Stout sales go uphill

Stout is giving tea a tough fight up in the hills. Amid the tea industry's valiant efforts to promote tea as a health drink, stout sales in the hill country account for around 40% of The Ceylon Brewery's total stout sales.

According to Ceylon Brewery, stout is widely acknowledged as a health drink and enjoyed by the hillside folk for its energetic and re-vitalizing properties. Ceylon Brewery Brand Manager, Herman Pereira told the Sunday Times Business that stout was consumed in certain parts of the country. The hill country and the coastal community dominated their sales.

However, only 20%to 25% of the 1800 legal sales outlets are located in the hill country, Mr. Pereira said. Industry sources, including Ceylon Brewery said the government's policy to have stiff regulation on liquor licensing had led to the increase in illicit liquor consumption.

Mr. Pereira however in a press statement said that 85% of their customers drank stout as it was 'good for the body. The statement also said that the beverage included many attributes such as that it enables them to work hard, contains vitamins, renews energy after a hard day's work, increases appetite and most importantly caused no hangovers or side effects.

Mr. Pereira said that the problem was not consuming alcohol but abusing it. Mr. Pereira said this at a ceremony held recently to re-launch Lion Stout. Lion stout was re-launched with an array of new products to help with promotions. The company release said that Lion stout was the market leader with 72% of the stout market.

Paris Aid postponed

By Mel Gunasekera

As Sri Lanka hots up for the December Presidential poll, the traditional Paris Aid group meeting has been postponed for end of January 2000, a World Bank source said.

The meeting was earlier scheduled to take place on December 14 and 15 in Colombo. The new dates have not been announced, but the meeting will be put off for at least a month, the source said.

Since the 1960's the World Bank has been organising the meeting which brings together foreign donors, and financial lending institutions including the International Monetary Fund (IMF), the Asian Development Bank and Sri Lankan officials, normally headed by the finance minister or the deputy finance minister.

The aid is usually needed to bridge 1/3 of the budget deficit. The group last met on May 28 in Paris and pledged little over US$ 700 million in aid. Sources say, donor countries may also be responsible for pushing the government to call for early elections. Elections are a time when the government needs mass approval on how the economy was managed and how it is going to be managed in the future.

There were also indications that if the main opposition party the UNP came to power, it will do away with many of the present government's economic policies, a well placed source said.

Though the government is presenting a Vote on Account instead of the annual budget, the source said, if the President wins, she will go ahead and present the budget in parliament next January before calling for general elections. This move will be done to ensure economic stability to donor countries, sources said.

The Sri Lankan government has already been warned that the forthcoming aid meeting will not be a pledging conference but a deliberative one. The government's failure to tackle several key issues like human rights violations, corruption, good governance, macro economic policies and the prolonging North East issue would be taken into account.

Last week, the IMF in its latest report on Sri Lanka clearly spelt out that the country faced tough choices and prospects remained bleak.

"The near-term outlook is somewhat less encouraging," the fund said in its Public Information Notice. "Less improvement was made in priority areas including the civil service and pensions, state trading monopolies and financial and labour market reforms."

IMF said that Sri Lanka needed to urgently reform the public sector and better target social spending. The IMF also noted that there were deficiencies in the Central Bank's statistical base which made it difficult to monitor programs and policy implementation. The fund hoped Sri Lanka would soon come up with a reform package that could be supported by an Enhanced Structural Adjustment Facility (ESAF). Sri Lanka had been hoping for a US$ 500 million and pachage since 1995, but there had been no negotiations on linking a reform program with IMF assistance. However, any such plans for negotiations will be put on hold until the elections are over.

A worrying trend of increasing expenditure

By Dilrukshi Handunnetti

The forthcoming financial year is proving to be one of excessive spending despite tremors being felt by the country's economy with foreign aid becoming scarce.

With the budget postponed to next year and the government taking up a Vote on Account which coincides with a highly charged presidential election, several government initiated projects would be requiring more monies in the forthcoming year.

With moves to grant pensioners relief through an expeditious new pension scheme, the government has also given effect to a 1998 cabinet decision to recruit 3,000 Samurdhi animators who were not appointed as Samurdhi Development Officers (SDO) at a cost of Rs. 202.1 million.

In this backdrop come several other supplementary estimates, a bad financial practice often resorted to by governments unable to curb expenditure. Like the previous regime, the PA administration has resorted to carrying at a tandem to meet expenditure requirements, all of which is a drain on government funds.

The health ministry heads the contest with four mammoth supplementary estimates. According to the breakdown, the four will separately seek Rs. 228 million (Patient care services and capital expenditure), Rs.659 million recurrent expenditure (for general administration and patient care services programmes) while the other two Rs. 1.22 billion and Rs. 60 million will be also for recurrent expenditure of the ministry.

With defence expenditure also on the rise with the escalating cost of a protracted war, four supplementaries in the Order Book seek to allocate a total of Rs. 1. 63 billion. According to the breakdown, a mammoth Rs.247 million for military operations, Rs, 350 million for naval operations and support services, another Rs. 200 million for Air Force operations and Rs. 835, million for the Police Department specifically for law enforcement, public order and security operations are billed to be carried in the House.

The Transport Ministry will receive Rs. 589 million for transport services , transport boards and private omnibus transport while the Livestock Development Ministry will gain Rs. 40 million for estate infrastructure and capital expenditure.

The Finance Ministry has been allocated Rs.8 million for general administration, recurrent and capital expenditure. In this backdrop, the Local Government Ministry has also been allocated Rs. 491.6 million.

Meanwhile, the Education Ministry will receive Rs. 830 million, Rs. 16.6 million and Rs. 30 million from three supplementary estimates. The Public Administration Ministry will also receive Rs. 1. 35 million for the implementation of pension schemes.

With the number of supplementaries presented Parliament, economists have expressed concern over the worrying trend of increasing expenditure which is not accounted for in the annual budget of the state.

Ceylon Theatres buys into LCL

Ceylon Theatres Ltd last Tuesday triggered off the Takeovers and Mergers code when they bought 196,600 shares of Lanka Ceramics Ltd (LCL) increasing the total holding to 30.02 per cent. It also bought 196, 600 shares of Lanka Ceramics LTD (LCL) at Rs 21 on Thursday, increasing its stake to 30.02 per cent. The move triggered off the Company Takeovers and Mergers Code which requires the company to make a mandatory offer to other shareholders. A mandatory offer was made at Rs 21 per share.

LCL has been plagued by bad finan-cials in the first and second quarters recording losses of Rs 31 mn and Rs 16.66 mn respectively. However analysts believe the ceramic industry has a lot of value addition.

Bringing the value of the human asset into the balance sheet

By Dinali Goonewardene

STB: How do you propose incorporating human resources into the accounts of a company?

SD: I'm not aware of any country which has brought in the value of employees into a balance sheet. Now most of the time we talk about employees being the biggest asset in the organisation. Even if you look at the annual report of companies we always talk of the biggest asset in an organisation- employees.

But when you really look at it I ask myself the question where is this biggest asset highlighted anywhere else in an annual report or accounting system. It does not happen. If you take a balance sheet you get the furniture, fittings or the other assets in the balance sheet , not the employees.

What I want to promote as a human resource professional is for the accounting bodies in Sri Lanka, the Chartered Institute of Management Accountants as well as the Institute of Chartered Accountants to evaluate and look at the possibility of how this employee asset can be bought into the balance sheet. The question is how. Because employees keep on changing unlike the fixtures and fittings, they don't stay permanent.

STB: What are the advantages of valuing human resources and including it in the financial statements?

SD: The advantage to my mind is, these are all my personal views, that you can see the actual value of your people. For example if you take the total salaries of your employees you get an X number, Company A will have an X number. In similar sized organisations, if you compare apples to apples, company B will have another number. If you have the same number of people, same size, same business then the values of the employees in the two organisations might vary. One organisation might have a low value whereas another organisation might have a high value. The company with the higher value has more knowledgeable people, more specialised people. You pay more because of the value of these employees to your organisation.

The value of the company as a whole goes up. If you take the assets of an organisation, because of the assets the value of the organisation goes up. I think if there is a way of valuing your employees and putting it in the balance sheet the value of the organisation goes up by that much. Now in companies you have mergers and acquisitions. You sell companies. But again when we sell you take the share value.

But I don't know whether people really pay attention to what quality of people are there in that organisation. And what happens most often when a company is up for sale or there is a feeling of insecurity or instability in that organisation, the better employees tend to move out, the better performing people. So then you might end up selling a shell. You might just sell the name of the company, but you might not have good quality people in that organisation. So that is where the value comes in.

STB: What is the level of international acceptance for this concept?

SD: It is still being debated. I have not come across any country still, which has been able to come up with a model, value the people and put it on a balance sheet. I don't think any professional bodies have really gone into it. It may be due to the controversial aspects of it. How can you value the people?

STB: How will you value human resources, on the basis of qualifications, experience or skills?

SD: There are different models for that. Actually there is a book called Intellectual Capital written by a guy called Thomas Steuart. In that book he talks about putting a value to people. He says you put a value to the people whom you can not replace easily.

Now if you have different types of jobs in your organisation there are certain jobs where you can easily find people. So for those jobs, not that they are not valuable to the organisation but you don't look at really putting a value to it. But there are other jobs which if somebody leaves it's very difficult to replace. Maybe you replace with a person of lower quality by way of experience, qualifications, know how. This is the variation that comes in. If you take human resource jobs itself, in this country you don't find many of human resource managers and human resource directors.

There are not many people who are really competent, who are knowledgeable in all aspects of human resource management. There are many jobs like that where the incumbent of a job has to bring in different levels of know-how and knowledge to a job. Now this man talks about identifying those jobs that are very difficult to replace and then putting a value to those jobs.

STB: When you value a person based on know-how or experience it involves something subjective and it could conflict with existing accounting standards.

SD: I think what people advocate in valuing human resources is that normally you take the value of all your people in the organisation. There are different models which have been developed to value people To my mind the most practical one is the Lev and Schwarts model. There they talk about valuing the salaries of your employees right upto retirement. Say you have a set of people working in your organisation and what would be the level of their salaries when they retire?

So you take the current salaries and keep on adding the annual increases and then you come to the final salary at the time of retirement. So that is one way of valuing.

STB: Measuring human capital would conflict with the accounting concept of prudence, where you do not recognise something in the balance sheet unless you are sure of it. A person could leave his place of employment after a value has been included. How would you surmount this?

SD: Say you include a value and then the person leaves. Normally you should ideally take what is at the end of the financial year. In accounting in companies you take as of 31st March.

So you take the value of your people as of 31st March of that financial year. You have to keep on revaluing. So that every year the value in the annual report or balance sheet will change. You will have one value as at 31st March 1999 and another value as at 31st March 2000. You might have the same number of people but the values of those people will change. If they leave and then you replace maybe you replace with a less expensive person or a more expensive person. That way the values of the employees will change.

STB: Like an asset will the values of an employee depreciate or appreciate?

SD: To my mind the value of the employee should appreciate. You have a base salary today, you keep on giving salary increases. You value the people up to their retirement. Assuming they work with you till retirement then you put a value. Say you have a group of 200 people in your company, you take their salaries and you keep on adding notional increases, 10 per cent, 15 per cent, 20 per cent up to their retirement. Then you come up with the total value. What is the value of your employees? And that can keep changing every year. The values depending on the people coming in and going out.

STB: But the balance sheet could reflect the wrong value. If you value at 31st march and the employee leaves the next day for the following year you will carry his value in your balance sheet.

SD: Absolutely. But isn't it the same with anything else also. For example you have your assets but then you put your assets as of a particular day. So if the asset value changes as you dispose of an asset for example or if you sell something during the financial year.

Although it is there in your annual report it will be different when it's published the next time.

STB: Will a valuation focus on specific managers or everyone?

SD: Ideally if a company is valuing its employees it should value all its employees.. And then you come up with the total value of employees in an organisation. You can do another thing. When employees leave we call it the employee turnover and you calculate a percentage. Sometimes we say our employee turnover percentage. Of a crowd of hundred people only three per cent of our people leave during a month. So we might sometimes feel comfortable that three of the people leave.

What we don't do is that we don't look at within that three percent what is the percentage of valuable people who leave. Then you could also put a value to the movement of those people. And then when you try to retain those people the value of those people can tend to move up.

Look at the two per cent or three percent. If ten people have left within the three per cent, within the ten people how many can really make an impact on your organisation if they leave. So when they leave you have to replace ideally with even better quality or at an equal level.

STB: If senior managers are attributed values it might cause tension among them. Do you think it advantageous to start valuing them?

SD: The value comes from the cost of that employee to the company. All of us have a cost to our organisation. Our salary, EPF, ETF, our benefits. All that is valued and a rupee amount put against our name. So that is what it costs our company to employ us. The value is already there, the cost is already there.

Including Intellectual Capital

STB: Most annual reports describe employees as the most valuable asset of a company. Has there been any debate in accounting bodies on incorporating the value of employees in the balance sheet?

RM: The concept of annual reports putting in the value of employees into the assets of a company, the debate, has been there. The debate really started with intangibles because people say if you look at a company and look at the assets and liabilities, quite often, what is there in the assets and liabilities is not a real reflection of the company's true value because they say the balance sheets do not incorporate intangibles. Intangibles not only refer to employees which is a new aspect they are looking into like intellectual capital. They're looking at things like goodwill, trade marks, for example take Coca Cola. The Coke name has a lot of value. In the financial statements of Coke you will not find the Coke brand because there are problems with regard to how you state intangibles assets , what you cannot touch and feel. Buildings, furniture you can touch , what you call a tangible asset. So yes, the debate has been there about not only employees but all forms of intangible assets. That covers brands and goodwill and other non-tangible value of a company which is not reflected in the balance sheet.

STB: How would a valuation of employees conflict with existing accounting standards?

RM: My first question is a counter question. How do you value it?

One of the problems with accounting standards is we would like to value intangible assets but if it is like a building or an asset you can value it. You have bought it in the market place. But quite often most of the intangible assets in the company are not what you buy in the market. For example the Coke goodwill, the brand name they didn't buy it, they generated it over a period of time. So how do you get at the value? It's not purchased. It is generated internally. To value an internally generated asset is not easy. That is why accounting standards at the moment, say internally generated intangibles, can not be recognised in the balance sheet. Because of the problem of trying to get a reliable number.. So that you are allowed to record as goodwill because you purchased it. There is an arms length transaction and you paid money. And you will not pay money unless you thought there was value. So purchased intangibles can be shown. But internally generated are not allowed. Because we do not have a reliable method of valuing internally generated assets. So that is the issue that has come up. People may say it's conflicting. Why if I buy it I'm allowed to show it as intangibles but if I generate it internally I'm not allowed to show it .Accounting standards accept that there is a problem. But until we can find a means by which we can find out a reliable method by which we can put a value to internally generated intangibles the standards committee don't allow you to recognise them. Unless the internally generated intangibles, there is an active market for it.

STB: If the employees total compensation package including increments up to retirement was used as a basis for valuing employees and this was discounted each year to provide for the remaining years of service would that be within accounting norms?

RM: That is one type of basis that people say can be used. That is one way of valuing the employees but you have got to do an actuarial valuation of that. Because you have got to assess the probability of employees leaving, how many of them will remain up to that time. Then you have got to bring fatality into account. You could bring factors like people may get sick, mentally unsound. All those have to be built in. So you can't do a straight forward valuation of current salaries up to the day he retires and then roll it back. Just as much as you build in increments you have to build in possibilities of his leaving, ill health and death. Then do an actuarial valuation. Then of course you could bring values in. There are several ways in which people say it can be done. This is one of them. But the model has to build in more issues. Like you do for pensions.

STB: Do you think it would be advantageous to incorporate a value for employees in the accounts of a company?

RM: There are more critical issues before employees come in. There are things like value to the company coming from goodwill, from intangible assets that are generated like know-how. Know-how that has been developed, . These are very critical. While this is also important, I'm not saying it's not important but the International Accounting Standards Committee is looking at some of the critical ones which are demanding recognition . Like intangible assets, like value created assets. You develop your own computer software let's say. You develop it on your own and you have technical know-how which nobody else possesses. It can be a very valuable asset. You can't buy it outside . You have developed it. And you use that to give you an added leverage over others don't have. Rightfully my company should incorporate that as a value. Quite often some of the intellectual value coming from employees is built into that. Internally generated values are contributed by employees. But the International Accounting Standards Committee is looking at the critical ones first. But the debate for bringing in the value of employees is there. It's just that they haven't come to that yet. They are looking at goodwill, trademarks, technical know-how. People are going towards a balance sheet approach to accounts, where they look in to getting the balance sheet right and the difference between your balance sheet will be your performance. To get your balance sheet right you have to make sure all the assets are recorded. Not only the tangibles but also the intangibles. We have got an accounting standard that says intangibles can be recorded provided they are purchased.

DFCC in Asia Money's rankings

Company                               Score

DFCC                                      5

Hatton National Bank               4

Ceylon Grain Elevators             3

Hayleys                                    2

John Keells Holdings                1

Generating the highest after-tax profits of any listed company in Sri Lanka between 1992 and 1996, the Development Finance Corp of Ceylon is a favourite among the international investor respondents to Asiamoney's Best Managed Companies survey because it sticks to its core strengths: commercial banking, insurance and investment banking.

"We have taken extremely bold steps to become a more market-oriented institution", says Moksevi Prelis, veteran CEO and the man credited with much of the bank's recent success. "We grew with the economy and we capitalised on our opportunities. Now we are developing a new formula to keep us ahead of the pack".

One well-noted opportunity is DFCC's investment in Commercial Bank of Ceylon, in which it holds a 30% stake. "DFCC through the branch network of Commercial Bank will have a wider reach, especially in rural areas", explains Jardine Fleming's head of research, Panduka Ambanpola, in Colombo. "The bank is in a good position to benefit from the expected recovery in the economy and planned infrastructure projects. This will translate into higher ROE in the long run".

Close behind DFCC, Hatton National Bank, which also helped fuel the country's growth in the early 1990s, is today looking at squeezed margins as a result of greater competition and growing overhead costs as personnel costs rise after union action against most local banks.

Sri Lanka is not the only country to have made only fleeting appearances in the polls. Pakistan and Japan, too, were featured in some, but not all. In Pakistan, the best ranked company was chemical giant Industrial Chemical Industries, while fibre producer Dewan Salman Fibre, which has been expanding its acrylic fibre business, took second place.

In Japan, electronics giant Sony topped the charts, with semi-conductor manufacturer Rohm placing second.

Wanted: better index

Year GDP% change Percapita GDP CCPI

(US Dollars)

1990 129 2834

1991 135 4.6 522 3180

1992 141 3.5 557 3542

1993 151 7.1 588 3958

1994 159 5.6 656 4292

1995 168 5.5 719 4621

1996 174 (696) 3.8 759 5358

1997 185 (804) 6.3 (15.5) 814 5870

1998 (913) 4.7 (13.5) 837 6420

By Dr. C.S. Weeraratna

Various parameters are used to indicate economic growth. The annual change of the Gross Domestic Product at Constant Factor Cost Prices (GDP-CFCP) is one such parameter and is commonly used as an index of economic growth. In Sri Lanka GDP-CFCP upto 1997 was calculated on the basis of 1982 prices, and GDP-CFCP for 1999 is calculated on the basis of 1996 prices. According to GDP-CFCP indicated in Sri Lanka Central Bank reports, the economy of Sri Lanka grew at different rates during the present decade as shown in Table 1.

Note: GDP at constant factor prices is indicated in billion Sri Lanka Rupees. Upto 1997, 1982 prices have been used as a base. 1998 GDP is expressed in relation to 1996 prices. Values in parenthesis are based on 1996 values.

Source: Central Bank Reports

GDP indicates only the value of physical production based on a reference price. But, the costs involved in production are not taken into consideration, thereby leaving out the productivity factor. An increase in production with a relatively higher increase in cost/expenditure would not indicate real economic growth. Market prices of the produce may also vary each year and hence, an increase in GDP alone does not necessarily indicate positive economic growth.

Percapita GDP (PGDP) is also used to indicate the economic prosperity of a country. As shown in Table 1, PGDP in Sri Lanka in US Dollar terms has increased by 60 % during 1990-1998. In terms of Sri Lanka rupee, this increase is 148%. However, the Cost of Living (COL) indicated by Colombo Consumer's Price Index (CCPl) during this period has increased by nearly 126 %. Thus, the beneficial effect of an increase in PGDP has been nullified by a rise in COL. Further, income disparity in Sri Lanka is high, with nearly 70% of the population receiving less than the average income. Hence, an increase in PGDP alone cannot be considered as a good index of economic growth.

People in a country with a lower percapita GDP and lower cost of living (COL) are certainly better off than those in a country with a similar or lower PGDP and high COL. Hence, the index GDP (PPP) (PPP- Purchasing Power Parity) per capita is also used as an index of economic development. The PGDP for Sri Lanka in 1995 was US $ 719 while the GDP (PPP) for 1995 was US $ 3250. GDP (PPP) is a better index of economic growth for inter-country comparisons and also to compare real incomes in a county over a period of time. According to data available, the GDP(PPP) in Sri Lanka in terms of US $, during last few years are indicated below.

1993-3030;1994-3160;1995-3250;1997-3415;1998-2490.

In view of the shortcomings of the existing indices of economic growth, there is a need to have a better index to correctly evaluate a country's economic performance.

Profits on the rise

Srilankan Airlines group operating profits inched up from Rs. 1.40bn last year to Rs. 1.45 bn for the financial year ending March 1998. Operating revenues improved to Rs. 19.48 bn in 1998/99 compared to Rs. 18 bn. Group operating profit recorded Rs. 2.94 bn.

1998/99 revenues included Rs. 17 mn from airline operations, Rs. 1.56 mn ground handling, Rs. 145 mn duty free sales and Rs. 431 mn flight catering. SriLankan carried 1.26 mn passengers representing a healthy seat factor of 71%, while the cargo carried dropped marginally to 35,500 tonnes reflecting the economic downturn in the Far Eastern markets, Chairman S. K. Wickremasinghe told a media briefing.

The large increase in our debt service costs due to the devaluation of the rupee roze by 11.5% during the period." Group liquidity was strong and cash balances increased by 30% in US dollar terms.

During the period under review SriLankan acquired the remaining 40% shares held by Thai Airways International in Air Lanka Catering Services Ltd at a cost of Rs. 40 mn. SriLankan plans to establish a new flight kitchen with a capacity of 15,000 meals per day. Officials refused to disclose the investment in the new kitchen stating 'that it was part of our business plan', instead preferred to say the kitchen is expected to be completed by 2001. (MG)

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