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18th June 2000

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Ring of growth

Celltel:

Celltel Lanka Ltd. is raising US$ 32 mn for their network expansion.

US$ 10 mn would come as an equity injection from major shareholder Millicom International. The balance would be raised via a consortium of local commercial banks, Celltel CEO, Michel Schluter said. The local funds would be used to refinance their existing debt and expand their third generation digital network. ABN Amro Bank are the lead managers to the issue.

Suntel:

Suntel is in the process of finalising plans to Rs. 3.5 bn. The total package is a combination of a debenture, a loan and a equity. The International Finance Corporation would come in as an equity partner. The funds would be utilised for network expansion and debt restructuring, company officials said.

SLT:

Sri Lanka Telecom is expected to raise around Rs. 1.6 bn through a consortium of local commercial banks for its network expansion, company officials said.


Lanka Bell: Regulations take toll

By Mel Gunasekera and Shafraz Farook

Sri Lanka's youngest telephone operator Lanka Bell, is scouting for an investment partner to provide an equity injection for network expansion.

"We are just consolidating our operations till a big operator comes and takes charge of things," Lanka Bell CEO, Vijendran Watson said in an interview.

Lanka Bell's main equity partner, Singapore trading and telecommunications company Transmarco Ltd. is keen to sell. Transmarco's exit comes after Lanka Bell announced last December that they were no longer scouting for a strategic investor to finance its expansion programme after Transmarco offered additional US$ 30 mn funding.

The uncertain regulatory framework has been the biggest stumbling block for Lanka Bell's expansion and the main reason for Transmarco's exit.

"Our shareholders had a numerous discussions with the government and potential investors walked away in disgust at the present regulatory framework. And they said 'you sort that out, we will give you the money to expand'," he said.

Watson says that a few parties have expressed interest, but the prevalent country situation and the uncertain regulatory environment are holding them back.

Since commencing operations, the company suffered heavy losses and incurred high level of foreign debt by investing into expensive technology. The company has since turned around showing positive earnings before interest, tax, depreciation and amortisation (EBITDA) and restructured its debt.

Lanka Bell surpassed its own estimates of EBITDA of Rs. 70 mn to an EBITDA of Rs. 137 mn as at March 2000, he said.

"The business has made a turnaround from a Rs. 444 mn loss, where shareholders were putting US$ 300,000 per month. Operationally, we are now cash flow positive, able to purchase equipment and run our daily operations," he said.

In January this year, Lanka Bell said it was planning a stock restructuring to partly clear a US$ 34 mn debt to suppliers Nortel Networks and GTE Corp. Part of the supplier credit was converted into long term loans, the creditors also received US$ 13 mn in cash.

However, the stock restructuring plans went astray after the shareholders had discussions with the government, regarding resolving the interconnection dispute.

Shareholders felt the dispute would drag on for a lengthy time period. "We can't prepare a business plan with a huge uncertainty. It's not about having a level playing field.

It's about having stability in the market. The regulator should have stepped into resolve the issue for everybody's benefit. Then investment would have flown in. Now investment cant come in, as nobody wants to bet on uncertainty," he said.

Meanwhile, work on a US$ 1.5 mn VSAT network has begun and it is expected to be in operation later this year. VSAT's are used to cover small areas, and will be beneficial in rural areas.

Presently, the company has a 35,000 customer base.

Lanka Bell's present shareholders include Transmarco (60%), infrastructure fund AIDEC (30%) and Nortel (6%).

See also


Mind your business

Fun Fund

A large fund was advised by one of its chief board men not to go for the latest issue of three year gilt at 15%, as interest rates are expected to shoot higher. Instead plan short term and wait for the kill, they were told. Then how come a concern connected to the same man dumped a large sum of long term government paper at 14.25% to the same fund? Those connected to the fund have been given an appointment in places connected to the advisor we hear.....

Rot sets in

The vehicles are said to be ordered by a Japanese giant for its local partner. So why was it lying in the port for over three months to be cleared? Apparently, the rot had set in already as the chassis of the vehicles were said to have been corroded and a crane had to be used to get the vehicles out of the port and into a garage! Another case of MNC dumping their cast offs on poor nations......

Wait and see

Ever since flamboyant minister in charge of the garment industry was assassinated, the industry has been wondering who would fill his shoes. And at least one ruling party politician has been canvassing leading garment manufacturers, implying that he would be the successor and requesting their support.

Discreet inquiries have been made by the industry to ascertain the truth of this and the answer has been a definite 'no'. In fact, indications are that the portfolio will not be allocated until after the polls

Cola wars hot up

There was a lull in the cola wars for some time now but all that is likely to change soon. The management of one company changed hands and more aggressive marketing of their soft drinks is expected.

A strategy being looked at is reducing prices of the beverages. This was tried out on selected products and the market share rose appreciably as a result, company executives say. Now, they are contemplating a price reduction on the company's premier hallmark product.


Diesel price hike: the questions to be answered

Comment

Shock. Shock. Shock. Last week's lightning diesel hike left everybody gasping for breath.

Was the hike disguised to prop up the inefficient state monopoly? Was it a step away from subsidising fuel and raising it to international market prices? Either way, the hike together with a string of utility and defence levy hikes is having a rippling effect throughout the economy.

The Ceylon Petroleum Corporation (CPC) attributed the 20% diesel hike to spiralling world oil prices. Todate, the government has protected diesel and kerosene users from rocketing world prices. Present market prices would put diesel between Rs. 22 to Rs. 24. On the other hand, petrol users fork out Rs. 50 per litre - way above current world market prices of around Rs. 25 per litre. It's no secret that petrol users are cross-subsidising diesel and kerosene consumers.

Interestingly, CPC who benefited from lower oil prices in 1998 and the first half of 1999, did not pass on the benefit to its consumers. Instead, it was used to generate profits and meet the heavy operational expenditures including maintaining an expanded workforce of around 7,000.

According to Central Bank statistics, with the February hike between 23%- 48% will not be sufficient for CPC to break even this year. CPC can operate on a break even level only if the average crude oil price remains at around US$ 20 per barrel.

Meanwhile, all eyes are turned towards OPEC - the oil cartel. International Brent crude is currently trading at US$ 31.70 per barrel.

The oil cartel is expected to meet in Vienna next week to discuss an output increase.


Taxation Institute Bill through parliament

By Dinali Goonewardene

A Bill incorporating the Sri Lanka Institute of Taxation (SLIT) was passed in parliament recently.

The Institute of Taxation was formerly a company by guarantee. Formed in 1991 by former officials of the Tax Department, the Institute was run in the lines of the British Institute of Taxation.

"The Minister of Finance can now appoint members to the Institute's council, but the present council can continue for five years unless the number of members falls below eleven," President, SLIT, Anil Amarasekera told The Sunday Times Business.

The SLIT will utilise its new status to conduct examinations in taxation and grant certificates. Its objectives include formulating a code of conduct for its members and promoting, co-ordinating and disseminating tax knowledge.

SLIT will facilitate the exchange of information and views on taxation. The Institute also plans to make recommendations to the government for the improvement and simplification of tax law.

Meanwhile, the Institute has voiced its protest over recent newspaper advertisements by the Commissioner General of Inland Revenue, informing taxpayers of changes to the tax structure, when the relevant bills have not been passed in parliament, Amarasekera said.


Sampath tops trading

Sampath Bank's shares will commence trading tomorrow after the Colombo Stock Exchange (CSE) lifted the suspension last Wednesday evening.

Trading on shares of Sampath Bank were halted last Wednesday morning after the company informed the CSE that certain parties purchasing company shares in concert had triggered the Take overs and Mergers Code.

Sampath earlier claimed that the purchases also violated Central bank regulations. The issue was subsequently referred to the Securities and Exchange Commission and the Central Bank. However, later that evening, Sampath Bank wrote to the CSE retracting one of its earlier statements. The Bank said that the purchases by certain parties did not violate Central Bank regulations, but violated its Articles.

The battle to buy Sampath's shares reached its pinnacle last Tuesday when 8 per cent of the banks share capital was traded at prices ranging from Rs. 56.50 to Rs. 62.75. Hatton National Bank's (HNB) EPF, Distilleries Company of Sri Lanka and Stassen Exports Ltd held sway.

However, 2.34 mn shares were also traded on Monday at prices ranging from Rs. 50 to Rs.56.50. Sampath Bank's own EPF, HNB EPF and the Stassens Group were the price movers.

The war to buy up the Bank's shares first reared its head last Friday and 2.8 per cent of the Bank's shares were rushed through the bourse two minutes before closing time. But the shares which traded at Rs. 50 on Friday have appreciated considerably since, pushing up the market indices in the process. Meanwhile the market closed at 478.81 - a gain of 1.3% WoW.


Strengths which soften war's economic stresses

The war situation and its increased ex-penditures are no doubt having severe stresses on the economy. The direct and indirect impacts of the war are having adverse effects on the public finances as well as the balance of payments. There are however some features of the economy which mitigate these adverse impacts. These include the fact that most production sectors remain unaffected by the war owing to their spatial location, the prices of our agricultural exports are reasonably good, there is an export growth in industrial goods and foreign assistance is being availed of to cover some of the additional expenditures on the war.

It has been the good fortune of the country that most of the production sectors in the economy have been left unaffected by the war. Although the economy is firing on one piston less, it is able to move at reasonable speed. This is mostly due to the spatial location of industry and export agriculture. Most key economic activities, as well as food crop agriculture, are away from the scene of the war. Agricultural activity even near the war zone has continued though affected to some extent .

This situation is quite different to what happened during the JVP insurgency, when both industry and agriculture, particularly tea, were disrupted. The economy, particularly the industrial sector, is on a definite path of recovery. In the first quarter industrial growth was 11 per cent. Though the comparison is with a depressed first quarter of 1999, it is still indicative of a trend that developed in the second half of last year. Industrial production is rising and this is reflected in a 24 per cent growth in industrial exports in the first four months of this year. In the first quarter the economy grew by 6.3 per cent.

If production and exports gains in momentum then it would ease the balance of payments difficulties.

Fortunately export prices of our agricultural exports have also shown an increasing trend, though the most recent tea prices show a stabilization or even a slight decline. Yet current prices are reasonably good compared to last year's low prices. Tea output has also been rising and there is every prospect of the earnings from tea being higher. Rubber prices have also shown an improvement and coconut products, mainly desiccated coconut, are also earning valuable amounts of foreign exchange.

The strain on the balance of payments caused by the increased foreign purchases of equipment appears to be eased by lines of credit and deferred payments. Such assistance could smoothen the sudden impact on the balance of payments and foreign reserves. The commitment of the Indian government to give US$ 100 million is an example of this. No doubt other governments too are extending such assistance.

However, it must be recognised that though the strain of the additional expenditures may be soften and phased over time by foreign assistance, the burden of the expenditure will continue to be a strain on the economy, through an increase in foreign debt.

These favourable factors may not be adequate to off-set the full impact of the adverse effects of the increased war expenditures,but they would make the difficulties less burdensome.Three factors are however important.

First, we must ensure that the growth in the economy continues and in fact gains in momentum.Second, we cannot rely entirely on these favourable factors.The government must find ways and means by which the effects of the war expenditure on government revenue and the balance of payments are mitigated.Third,changes in government policy must be so designed as to not affect the production sectors of the economy adversely.


Snippets

Tigers team up

South Korean telecom giant Korea Telecom said recently that it has formed an Internet network service with seven other major telecom carriers in Asia to provide direct Internet access around the region.

The seven other companies involved are Japan's KDD Corp, Singapore Telecommunications Ltd, PT Indosat Tbk of Indonesia, Philippines Long Distance Telephone Co, Telekom Malaysia Berhad, the Communication Authority of Thailand and Chunghwa Telecom Co Ltd of Taiwan.

The Internet network, called AIN (Asian Internet Network), will enable Internet users to have direct access to the region's web sites.

Until now, Internet connections had to pass through the United States.

The service will cover the transmission of voice, data, video and fax communications, with its commencement last week.

Korea Telecom said the Asia-oriented cyber networks will help expand the region's Internet business and provide better quality Internet services.

The full-mesh AIN network will have an initial bandwidth of 512 Kbps or higher up to 45 Mbps depending on traffic volume, Korea Telecom said in a statement.The network will be upgraded automatically when its traffic touches 70 percent of utilisation.

Hutchison runs behind 2.5G CDMA

Hutchison Telecom said it will invest HK$500 million in so-called 2.5-generation CDMA technology this year to speed up the wireless data transmission capability of its CDMA mobile network.

At a news conference to announce the award of a US$10 million-plus wireless data technology contract to Motorola Inc, Hutchison Telecom officials said they expect Hong Kong to be completely covered by the high-speed data capable system within two months.

Under the pact, Motorola will provide technology that will enable Hutchison Telecom to offer a 64 kilobits per second wireless data transmission over its CDMA network in Hong Kong.

Cliff Woo, deputy managing director and wireless networks director for Hutchison Telecom said the company expects to have 120,000 Hong Kong customers using CDMA wireless application protocol (WAP) services by the end of this year versus 10,000 currently. Woo said combined with Hutchison Telecom's parallel GSM network, the group expected to have 300,000 to 400,000 WAP data users in Hong Kong by year end.

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