The Sunday TimesBusiness

27th October 1996




Fears on Telecom privatisation after Shell move

In the wake of price rises by monopoly gas distributor Shell Gas Lanka, calls are being made to break the monopoly of Sri Lanka Telecom on international voice traffic before it is handed over to the private sector.

There is also concern that the Telecommunications Authority as it now stands, may not be able to effectively and independently regulate the telecom industry after it is privatized.

A former Director General of Telecommunications has said that the Telecommunication Authority of Sri Lanka (TASL) should be given sufficient powers to act as an independent regulator as quickly as possible.

A pioneer venture capitalist whose company had pumped in millions into several projects in the telecommunications sector also warned that the sector was facing a crisis.

"The environment continues to be unpredictable and poorly regulated", Capital Development and Investment Company (CDIC) Chief Tennyson Rodrigo said.

Existing private telecom service operators who were providing a variety of services, were striving to stabilise their positions.

"Some of the foreign investors who have majority interest in these projects are now contemplating how they could exit from these investments", Mr. Rodrigo said.

Experts also say that as in other countries Sri Lanka Telecom should give bulk discount to large service providers or come into revenue sharing agreements as service providers are responsible for the origination of a large volume of telephone traffic.

Experts say that according to International Telecommunication Union data, revenue per telephone line in Sri Lanka in 1994 at US $ 957 is higher than Thailand (US $ 598) and Malaysia (US $ 741). In 1995 this is said to have climbed to US $ 1050. Average revenue per payphone in 1995 is said to have been a phenomenal US $ 4,700.

Meanwhile veteran trade unionist, Batty Weerakoon warned last week that the make-up of the telecom regulatory body needed re-thinking.

He said members of the body would be appointed by the Minister in charge, there was no provision for representatives from other important sectors such as information, science and technology and education to be included.

"With the interest of all these sectors being affected, there is absolute zero regard being paid to these problems", he said.

This was especially important he said because foreign interests would be running Sri Lanka Telecom after privatization.

Shell gas deal under cloud

By Asantha Sirimanne

With Shell Gas Lanka raising the price of gas twice in a year, there is mounting criticism of the sale agreement, which granted special concessions such as a monopoly to Shell in order to get a high price for its shares.

Clause 9 of the sale agreement provided that the price of domestic LP gas cylinders (13kg) shall not be increased by more than 10 per cent per calendar year unless international gas prices went up substantially or any of several factors affecting LP gas cost went up according to a pre-determined formula.

"Except as provided otherwise below the LPG tariff shall not be increased by more than ten per cent (10%) in any calendar year compared to the LPG price for residential use at September 30 1995. However to the extent that the company has elected not to increase the LPG tariff in any calendar year (including 1995) when it was entitled to do so, it may to that extent, increase the LPG tariff in the subsequent calendar years by more than 10 per cent", the agreement said.

Critics say this enables the company to raise tariffs by 10 per cent each year, whether or not there are any real cost increases in raw materials or in operating costs.

Last week opposition MP Mahinda Samarasinghe described the agreement as a sell out and called for the agreement to be re-negotiated.

Another disadvantageous clause pointed out by critics relates to terminal company Shell Terminal Lanka (Pvt) Ltd., which is expected to be used for transporting gas from ships to Shell Gas Lanka facilities.

The pricing formula for gas also includes the terminal throughput charge, which can be increased when project costs rise. The cost of the terminal was originally estimated to US $ 33 mn.

The agreement provided the terminal throughput charge to be adjusted by US $ 1.10 for every US $ 1mn increase in project costs.

Critics say the project is now estimated to cost around US $ 50mn the agreement provides and no incentive for Shell to keep project costs down.

Though Clause 9.2 of the agreement provided that the company shall be subjected to directions of the Regulator to determine the basis of price and that the Regulator should be informed of an adjustment of price 14 days before it come into effect, the Regulator has still not been set up.

Sources said the PERC had taken upon itself the role of the regulator but found itself in a difficult position as it was one of the parties to the agreement in the first place.

Analysts however say there was a cross subsidy involved in the pricing of LP gas where the 13 kg domestic cylinder was subsidized by revenue from industrial users of LP gas.

In 1995 for example gas prices had been deliberately restrained under government ownership, analysts say, forcing the subsequent purchaser to increase the price and thereby get the blame.

However others have pointed out that the high purchase price itself would cause purchasers to raise the prices of goods in order to recover their investment, and a compromise pricing mechanism may be needed to ensure the continuation of the privatization programme and minimising public opposition.

In addition, observers say, free market conditions should not only be allowed to operate but should be actively promoted.

WTO assures a market share in popular apparel

By Ruwanthi Ratnayake

"The establishment of the World Trade Organisation and the Textile Accord in January 1995, will give quota dependent countries like Sri Lanka the benefit of an assured market share in popular apparel during a transition period of ten years. During this period, Sri Lankan exports can restructure themselves to face the challenges of a quota free era by the year 2005," Apparel Exporters Association former chairman Lyn Fernando said, at a recent seminar on GATT/WTO and its implications on Sri Lanka.

The international trade in textiles and garments has for over two decades been regulated by the multi-fibre agreement (MFA) and Sri Lanka's success in garment exports to a great extent has been as a result of having a guaranteed market access due to the restraints imposed by the MFA.

Sri Lanka's major export markets have been the United States with over 70 percent in the mid seventies down to 60 percent more recently, and the European Union which accounts for 34 percent of Sri Lanka's total garment exports, while the exports to other countries have been negligible, Mr. Fernando said.

According to him, the percentage of exports of quota categories of garments to the United States have been over 94 percent, while the total non quota exports of apparel to the United States have increased from 2.5 percent in 1990 to 22 percent in 1995. The non quota garments to the EEC amount to over 80 percent." We have a fairly large number of non quota categories of garments that we could export to the European Union as compared to our competitor countries," he said, adding that Sri Lanka was one of the few Asian countries that supported the U.S.A. and the European Union for a longer phase out of quotas, during negotiations that led to the WTO and the Textile Accord. This was in order to enable Sri Lanka to restructure its garment export industry, during the transition period of ten years.

The effects of the WTO and the Textile Accord for Sri Lanka, are that during the transition period, a quota dependent country such as Sri Lanka will benefit, by having an assured market share through the quota system. However, countries such as India, Pakistan, Hong Kong etc, wanted a speed integration because they were certain that with the removal of the quota system, they could increase their textile and clothing exports. As a result of liberalization, these countries will be in a position to have a greater share of the trade, because they have well developed textile manufacturing bases, better developed marketing strategies, their own brand names etc. Hence, these countries will have a greater advantage over countries like Sri Lanka who are quota dependent.

Further, Sri Lanka faces many other constraints. Firstly in comparison to the quotas of competitors, Sri Lanka has a much smaller amount and the percentage increase in quotas would be much smaller compared to the percentage increase in countries such as Bangladesh China and Hong Kong. The increase in quotas could be even greater than the increase in demand, Mr. Fernando said, adding that countries such as Bangladesh which is classified as least developed country enjoys duty free status in the European Union, while Sri Lanka has a 14 1/2 percent duty on exports. In addition, Sri Lanka also has a threat from countries such as Vietnam, Cambodia and Laos where the wage rates are much lower and the productivity higher than Sri Lanka. The other disadvantage is the long lead times where it takes a minimum 90- 120 days for a Sri Lankan to import raw materials and manufacture. Buying seasons have changed from 2-4 seasons a year to 6-8 seasons a year. This means that new styles are being introduced frequently, Mr. Fernando said.

When considering the opportunities for Sri Lankan garment manufacturers, Mr. Fernando said the developed countries account for almost 80 percent of the trade in garments and that they are likely to experience more or less static growth figures. In the developing countries especially in the Asia Pacific region there would be an increase in purchase of garments, in proportion to increase in income levels. But the regional grouping that Sri Lanka belongs to will have the largest population and the lowest income levels, unlike in the ASEAN bloc mentioned earlier, he said.

Mr. Fernando feels that it is necessary for Sri Lanka to develop a quick response system and respond to market demand promptly. In order to achieve this, over the years the country has encouraged textile mills to be located in Sri Lanka, but since the textile industry is highly capital intensive, requiring few workers, it would be impossible for the country to make all the fabrics required by the garment industry, with new varieties of fabric coming into the market every day. Further in order to reduce lead times firms should be encouraged to import grey fabrics for processing, dyeing and printing, locally. In addition, a total duty free trade in textiles is necessary, he said. It would enable a Sri Lankan garment manufacturer to prepare a range of samples with the latest fabrics and offer them to foreign buyers. Hence, supplying at short notice would give Sri Lanka a competitive edge with countries like Korea and Hong Kong who focus on product specialization in addition to quality and speed of delivery.

The Uruguay Round Agreement on Agriculture (URAA) marks a turning point in the regulation of international trade in agricultural goods. After more than four decades since the inauguration of the GATT, the agricultural sector is now included in the mainstream, GATT/WTO rules, Institute of Policy Studies, Executive Director, Dr. Saman Kelegama said.

According to him, the agricultural sector provides employment to about 40 percent of the labour force, which is the highest in comparison to all other major sectors, with about 65 percent of the country's population depending on agriculture for their livelihood. More than 90 percent of Sri Lanka's tea production, 65 percent of rubber production and 17 percent of coconut production is exported.

Trade reform provisions of the URAA fall under three main categories which include market access, domestic support and export subsidies. However, export subsidy provisions are applicable to developed countries only. In addition, the existing production subisides in Sri Lanka are consistent with WTO domestic support provision without requiring any further policy adjustment, Dr. Kelegama said. Hence, Sri Lanka's commitments to URAA relates only to market access provision. In addition, there is, the Agreement on Trade Related Property Rights, the Agreement on Sanitary and Phytosanitary Measures and the Agreement on Safeguard, Anti-Dumping and Subsidies and Countervailing Measures. However, no notification has yet been made by the government regarding its commitments under the agreement on Trade Related Property Rights and Sanitary and Phytosanitary Measures. Sri Lanka may postpone the implementation to these agreements as a developing country, Dr. Kelegama said.

According to him Sri Lanka's exports will benefit only marginally from market access provided by liberalization in other countries. In the case of tea, one of Sri Lanka's major agricultural exports, it had been relatively free of intervention even prior to the URAA. An FAO projection for world tea trade suggests that the tariff bindings agreed under the URAA would increase world consumption by only 1.4 percent.

In the case of imports, the effect of URAA on the world market prices of rice, sugar, milk powder and other milk products has been estimated to be virtually zero, Dr. Kelegama said. However, major producing countries are predicted to increase world wheat prices by 3.8 percent, between now and 2005, he said adding that" the net direct impact of the Uruguay Round on Sri Lanka's agricultural trade is likely to be negligible and will not have a significant impact on this particular sector. "

Momentum curtailed

Market Focus By Analyst

The renewed momentum at the Colombo Stock Market was curtailed by profit-taking and loss-adjustments by retail-investors with the market stabilizing around ASPI 600-610 levels.

Foreign participation was also evident on certain trading days, with net foreign inflows. Foreign investment was mainly in blue-chip companies with purchases in Hayleys leading the way.

The main reason for the lack of foreign participation in Sri Lanka is the continuous depreciation of the rupee against the major currencies, which will affect dollar value on their Sri Lankan assets. However, the current trend is that the rupee is under pressure due to balance of payment deficit, erosion in reserves and inflationary pressures. All these factors add upto the depreciation/devaluation of the rupee.

On the broader economic-front the passing of the Rehabilitation of Private Enterprises Bill is of significance to foreign/local investors, as this Bill in the wrong-hands could cripple the known capitalistic market friendly economy which we are accustomed to.

The passing of this Bill is a short-sighted approach to a long-term problem of business cycles, same analysts say.

The Goods and Services Tax (GST) will come into effect in January 1997. It is to be seen what impact it will have on the 'CSM'.

Unit trusts are to be worse off if the tax-holiday is not extended. This will provide them with time to adapt to the changes gradually.

The hotel-sector which has been worse off due to the on going war in the north and east could see a revival in the quoted prices of these shares due to the attractive prices at which they are trading at the moment. Certain stocks were trading far below their par-value with potential for growth in earnings evident in a two to four year period.

It is recommended to sell stocks which have appreciated more than 10% within the past three-weeks as profit-taking could dampen the price.

Browns Group has launched an intensive training programme to improve customer service, the company said.

Directors, managers and senior executives have joined the programme, Frontline Customer Service Personnel to improve their knowledge and skills so that they could offer a superior service to the customers.

Mind Your Business

Many interests

It appears that there would be many bidders for a controlling interest of the now state-run bank that deals with mortgages and investments.

From a field of many, a newly established financial institution and a bank that deals with commercial matters are the front-runners, we hear....

Under review

Whatever the pundits may say last week's passage of the Rehabilitation of Public Enterprises Bill through Parliament is already having it's effects.

A South Korean business concern which watched the local developments closely informed their local agents that an earlier decision to set up a manufacturing facility in Sri Lanka would now have to be reviewed....

Something fishy

Though the law may not have been blatently centravened in the sale of a controversial regional plantation company, we have certainly not heard the last about this deal.

Several queries have been raised in Parliament and more are likely to be on the Order Paper.

And, we may even have a Presidential Commission on the matter, if some people have their way.

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