Financial Times

Tea auction stands test of time
By a Staff Correspondent
Hammer in one hand, pen in the other, the tea broker calls out bids and offers with amazing speed, hardly pausing for breath, disposing of his catalogue at an astonishing five lots a minute. Lots sold at the Colombo auction could vary from 500 kg to 2,000 kg of tea, on a general basis.

A BOP from Loinorn estate is offered at Rs. 160 a kilo but the first bid is only Rs. 130. Then bids came in fast and furious and the price rises rapidly - Rs. 140, Rs. 150, Rs. 154, Rs. 158, Rs. 160, and ultimately the lot is sold for Rs. 170 a kilo.
It took less than 30 seconds for the hammer to fall.

"Any bids on this?" the broker calls out on another lot. "Give me a bid on this." He inquires again hopefully: "No bids at all?" Finally the tea is sold at Rs. 105 having been introduced at Rs. 110.

A Great Western BOP is offered at Rs. 160 a kilo. When there are no bids the broker calls out: "Alright, fifty-eight!" A buyer replies: "Fifty-five!" The hammer comes down when another bids Rs. 158.

Bidding is in one-rupee slabs up to Rs. 100. Bidding slabs increase to two rupees above Rs. 100 and five rupees over Rs. 250. Some lots get sold fast with just one or two offers while others are withdrawn for lack of interest and catalogued at a subsequent sale.

"It's a very weak market today," says Lallith Ramanayake, former chairman of the Colombo Brokers' Association and managing director of John Keells Ltd. "There's not much bidding. One reason is that quality is not up there. These are the heavy cropping months."

The main sale - of ex-estate, mostly high grown teas - takes place in the upper floor amphitheatre of the Ceylon Chamber of Commerce on Wednesday. A board in front of the podium lists the names of the brokers in the order of sale. It draws around 150 buyers.

The dust auction - another big sale that includes buyers from the so-called Pettah market - is held later in the morning in the Chamber's ground floor auditorium. These teas, which give strong liquors or 'kahata', are sold mainly in the domestic market. This auction can get even more raucous with up to 200 buyers present and 15-20 buyers sometimes bidding for the same lot. The off-grades are sold in another room where the bidding can be equally furious.

The island has a bewildering variety of teas to suit different tastes and palates. The high grown teas are broadly divided into the Western quality season and the Uva quality season, from estates on the western and eastern slopes and valleys of the central massif, respectively, with the dry winds blown over the mountains at the tail end of the twin monsoons helping to produce their special character.

Nuwara Eliya tea, at the centre and the highest elevation, has its own distinct character - with a light liquor and subtle flowery taste that is best appreciated by drinking it without milk. Nuwara Eliya teas, known as the champagne of Ceylon teas, are preferred by Japanese buyers and less by those in the UK or South Africa who go for more coloury teas.

Then there are the low growns, which make up more than half the crop, and are preferred by Arab consumers as well as those in the former Soviet Union. The low grown auction is on Tuesday.

The rapid-fire bids and offers sound like some incomprehensible manthram to the layman and leaves the uninitiated visitor gaping with amazement. Foreign consultants, brought in to study the auction with the aim of improving it, have described it as the most efficient, streamlined and transparent system available for the sale of commodities.

The open outcry system at the Colombo auction, that has served the Ceylon tea industry since the 19th century, is so efficient that the software companies asked to automate the sale have up to now not been able to replicate its atmosphere, efficiency, and some other important features.

The project, initiated by the Colombo Tea Traders' Association, which runs the auction, has now been temporarily shelved for a variety reasons. Automation was considered with the aim of speeding up the auction, started in 1883, and ensuring that all teas get the best exposure.

This was an effort to cope with the increasing volumes coming to the auction as production increased year-on-year. Nearly 300 million kilos of tea are traded annually through the auction and the number of lots on offer each week now exceeds 8,000.

Volumes have got so large that auctions for the main grades, off-grades and dust are now held in separate rooms. One of the main reasons the automation project was shelved was because some of the buying members were not geared to participate in an automated tea auction owing to an apparent lack of IT skills and also a lack of sufficient personnel.

"If we automate now a lot of people may be disadvantaged since there are very senior buyers who may not be computer literate," said Mahen Dayananda, chairman of the CTTA.

"Unlike the current auction, it is more difficult for one person to sit in front of a screen for a long period of time - bigger firms can have people replacing each other and their skill levels are much higher since most of them are involved in IT and other IT-based initiatives, on a regular basis."

But some of the smaller organizations have not reached the same level of maturity in IT. "The whole aim of an auction is to get the highest possible price for the teas on offer," said Dayananda. "The only way to achieve that is to get the maximum number of people bidding. So we don't want to disadvantage smaller buyers, kill competition and reduce demand."

There was also a lack of agreement among the software vendors in the project on certain issues, although the technical solution proposed came very close to matching the efficiency of the physical auction. "They hadn't licked it 100 percent but were getting there," said Dayananda. The vendors solved the problem of the speedy disposal of teas by having multiple lots on screen at any one time, almost replicating the efficiency of the open outcry system.

Brokers sell fast to get the bids and it takes years to learn to sell fast. "A good auctioneer can get that much better prices from buyers than a bad one," explained Ramanayake. "You push buyers to the limit on their orders."

In an electronic auction it is difficult to sell fast and the broker does not know how much time to give for bids to be keyed in. A fixed timeframe was tried in the automated auction that was evaluated. "In the physical auction, if there is no interest for a particular lot, the selling broker can sense it and withdraw the tea and immediately go on to the next one," said Ramanayake.

The auctions allow producers to get the best price for their teas as exporters bid up against each other. A crucial aspect of the auction is that all producers - large and small - get an equal hearing. Producers who sell their teas outside the auction face the risk of reduced bidding and big buyers who can dominate.

The system works with clockwork efficiency. It takes three weeks for teas to be sold after manufacture and one week for the producer to get the cheque. Under the bylaws governing the auction, buyers are compelled to pay on the seventh day after the auction so the producer is sure of getting his money on the eighth day.

Brokers distribute about half-a-million samples to exporters around Colombo in a small sale. In a big one, the number of samples distributed goes up to a million - requiring a huge logistical effort.

There is also a heavy flow of information from the estate, to the broker, exporter and overseas buyer - on volumes produced, the weather, which plays such an important role in quality, and quality levels. Overseas buyers can see how the market evolves three weeks ahead and can be prepared.

The auction, and the sampling, are the only parts of the system that remain physical. Everything up to and after the auction is computerized - there's even an SMS service that alerts brokers and buyers about developments at the auction
One of the concerns about automation was that it may not be able to replicate the environment of the open outcry system, which is considered very transparent and healthy.

The body language of the brokers and buyers plays a vital role. Buyers sometimes shout out their bids. At other times a raised hand, a nod or a shake of the head is enough for the broker on the rostrum to know that the buyer is still bidding or has opted out.

"The selling broker is familiar with the voices of buyers - so he knows who is bidding and how high he is likely to go," explained Ramanayake. "Similiarly, from the body language the buyer knows at what level the broker will yield - from the tone of his voice the buyer knows the broker does not want to sell."

Microfinance units urged to handle remittances
MANILA - Microfinance Institutions (MFIs) need to get more involved in the multi-billion dollar business of workers' remittances in the Asia-Pacific region - for their own gain as well as to benefit their mainly low-income customers.

This is advocated by ADB Lead Rural Finance Specialist, Nimal Fernando in the latest issue of ADB's Microfinance Newsletter. Workers' remittances - the portion of overseas workers' earnings sent back to their families in the home country - are a huge and growing business.

According to the some estimates, remittances to Asia and the Pacific amounted to $27 billion in 2002. Of this, $11 billion went to East Asia and the Pacific while $16 billion went to South Asia, where they equalled 2.5% of gross domestic product (GDP). India, the world's largest workers' remittance recipient country, accounted for 62.5% of the inflows to South Asia, while the Philippines accounted for 58% of remittances to East Asia and the Pacific in 2001.

Bangladesh, Pakistan, Philippines, Sri Lanka, and Thailand were also among the top 20 developing country recipients of workers' remittances in 2001. All these figures are underestimates, as remittances are also sent home in unofficial ways. "If MFIs became involved, they could help transfer funds from the overseas worker to his or her family's account at home at a cheaper rate than offered by current systems," says Fernando.

"The MFI could arrange for part of the transferred funds to go into a savings account and it could also, since the family has an account and a history of transactions, provide loans to help families in emergencies or to finance income generating activities."

The arrangement would also benefit MFIs, which rely heavily on interest income that can be volatile. The remittances business would reduce this vulnerability. As in the case of one micro-enterprise bank in Eastern Europe, MFIs could cross-sell their products to clients involved in remittances by offering special deposits, investment and other types of loans to families who receive remittances.

Such expansion of their business can also help MFIs realize the scope of economies and improve efficiency and sustainability and they can pass on efficiency gains to their clients through lower prices on products and services. "More importantly, they improve the value of the institutions to the poor and low-income people," says Fernando. "The economic impact of remittances on low-income and poor households can be improved by encouraging recipients to invest a portion of the inflow in financial assets that provide them safety, reasonable returns, liquidity, and greater capacity to leverage funds."

Also, MFIs can use remittances to leverage more funds in the commercial markets to finance their growing lending operations. This will enable them not only to diversify their funding sources but also increase the breadth and depth of their outreach.

Lack of inspiration retards economic growth
By Dinesh Ranasinghe, University of Colombo (Faculty of Management and Finance)
Our economy has not been doing well compared with developed countries' economies for the past decade. The main reason for our backwardness is poor morale and lack of inspiration among the population.

People in Sri Lanka enjoy an excessive number of holidays which has a negative impact on the country's economy. It is one of the few countries which enjoys two New Year seasons a year in addition to other holidays.

Strikes and picketing is also increasing. Most of the strikes have been in government or semi-government organizations with employees demanding an increase in pay.

Is it not justifiable to link these demands to an increase of productivity? They should perform effectively and efficiently for a reasonable return. Otherwise it is the country that loses.

Only a small percentage of the population pays taxes to the Inland Revenue as direct taxes. Having all government employees exempted from direct taxation at any given income level is truly unfair because the intention of the policy was to reduce the net salary discrepancy between private and government organizations.
In developed countries, all employees are eligible to be taxed irrespective of the sector that they're working for.

Compared with a developed country, Sri Lankan infrastructure facilities are not up to standard. Nowadays, all sectors (private and government) are influenced by various political forces. Government agencies are more vulnerable to such influences than other sectors.

These factors act as components of a vicious cycle, which are interrelated and interdependent. Eliminating these destructive factors would not be an easy task but the necessity for it is greater. The debt ratio per head is increasing and even a newborn baby is in debt to foreign countries.

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