Sri Lanka should evolve a culture of corporate governance suited for its people and in conformity with its own culture. This was the bottom line of Prof. K.R.S. Murthy's Convocation address at the Postgraduate Institute of Management of the Sri Jayewardenepura University recently.
Prof. Murthy, who is Director of the Indian Institute of Management, Bangalore, surveyed several corporate cultures around the world to disclose widely different patterns of corporate governance. In France it was characterised by a strong leadership which was both pragmatic and personal. The government itself plays an important role in corporate decision making by having a stake of 15 per cent in many of its corporations. Japanese corporate governance is based on trust, while in Germany a single owner may have over 50 per cent of shareholding, unlike in the United States where single ownership is around 5 per cent. German corporate governance, he explained, had a strong tenant of managing property in the public interest and for the cummunity. He quoted instances where German corporations have earmarked funds to help the community.
He stressed the importance of developing an effective corporate governance which combines dynamism with accountability. Restrictions and regulations deemed at ensuring accountability can sometimes deter dynamism. On the other hand, dynamism without accountability could be corrupt. In India, he pointed out, there was a suspicion of the behaviour of corporate enterprise. Consequently, regulations abound and administrative controls are a plenty. Developing countries emerging out of long periods of Statism towards capitalist enterprise must couple business dynamism and innovation with ethnical and responsible behaviour.
Prof. Murthy pointed out that short-termism often guided corporate managers who competed with each other to show profits. How true is this in Sri Lanka? Corporate management in many countries also tended to increase its own perks and salaries while justifying down-sizing of its work force as essential for corporate growth. Disbursed shareholding often denied a watchful eye on corporate entities. Where unit trusts and other corporate entities held shares it had the benefit of closer examination of accounts and corporate behaviour. Impliedly such large ownership is conducive to corporate accountability.
Sometime ago Mick Moore of the Institute of Development Studies of the University of Sussex said that Sri Lanka had moved away from the debate as to whether it should be socialist or capitalist. The issue was "What form of capitalism?" Prof. Murthy's comprehensive survey of several countries indicated a wide divergence in corporate governance. What requires to be evolved is a form of capitalism most suited to the needs of the country. Institutes and corporate entities should examine these various forms and determine the type of corporate culture which would best suit our conditions taking into account the need for dynamism and performance, accountability and public interest.
Activity in the international project finance market is being driven to new heights as a result of deregulation, privatisation and rapid economic growth in the developing world, states Richard Lapper in an article in the London Financial Times. Banks are lending money for an increasing range of power, transport and infrastructure projects, he says. Moreover, these loans are made on a so-called non-recourse basis "which means that in the event of default (the banks) have no claims other than on the assets of the project itself".
Lapper says that project developers and sponsors are turning from syndicated loans and export finance facilities to a much broader range of local and international banking and capital markets for financing. He quotes Geoff Haley, partner and head of infrastructure at the London law firm, S.J. Berwin as saying "in the past three years the scale and number of infrastructure projects worldwide have doubled each year".
According to Lapper, the main driving force for these developments has come from Asia, "where very rapid economic growth is putting the existing power and transport infrastructure under intense strain". With competition compressing margins on conventional lending business, he says, an increasing number of banks has been attracted by the larger margins afforded by project financing, and further, developers are turning to the bond markets to raise funds.
The writer cites Standard and Poor's the international credit rating agency, which says that the portfolio of rated debt raised to fund projects has grown from $11.5 bn. in July 1995 to $16 bn. in June 1996 with most of the growth occurring in Asia and Latin America.
Lapper states that investors have also backed a number of funds set up to provide equity financing for selected projects. Further, an important related change, he says, is that the public sector, in the form of the government-owned export credit agencies and the multi-lateral banks, have begun to play a more flexible role. Over the past two to three years export credit agencies have begun to provide backing to non-recourse financed projects, often through the provision of political risk insurance, and the mulitilaterals, particularly the World Bank and the International Finance Corporation frequently lend to, or invest in, projects alongside the private groups. Lapper says that with more capital available developers are able to consider much bigger financings.
The size of individual projects, says Lapper, has been steadily rising with power, mining and transport projects frequently exceeding $1 bn. According to Lapper, the broader range of financing means that risk is spread more widely, but he says, project sponsors and their backers argue that they are also becoming better at managing risks. It is pointed out that the private sector is now more capable of assessing and identifying risks, while, in the past, lot of these risks were hidden in the public sector. According to Peter Gray, project partner at Linklaters and Paine, another London law firm who is quoted by Lapper "We are finding that more and more of our work involves identifying risks and advising on their allocation rather than on producing plain vanilla documentation."
On the matter of risks, Lapper says that although rates on project finance loans are falling and conditions are becoming easier for some borrowers, risks are growing in some areas. He cites a recent report of Standard and Poor's which warned that the declining cost of power, as a result of electricity deregulation and technological change, is testing the commercial viability of some projects.
Sovereign risks, says Lapper,"are as big as ever". He cites the example of the Dhabol power project in India which was halted by the government of Maharashtra well into the first phase of construction. Even in developed markets, he says, regulatory or legal changes can present operators and banks with problems.
In a related article, published in the London Financial Times, Conner Middelman discusses capital market borrowing as a way of raising project finance. He says that bond issues and private placements are becoming increasingly popular as a means of raising project finance. Yet, he says, “the much heralded issuance boom has not materialised and bonds make up just a fraction of overall project financing". The reason for this, he says is partly that many investors lack experience with these types of investments and also because there are some limitations inherent in capital market borrowing.
Middelman says that there are some significant advantages to capital market financing. First bond issues can have maturities of up to thirty years (depending on location and contractual structure) whereas banks tend to lend for periods only upto 15 to 18 years. Many institutional investors, he says, such as life insurance companies or pension funds require instruments that match their long term liabilities. He adds that many institutions have been showing interest in such instruments as yields on corporate and sovereign debt have declined sharply over the last 18 months.
An another advantage, says Middelman, is that bond financing "have more streamlined covenant packages that give greater room for manoeuvre to the borrower than banks loans". A disadvantage, says Middelman, is that, should any problem arise during the life of the project or the borrower needs extra money, banks may be more accommodating than bond investors. Middelman quotes Rob Halliday, director of project advisory at NatWest Markets, as saying, "being much closer to the project, banks tend to be both flexible and supportive because they know the only way they can sort out the problem is to help the borrower - it's an active partnership".
There are, says Middelman, some other disadvantages to bond finance, In projects with long construction periods, contractors do not need all the money up front. Moreover markets can be unpredictable and "borrowing windows can slam shut very quickly often due to shifts in sentiment rather than any reason related to the project." Nevertheless, says Middelman, many bankers feel that over the long term the attractions of bond financing will increasingly assert themselves.
The Workers' Charter, if implemented, could seriously affect the export garment sector, warned a leading garment industrialist last week.
Sri Lanka Chamber of Garment Exporters President Cassian Fernando, speaking at the Chamber's fourth AGM said a major problem facing the local garment industry was its relatively low productivity.
At present, the country's garment sector exports only 452 million units of garments annually though we have 265,000 employees working full time in the industry. This means that on an average, a worker produces around 1706 pieces of garments per year, or about 6.4 pieces per day.
"Despite poor productivity, it is only our piece-rate system of wages that acts as an incentive for workers to produce more."
"However, if the Workers' Charter comes into operation and this system is abolished, the low productivity rate we have at present will further decline due to the lack of such an incentive", he warned.
Mr. Fernando further said the country's unrealistic foreign exchange rate was a major concern to garment exporters.
"The rupee has been devalued vis-a-vis the US Dollar at a rate far less than in other SAARC countries. This means that neighbouring states competing with us for foreign markets would stand a better chance in securing buyers for their products. If we are to survive in a quota-free world which is set to become a reality within the next seven years we will have to make some serious adjustments with regard to our exchange rate policy", he noted.
Mr. Fernando said currently there existed a number of anomalies in the export garment trade. He noted that whereas a unit of garment fetched US$ 1.7 in 1976, by 1995, this had increased to only US $ 3.5. He noted that a similar garment would have fetched around 5.5 US Dollars if purchased in a country like Singapore.
"To this day, the garment industry remains the country's highest gross foreign exchange earner. Small and medium scale garment manufacturers comprise a significant proportion of the 732 garment exporters presently in existence and employ about 80,000 persons", said Mr. Fernando, whose chamber represents 156 non-BOI sector garment exporters.
"However, despite the fact that we make a significant contribution to the country's economic development, we still get far less facilities and far less concessions than the BOI sector", he observed.
Mr. Fernando added that some other problems facing local manufacturers were the high rate of interest on loans, which were however necessary to upgrade the existing outdated machinery used by garment industrialists and the lack of a viable marketing strategy with regard to export markets.
Some thrive others decline
The stock market is down and most corporate results are poor, but there are some industries that still thrive - wall tiles and floor tiles, for instance.
The secret is not in the local demand for the product, but in higher export orders.
Anyway, the industry is optimistic and that is why one leading manufacturer ordered a fifty percent increase in production for 1997.
Abolish monopoly
The common man was shell-shocked by the price hikes in gas and now, the State's attorneys are poring over the agreement to see whether any clause was violated.
But surprise, surprise, most of those in the corridors of power are also now in favour of abolishing the present monopoly status...
Gold loses colour
They say that all that glitters is not gold, but for those who make money when it goes up in smoke, all that is gold does not glitter.
Their product launched with much fanfare has not yielded expected results, largely because tax-free smuggled items are still freely available.
So, now its try again, with another promotional campaign.
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