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Lacking
in transparency Corruption
is creeping in; inaction on the economic front is shown by rising
concerns among consumers over the cost of living which the opposition
is gleefully watching - and hoping to exploit - while the privatization
programme seems to have gone awry. The promised transparency in
government business has turned out to be just a dream. The worst development
is the violation of state tender procedures with contracts going
into the hands of favourites of the ruling party. The latest tender
to stir a hornet's nest is a tender by the Agriculture Ministry
for storage systems. Even before the tender closed on February 5,
there were indications that the contract would be given to an Israeli
company. However sincere
a government-in-waiting wants to be, it works in reverse gear when
in power. Somehow, political friends and party affiliates have to
be looked after. This is not only the general perception of the
public, whether it's the PA or the UNP which is in power but it
is the plain truth. Questions about
tenders are being raised over the bus privatization, a rice deal
(in which Prime Minister Ranil Wickremesinghe has himself ordered
an investigation), power projects (spilling over from the last regime),
the Colombo-Katunayake highway, Sathosa privatization, the Indian
credit line and so on. Nothing has changed. It was the same then,
it is the same now. Public concern
is understandable because transparency is seriously lacking in government
business. In the first place important government officials are
not accessible to the media. There are also various high profile
consultants in the government doing no one knows what and earning
high salaries which come from taxes paid by the public. On the other
hand the cabinet is getting bloated by the day. Prof S.T. Hettige,
the well-known Sri Lankan sociologist, in an interesting article
on the number of ministers in the government which appeared in a
local newspaper, says that any sensible citizen would agree that
what Sri Lanka needs is just 15 ministers who are experienced, knowledgeable
and efficient, and 15 deputies. The government only wakes up when
there is a political crisis like the cost of living issue. Current
moves to appoint various committees to look at relief measures like
a wage hike have been triggered by worries of an intensive opposition
campaign on the cost of living; not because consumers are complaining.
The bus privatization has raised many questions, one of which is
why IBIS has been given many extensions to pay the first instalment. The same question
is doing the rounds in the petroleum industry about the IOC deal,
a charge the IOC representative here has denied. In the IOC case,
it may be that the first payment is made when IOC physically takes
over the fuel stations. But again there are concerns of a lack of
transparency in this deal. Concerns have been raised in the business
community on reports that the Police Department plans to import
vehicles under the Indian credit line without calling for tenders.
It is however unfortunate that the business community which has
pushed for good governance and transparency in the past few years
cannot effectively play that role now, when it is being accused
of corruption and lack of transparency, as the SEC fiasco has shown.
Two weeks ago,
Chandra Jayaratne, a former head of the Ceylon Chamber of Commerce,
slammed the business community as corrupt, unethical and not transparent.
"If the business community needs to rebuild public trust, they've
got to be responsible to the society as a whole, and must adopt
and employ independent analysis and accept media reviews of their
conduct," he was quoted as saying at a public seminar. The media appears to be the last line of defence to the public. But will the government listen when the public complains through the media, or react only when the opposition is gaining ground? Repositioning
latex crepe in US, EU markets The latex crepe
industry in Sri Lanka was initiated as far back as the mid-1930s.
Both Malaysia and Sri Lanka produced latex crepe to cater to markets
in Europe, USA and Japan. There had been extensive promotion of
these grades of rubber in world markets by Malaysia until 1969,
when Malaysia was producing nearly 40,000 MT of this premium grade
of rubber annually compared to nearly 20,000 MT produced in Sri
Lanka. Thanks to the very extensive market promotion done by Malaysia
for this premium commodity, the price paid for white latex crepe
until 1969 was over double the price of RSS No.1; while sole crepe
was enjoying a premium price over the normal white crepes. Even
now, Malaysian Rubber Producers Research association extensively
promotes the rubbers produced in Malaysia in the UK and in Europe,
while in the United States there are four stations in different
States to propagate their raw rubber and rubber products. Latex crepe
being a hand-made, very high quality grade of natural rubber (NR),
was known as the Rolls-Royce of rubber and was paid such high premium
prices because it is the purest form of NR produced for food and
pharmaceutical applications and in the adhesive industry. At present
the demand for latex crepe rubber is growing while the price paid
for the same is extremely attractive as predicted by the RRI in
year 2001. Owing to the
very high labour scarcity and cost in Malaysia and also due to the
very large and fast growing rubber industry in Malaysia, in 1969
they reluctantly decided to do away with the manufacture of this
labour intensive grade of NR; even though the price paid for it
was very attractive. In 1969 Malaysia
launched the "Technically Specified Block Rubber" (TSR)
scheme. TSR rubber is made by a semi-automatic process. Hence the
labour requirement for manufacture is minimal and vast quantities
can be processed in factories. Even the time taken for the manufacture
of TSR grades of rubber is only about 5-6 hours compared to nearly
four days or more taken for crepe and RSS manufacture. In TSR producing
countries fuel and electricity is available at cheap rates and hence
that is another attraction for them to increase TSR production deviating
from crepe production while in Sri Lanka where power and fuel are
costly and the labour is still cheap compared to south East Asian
countries, the preferred forms of NR are latex crepe and sheet rubber. The availability
of skilled factory personnel and estate managers who are able to
continue with the production of this premium grade of rubber is
another factor in favour of continued crepe manufacture Sri Lanka. However, Sri
Lanka has miserably failed since 1969 to occupy the vacuum created
in crepe manufacture by Malaysia when the NR production in the country
was over 125,000 MT. It also did not promote this superior grade
of rubber in the world market until about the mid-1980s when RRI
jointly with the Planters' Association and the Colombo Rubber Traders'
Association started campaigning to regain the market for these rubbers
which faced a sharp decline in price and demand. But so far there
has been only a little success in that process compared to the situation
before 1969. Since 1969, there have been many instances where latex
crepe No. 1 was sold below the RSS No.1 price. Poor or no
feed-back from the consumers masked by the middlemen was another
reason for this declining demand and price for the commodity. Representations
made by the Ministry, the Colombo Rubber Traders' Association and
the Planters' Association did not improve the situation vastly.
The market for this rubber in the adhesive industry has been lost
completely. In the TSR
scheme launched in 1969 there was a grade called TSR EQ which is
much whiter in colour than the other grades of TSR rubber, introduced
purely to compete with crepe. But high foreign matter content up
to 0.05 percent by weight was the main snag for this grade of rubber
to be used in food and pharmaceutical products. Hence, in 1989 the
TSR scheme in S.E. Asian countries was revised and, instead of EQ,
a new grade called TSR L was introduced with the foreign matter
(dirt) content below 0.03 percent, while the colour specification
was more lenient than in the EQ grade. This grade, owing to its
consistency in quality almost fully grabbed the adhesive industry
market, replacing crepe. The main factor
that influenced the adhesive/adhesive tape industry at that time
was the inconsistency in quality of the latex crepe No.1X and No.
1 grades which are graded purely visually. There were two types
of crepe rubber qualifying to be grades as No. 1. a.Fractioned
and bleached (FB) rubber. b.Unfractioned
and bleached rubber (UFB) FB grade being
a grade produced by removing a high percentage of non-rubber present
in NR latex is almost completely soluble in solvents while it is
free from dirt matter or toxic chemicals. Hence, FB crepe is the
grade suitable for the adhesive industry. UFB grade, on the other
hand, does not completely dissolve in solvents to make adhesives
and produces a gel which clogs transportation channels of the rubber
solution. However, as the visual grade does not indicate this drawback,
the consumers who repeatedly face these problems ultimately gave
up the use of this commodity in the adhesive industry. Mould contamination
of lace crepe (the thinnest form of crepe rubber designed to ease
drying) caused by incompletely dried rubber and the rubber stored
in humid atmosphere was also a major drawback of crepe rubber. In
the case of sole crepe, mainly the good quality dry sole crepe sheets
packed in wet Albesia boxes created the mould problem thereby lowering
the demand for sole crepe. However, action
taken by RRI jointly with the PA helped to minimize these complaints
to a great extent. RRI jointly with the PA imposed the following
guidelines: a. latex crepe
IX must be produced out of fraction removed and bleached latex. b. all laces
graded as IX should be dried in a hot air drying tower. c. sole crepe
must be packed only in corrugated cardboard boxes and not in Albesia
boxes containing high moisture levels. These guidelines
helped producers of latex crepe, including sole crepe, to eliminate
most of the problems faced during trade. But when the rubber prices
were down, in order to lower the cost of production, some companies
deviated from these rules and started central processing of rubber
in a large factory by collecting latex from many divisions; some
situated far away. This central
processing caused many problems thereby affecting the reputation
of crepe rubber in a big way. In some of the places where the central
processing was done, there were no adequate milling facilities and
there were instances where the partly milled rubber mats had to
be kept till the next day for milling, thereby offsetting the pure
white colour. In some other places there were no adequate drying
tower facilities and hence the laces were dried in lofts thereby
creating mould problems and even discolouration caused by slow drying.
In some places there was no adequate water supply for processing
huge quantities of rubber collected from several divisions. Since the beginning
of containerisation of crepe rubber, there was another new complaint
for latex crepe rubber called "storage softening". RRI
identified the cause of this defect as "peptization" caused
by the residual bleaching chemical present in the crepe lace which
ultimately softens during transportation in metal containers where
the temperature is higher than the ambient. However, with
the introduction of the water soluble bleaching agent by the RRI,
the problem was completely eliminated, because the ionic water soluble
bleaching agent does not adhere to non-polar rubber chains to cause
peptization during transit under temperate conditions. Even after
these improvements introduced during processing of crepe rubber
some consumers of crepe rubber wanted to standardize latex crepe
too, giving specifications like such as TSR. But latex crepe, being
a very high quality premium grade of rubber produced for specific
end-users, should not be graded as ordinary TSR to enjoy the price
of TSR grades with a small premium. Instead, RRI jointly with SLSI,
PA, producers, brokers and shippers of rubber formulated a scheme
specifying some special and important parameters of crepe rubber
according to the need of the specific end-users. The efforts taken
by The Competitiveness Initiative with the support from Kipp Tobin
should be appreciated at this juncture. The manufacturers of latex crepe should also cooperate with the RRI and the Rubber Cluster to achieve the objective of regaining the demand we had for latex crepe and sole crepe before 1969. Banks
bound to fail in risky business What were
the issues you addressed in your lectures to the Central Bank officials? In my lectures
at the Banking Studies Division of Central Bank, I had lectures
on the new capital adequacy requirements; that is the Basel Capital
Accord, with which the central banks and commercial banks all around
the world would have to comply by 2006. There was Basel
I in 1988, which had problems in implementation. Under this new
accord, Basel II, banks would have to adjust their capital base.
This would apply to banks worldwide and would give supervisors and
markets more power. What are
your views on the changing role of regulators? The public tends
to think de-regulation means removing the regulator? De- regulation
means getting rid of the direct control on what financial intermediaries
can do and what assets they can hold. Deregulation around the world
has led to increase competition and greater risk. Enhanced regulation
requires the financial regulator to be more aware of the vulnerability
of the individual banks and try and restrain banks from taking undesirable
risky positions. Regulators cannot prevent banks from making bad
judgements. Some banks will always make some bad judgements and
some banks will always fail. The role of the Central Bank is to
be aware of the financial position of banks and impose greater constraints
on the banks that are excessively risky. How do you
regard the professionalism of the regulating authorities especially
the Central Bank? The level of
professionalism is fairly good. With increased regulation, central
banks need a great deal of professional ability and a variety of
professional abilities. They need professionals in economic, accounting,
business and law. How do you
assess the banking collapse Sri Lanka just experienced? I only know
what I've read in the papers. Banks fail in every country. The Pramuka
collapse is a relatively small collapse compared to banking collapses
in Britain, like the Fringe Bank crisis of 1973 and 1974, and the
BCCI bank collapse. There have been banking collapses in the US,
France and various other countries. There are very few countries,
which have not had an individual bank collapsing. Banks are bound
to fail from time to time as they are in a risky business. They
will make bad judgements. The important thing is that the Central
Bank should ensure the whole financial system remains stable. In
a competitive system banks will fail occasionally, just like in
any other business. Business is always risky. If you don't take
risks business wouldn't make profits. Central banks
perform on-site and off-site supervision of banks. Can the Central
Bank advice a bank's board of management of the decisions to be
made? A financial
regulator is in a difficult position. The Central Bank cannot warn
the public. If they do so the whole financial system could collapse.
The only think the financial regulator could do is to give a private
internal warning. In the US, the Federal Depositors Insurance Corporations
Act specifies a ladder of responsibility to the financial regulator
as a commercial bank's capital base erodes. Requirements depend
on the capital adequacy requirements and capital base of the bank.
Understanding the capital base depends on getting very accurate
data. This then raises the need for good accounting. It is important
to ensure that accountants are sufficiently independent and the
bank has good corporate governance. It is said
that for the financial regulator to help a commercial bank in difficulty
the commercial bank needs to possess government securities? The Central
Bank is like any other bank. It has its own deposits and loans.
When a commercial bank possesses government securities the Central
Bank can lend with a degree of safety and help the bank in its short-term
liquidity needs without exposing its own position to considerable
risk. Liquid assets
provide income and it assures the commercial bank that, when needed,
it can get money from the government by using the securities. Central
banks should make such loans when necessary because the collateral
is good. By making loans to commercial banks without security central
banks can put at risk their own money as well as that of the taxpayers.
There may be cases where this is desirable. But to do so central
banks needs more information, and then perform full on-site inspection
and assess the financial position. This process is time consuming.
Therefore by having liquid assets central banks could help commercial
banks in difficulty during a short period of time. Today there
are institutions offering deposits at very high interest rates.
The Central Bank has come under much criticism for this situation.
Is it justifiable? If institutions
are offering such high interest rates they are either engaged in
a much riskier business or that is an indication that its an illegal
scam where there is no repayment of the deposits. The public cannot
blame the financial regulators. They ought to know better and be
well informed. If a financial regulator informs the public it leads
to moral hazards. There is criticism
about the mismatch between loans and deposits of commercial banks
- that is lending long term with short-term deposits. Can central
banks control this? This is risk
taking. This is not specific to Sri Lanka. It is common all over
the world. What the regulator could do is to ensure that risks are
not excessive and banks are within the required capital base requirements.
The Basel Accord requires the capital base of a commercial bank
to be well over the risk of its overall asset portfolio. In Sri Lanka,
the Central bank has cut interest rates, but commercial banks have
not yet reduced their lending rates? This is a problem
of competition. Lending rates and margins depend on the competition.
Competition ought to ensure banks don't charge excessive monopolistic
rates and fees. But we've also got to remember when comparing the
interest rates on deposits and loans, there is a risk premium associated
with the loans. During the
last year, most commercial banks here made good profits. How do
you assess this situation? In Sri Lanka,
with a bank collapse if other banks are doing well it is a sign
that the banks are stable and well financed with high capital. The
second point is how would one assess whether the profits are excessive. |
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