999 to address the problem.

The problem

Koskinen noted that initially Y2K was viewed widely, and incorrectly, as an information technology problem rather than as a management or business problem — a point that the other three speakers echoed strongly. Policymakers must recognize that addressing the Y2K issue involves evaluating and managing risk, perception, and behaviour.

The key to Y2K, Koskinen said, is understanding the nature of the problem and developing contingency plans to work around it.

Is everybody ready?

Most countries got a late start dealing with the issues posed by the year 2000, and, according to Marcoccio, "the gap between the leaders and laggards...is widening."

More than thirty countries have not begun to address the issue; 93 percent of computer companies and governments have not determined when their systems will fail; and 81 percent of all commercial software is not Y2K compliant.

On a more positive note, awareness of the potential problems has increased, as has spending to tackle them.

Although the United States is a leader in Y2K preparedness, it is unlikely to fix 100 percent of its systems before January 1. However, the experts generally agreed that the US economy would do "relativelv well."

No national catastrophes are expected, although Koskinen noted that localized failures were quite possible. The federal government is taking steps to ensure that its systems work and that its interfaces with state and local governments work.

The United States is also working with the United Nations to bring other countries into the informational loop and encourage them to take action, Koskinen noted. Although the level of awareness of Y2K has grown, many countries are not sure how they will be affected and are taking a "wait and see" approach, which the speakers called a high-risk strategy.

Although fixing the Y2K glitches in computers will be technically easy, Koskinen observed, everyone will be requiring the same fixes at the same time.

Yardeni agreed with Koskinen's assessment, likening the Y2K phenomenon to a plumbing problem. "Everyone has the same problem and calls the plumber at the same time. Backups will occur."

Describing the situation in the rest of the world, the experts indicated that some countries with immediate economic difficulties have, for obvious reasons, focused on those problems rather than on Y2K. Other countries that do not rely heavily on large mainframe computer systems initially ignored the specter of Y2K.

However, even in less technologically advanced countries, some missioncritical systems are partially automated and are thus vulnerable to Y2K problems - such as power outages, port delays, or supply shortages — which could wreak havoc on an economy.

Koskinen singled out international shipping as a particularly vulnerable sector, whose Y2K-related problems could have a widespread impact.

What can countries do?

Time is short, and countries that are ill prepared for the millennium may think it easiest or most cost-effective to respond to Y2K problems as they arise.

Not so, argued the speakers with one voice.

Although they asserted that there was no quick fix, or "silver bullet," they emphasized that countries should begin immediately, no matter where they are in terms of preparedness, to tackle both remediation and contingencies.

(They must identify their missioncritical systems, fix those they have time to fix, and develop plans to work around those they will not have time to fix.

The areas that are most likely to be affected and where efforts should be concentrated, according to the four experts, are electrical power systems, telecommunications, transportation, manufacturing, retail and wholesale distribution, government services and administration (including taxation), military defense, and international trade.

The experts generally considered banking and financial systems, both national and international, to be in good shape.

For most countries, organization and resources are the biggest problem.

Efforts to address Y2K problems should be co-ordinated, Koskinen said, as they are for natural disasters.

In this connection, he noted that the United Nations, with World Bank support, has established the International Y2K Co-operation Center to share information around the world and promote increased co-operation and action among countries and industries on the Y2K problem to minimize its potential effects on the global economy and society.

What can the IMF do?

IMF staff members attending the seminar were particularly interested in learning what they could do to help member countries deal with the millennium bug. The answer was "plenty." Describing Y2K as a classic "prisoner's dilemma" because of the lack of information about what countries are doing to prepare for it and because of the uncertainty surrounding it, Shepheard-Walwyn offered compelling arguments for IMF involvement.

He urged the IMF — with its access to the highest levels of government and ability to influence policy decisions — to encourage countries to set up a structure for dealing with the issue, appoint a high-level Y2K coordinator, and collect information on Y2K readiness. By making information available, Shepheard-Walwyn said, countries can help people assess risks and dispel uncertainties, which would go a long way toward averting the panic that could contribute to a global recession.

Specifically, the IMF should encourage central banks to formulate plans to instill confidence in the public. In anticipation of 2000, people may worry about credit, which could result in a "flight to quality" (when investors move their assets to safer havens), Shepheard-Walwyn said.

Y2K is a systemic problem, and, according to Shepheard-Walwyn, it must be addressed collectively and co-operatively.

US State Department official John O'Keefe, who joined the keynote speakers for region-specific discussions in the afternoon, suggested that the IMF had limited time and resources to help countries prepare for the millennium.

For this reason, he said, it should give priority to the situations of high-impact countries with the strongest links to the international financial system. Yardeni argued for a proactive IMF role.

In his view, the IMF should require countries to do more to show Y2K readiness as a condition for IMF assistance. He also proposed that IMF-supported programmes earmark some of the resources for Y2K problems.

Conclusion

In his comments, Fischer noted that the IMF had reached a critical stage in its Y2K efforts, characterized by a shift in emphasis.

Having collected information and alerted its member countries to the potential risks of Y2K — including the possibility that many of them would experience some inconveniences, disruptions, and breakdowns in the supply of goods and services — the IMF must now, Fischer said, begin to encourage countries to think about contingency plans to maintain critical functions.

Thus, the IMF must be knowledgeable about outside sources of assistance, so that when members come to the IMF for help, they can be directed to possible solutions.

Or, in Yardeni's words, "prepare for the worst, hope for the best. (IMF Survey)

Winds of change blow over DFCC

DFCC Bank DFCC Bank recorded a 5 per cent increase in profit after tax from Rs. 652 mn in the financial year 1998 to Rs.686 mn in the financial year 1999. Income grew by 7 per cent to 2.9 bn, the company's 1998/99 annual report stated.

"The performance of DFCC should be viewed in the context of the world economy battling against the forces of crisis in the aftermath of the Asian and South American debacles and a banking sector which was characterised by collapses in Asia and an abundance of mergers and acquisitions," Chairman DFCC, C.A Coorey said.

In a business climate that did not generate enthusiasm among investors, DFCC's net loan portfolio increased by 34 per cent to reach Rs.15.84 bn.

The growth in loan portfolio was not matched by a corresponding increase in revenue due to low on-lending rates and diminishing margins. However a substantial improvement in dividend income, the reduction in corporate tax from 35 per cent to 30 per cent together with a write back of last years over provision for tax contributed to the profitability of the bank.

The government's relief scheme for domestic textile industry also enabled the bank to recognise income which was previously provisioned.

The company's earnings per share increased by 5 per cent from Rs. 18.50 in 1998 to Rs. 19.47 in 1999. Return on average shareholder's funds declined from 14.4 per cent in 1998 to 13.6 per cent in 1999.

During the year DFCC selected international consultants Pricewaterhouse Coopers of USA to provide consultancy services for developing a new corporate strategy and organisational change.

"Winds of change sweeping across the financial world have made past strategies, practices and role models increasingly irrelevant and aspect of globalisation a reality. It is in this context that DFCC decided to seek international consultancy assistance to map our future" Chief Executive, Moksevi Prelis told shareholders.

"Strengthening the relationship with the Commercial Bank with a view to harnessing synergies and adding value to both institutions will be an integral component of DFCC Banks future strategy" Mr. Prelis said. DFCC has a 29.5 per cent stake in Commercial Bank. The Bank also increased its stake in Lanka Ventures Ltd from 36.6 per cent to a majority stake of 56.3 per cent.

The bank holds a 35 per cent stake in National Asset Management Ltd which, despite a decline in the market outperformed all other trust funds.

DFCC reduced the number of listed holdings in the portfolio from 91 in the financial year 1998 to 55 in the financial year 1999.

This was done with the objective of rationalising holdings, reducing the possibility of future capital losses and generating cash.During the year the bank issued a Floating Rate Note worth US$ 65 mn in the international debt market which was listed on the Luxembourg Stock Exchange.

It also arranged a syndicated loan facility of Rs.4.1 bn to Sri Lanka Telecom. DFCC structured and managed the debenture issue of Ceylon Glass Company Ltd, the first debt listing by a manufacturing company."Revised strategies aim at expanding upon our core strengths in development banking and in identifying and fulfilling market niches." Mr Prelis said in the annual report. A special area of focus will be the development of the debt securities market.

Fraud case accused allowed bail

The Fort Magistrate granted bail to Dirk Flamer Caldera and Rohitha Silva in a plaint over alleged misappropriation of funds last Monday.The Colombo High Court, exercising its revisionary jurisdiction, recalled the arrest warrants issued by the Colombo Fort Magistrate on Dirk Flamer Caldera and Rohitha Silva, a shareholder and Director of Idac (Pvt.) Ltd.

The Magistrate later released Mr. Flamer Caldera and Mr. Silva on personal bonds of Rs. 100,000 each. The case is to be called on July 21, 1999.On May 28, Idac Trading (Pvt) Ltd., Chairman J R S Caderamanpulle instituted two private plaints against the two of them, alleging they had misappropriated three generators belonging to Idac Trading (Pvt.) Ltd.

Mr. Caderamanpulle had further alleged in his affidavits, that he was informed they were trying to leave the Island.The Fort Magistrate had issued warrants of arrest on the Mr. Flamer Cladera and Silva, in the first instance.Mr. Flamer Caldera and Mr. Silva invoked the revisionary jurisdiction of the Colombo High Court seeking interim orders recalling the warrants issued by the Magistrate and enlarging them on bail.

The said applications were made on the basis that the said complaint of Mr. Caderamanpulle was false and malicious and that the Magistrate could not have been satisfied with the material placed before him by the complainant to merit the issue of warrants of arrest, in the first instance.

The Colombo High Court Judge in his order dated June 7,1999 directed that the Colombo Fort Magistrate, recall the warrants issued on Flamer Caldera and Silva and further directed that they be released on bail.

On the very same day, Flamer Caldera and Silva surrendered before the Colombo Fort Magistrate by their counsel K N Choksy. Senior counsel for Mr. Flamer Caldera, submitted to court that the complainant (Mr. Caderamanpulle) had in his affidavit to Court, suppressed relevant information and also misled Court on the facts of the case.

Choksy further submitted that the said Caderamanpulle had not filed any documents to support the allegations made and that he had in fact, sworn to third party information.

It was further submitted that Mr. Caderamanpulle misled Court by alleging that the suspects were trying to leave the Island, and thereby induced Court to issue warrants for their arrest.

Ananda Wijesekera PC with Dilan de Silva instructed by Palitha Liyanage appeared for Rohitha Silva. Mr. Dirk Flamer Caldera is also the CEO of Asia Capital Ltd

Apparel exporters gang up against BOI move

Two leading apparel associations have obtained a stay order to prevent the Board of Investment (BOI) from changing the facilitation and the 'one stop shop'.

The one stop shop is an import export facilitation department which engages in the inspection of goods and approval of import export documentation. The fundamental rights application was filed by forty -eight petitioners belonging to the National Apparel Exporters Association and the Sri Lanka Apparel Exporters Association. These investors whose BOI factories are situated outside the free trade zone have taken strong objection to the proposed changes.

The associations claim the BOI (through a press notice on June 5, 1999) withdrew the facilities with effect from June 7, 1999. The same facilities in turn, would now continue under customs department purview.

"This withdrawal was contrary to a legal agreement entered into in 1992, with the BOI" alleged a member of the National Apparel Exporters Association In a joint statement the associations state that the industry is under tremendous price pressure.

"The change in market demand has also increased the necessity to shorten lead times and the heavy import dependency adds an additional dimension to the necessity to have efficient import export facilitation procedure," they said.

It is the view of the investors that this one stop shop is absolutely essential for the survival and growth of the industry, they said.

The industry which has seen continuous growth in the past decade is expected to have a negative growth for the first time this year.

In fact the Central Bank statistics show a 6 per cent decline in the first 3 months this year in comparison to the corresponding period of last year.

The court has fixed the hearing for August 20.

Reform labour laws, cut holidays: Ken Balendra

A leading business magnate, Ken Balendra has called for reforms in labour laws including a reduction in the number of holidays.

Areas requiring urgent attention are labour market flexibility, equality of rights and obligations of both employers and employees and linking remuneration to productivity, Mr. Balendra told John Keells Holdings (JKH) shareholders.

He also called for government intervention in the vital element of physical infrastructure which is a pre-requisite for economic development.

"The development of physical infrastructure is being addressed at too slow a pace through the participation of the private sector and the road network is unlikely to attract private investment" he said.

Mr. Balendra also called for a national IT strategy in which specific goals are put in place.

"The challenge is to create a pool of trained and scientific manpower to ensure that this country can be a part of the global software services market which is currently estimated to be in excess of US$ 300 bn," he said. It is critical that authorities address the issue of IT education and invest now at all stages of the education chain to ensure that the level of IT literacy increases substantially and speedily, he said.

Despite these shortcomings, JKH intend exploiting numerous business development opportunities this year. The company is awaiting the conclusion of an agreement to undertake the development of the Queen Elizabeth Quay in the port of Colombo which is expected shortly. JKH will be a 26.25 per cent share holder of South Asia Gateway Terminals (Pvt) Ltd which was incorporated in connection with the privatisation of the Queen Elizabeth Quay.

The total cost of the project, over a period of 4-5 years is expected to be around US$ 240 million and will be financed with a 60:40 debt equity ratio.

The company also intends exploiting the tremendous growth in off premise pizza consumption the JKH annual report stated.

Keells Restaurants (Pvt) Ltd, the franchisee for Pizza Hut has performed exceptionally well despite the entry of international competitor brands and expects to implement strategies to exploit the market this year.

Despite declining consumer spending and the inability to reach revenue targets for its supermarket operations the company states that Super K outlets and franchise operations in the provinces have grown steadily. JKH sees a distinct possibility of expansions of the franchise concept in which there is increasing interest.

The ice cream division of Ceylon Cold Stores (another company within the JKH group) has recorded exceptional growth amidst vibrant competitor activity. Further growth is anticipated and plans are underway to increase production capacity in the ice cream plant in Kaduwela

Although the group's investment in a hotel property in Trincomalee has proved a disappointment, JKH is actively pursuing opportunities for more hotels to be constructed in strategic tourist locations in the country.

The group will also focus on expansion plans overseas, especially in the South Asian region.

April tourist arrivals up 34.7%

Tourist arrival for the month of April 1999 shows a 34.7 per cent increase year on year (YoY) over the same period last year. A John Keells report said that this helped boost total arrivals for the period January to April 1999, already buoyed by an excellent winter season to March 99, by 23.8 per cent YoY.

A total of 126,927 tourists' came into the country from January to March 1999 compared to the 104,763 tourists who came in 1998 for the same period.

The visit of the Borah community leader to Sri Lanka provided the main thrust for arrival growth in April. East Asian, African and the sub continent recorded sharp growths in arrivals.

The arrivals was led by a 120 per cent growth in Indian traffic and a 100 per cent rise in arrivals from Pakistan, the report said.This however is considered a one off windfall for the local tourist industry.

Western European countries arrivals were slowed down marginally due to the fears of civil unrest in the lead up to the provincial council elections, the report added.

However arrivals picked up post elections to record a growth of 16.1 per cent for April 99. John Keells predictions are that given the recouping Asian arrivals and increased focus by Western tour operators, summer arrivals are likely to show healthy growth, despite competition from regional destinations with excess summer capacities.

They said that growth is likely to slow down off the excellent winter base of 1998, the momentum provided by the growth in the first half 1999, is likely to push arrivals to a 12 per cent growth in 1999.

End to gas shortages

Shell Gas Lanka will stop restricting sales of new gas cylinders to customers by the end of this year.

Shell is constructing a terminal facility for the storage of gas in Kerawalapitiya, with a capacity of 8000 metric tons of liquid petroleum gas (LPG), Shell Gas Lanka official, Soshana Wijeratne said.

Billed to become one of the most sophisticated LPG import and storage facilities in the South Asia subcontinent, it will enable them to cope with the booming demand for gas, she said.

The process of unloading and storing gas will be speeded up to 24 hours.

The storage spheres are connected by underground pipeline to the ships used to import gas. The pipeline reaches 3.5 km off shore and is connected to a flexible hose which will be connected to the ship which will discharge the supplies of gas.

At present unloading and storing the gas takes 5 to 6 days. The LPG is unloaded from the ships into fleets of road tankers which are used to transport the gas to the Orugodawatte bulk storage facility.

The new terminal site comprises four storage spheres each capable of holding 2000 tones of LPG. It also includes a gigantic water tank for contingencies.

A state of the art safety mechanism will be in operation. This will ensure the smallest discharge will cause the system to shut down automatically. Temperature monitors and isolated sprinkler systems are also components of the safety system.

The main contractors to the project are Stork Protec. Construction included directional drilling of pipelines for the first time in Sri Lanka. This is a process of drilling where the soil is burrowed and the top soil is left undisturbed.

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