The Sunday TimesBusiness

26th January 1997




Power crisis or not, rates go up

By Shamindra Kulamanage

The proposed 30% electricity tariff hike is still in the balance, with the final decision to be taken by the Power Ministry by early February.

CEB Deputy General Manager (Generation Planning) Shanvindranath Fernando told The Sunday Times Business that a price hike was inevitable as operational costs had increased and commissioning of new plants was adding to costs.

Mr. Fernando countered comments made by Additional Secretary to the Energy Ministry in a national daily, on incurring additional costs with the introduction of additional thermal power.

The news item had stated the Ministry official saying that awarding of the tender for a 115 MW gas turbine plant in...., to have direct results on the proposed increase in tariffs.

Mr. Fernando pointed out that although world fuel prices are on the rise, fuel is heavily subsidised locally and has little effect on tariff increases.

Commenting on the 115 MW gas turbine plant Mr. Fernando said the project was initiated during the height of the power crisis last year.

"The crisis had reached saturation point and the government was willing to back an accelerated plan for one 115 MW gas turbine plant already recommended in the CEB's Generation Planning Report. To claim that the tender was awarded in an unprofessional or short-sighted manner is totally baseless," he said.

"The tender procedure was fully in accordance with all pre-requisites set by the government and was approved by the Cabinet of Ministers," Mr. Fernando added.

A unit of electricity generated by the 115 MW thermal plant is expected to cost Rs 3.70 in contrast to the over Rs. 6 being paid for a unit of hired electricity generated by the Aggreko Company which is under contract to operate a diesel plant of 83 MW up to June next year, Mr. Fernando said. It is the hired electricity that now caused the CEB to recommend a tariff increase which might come as a surcharge, he added.

Meanwhile, a power crisis or power cuts are highly unlikely this year, The Sunday Times Business learns.

More than 43 MW of additional power have been commissioned since last year's crisis and more than 160 MW are expected to be added to the national grid by mid year.

The Generation Planning Branch at the CEB, since 1991, has been annually publishing a Long Term Generation expansion planning report. The report recommends a long term plan of action, the adherence to which would assure the most reliable supply of electricity of the highest possible quality and at the lowest possible cost to the economy, Mr. Fernando pointed out.

Sadly the report does not go beyond the board of directors, while ad-hoc decisions are made by individuals or groups outside the planning functions in the electricity sector, about the type, capacity, location, construction timing and financing mechanism of new projects required to meet the demand for electricity, totally ignoring the impacts of such decisions on the reliability, technical and economic performance of the system.

The last power plant to be commissioned was a 120 MW plant at Samanalawewa in 1992. Though the demand for electricity since then grew at the expected rate of 8-10% annually with no power plants being commissioned, a crisis was inevitable since 1993. However, it was felt only in 1996 when the rainfall dropped to below average levels.

Mr. Fernando admitted that there was a substantial disparity between the domestic and industrial tariff's in the country. "Sri Lanka's domestic tariffs are among the lowest in the world while the industrial tariffs are among the highest in the world: But it should be vice versa. All developed countries and most developing countries including India and China subsidise the Industrial market through the domestic demand. As only 40% of Sri Lankan households are connected to the national grid this would not be a bad proposition, said Mr. Fernando. Subsidised electricity to industrialists would result in the production cost coming down which in turn would benefit the economy at large; instead of the 40% of households that consume electricity. "The government is, however, reluctant to act on this issue obviously fearing public unrest," Mr. Fernando said.

T. Nandakumar, CEB's Chief Engineer (Generation Planning) said: "We have been over optimistic about private BOO/BOT projects: as a matter of fact the Government in 1992 banned all power projects by the CEB and this directive has not been revoked todate. With the onset of the power crisis the CEB has been implementing its own recommendations".

The Mahaweli project, unlike other hydro electrical projects, has irrigation obligations while the operational cost compared to coal plants is also high. The rejection of the Trincomalee coal plant will be felt when electricity tariffs would have to be increased, said Mr. Nandakumar.

The rejection of the upper Kotmale project meant that the country had to forgo a US $ 380 million soft loan and the cost of over Rs.100 m. spent by the CEB on feasibility research for the project. "With the World Bank not supplying loans for power generation and even the Asian Development Bank loans not forthcoming as desired, only the Japanese Government remains as an option for soft loans to finance power projects, as commercial loans are beyond the capabilities of Sri Lanka," Mr. Nandakumar said.

Local fabric gets dressing down

A leading exporter recently was critically of the inferior quality of locally made, fabric and the pre-shipment inspection scheme in operation.

Sri Lanka Apparel Exporters Association Chairman Ashroff Omar, speaking at the Association's 14th AGM, said local textile manufacturers have very conveniently taken up the position that their only problem is the leakage of fabrics meant for export into the local market.

"If that is the case, why is it that even the government imports fabrics for very basic commodities such as school uniforms and army uniforms?", he asked.

Mr. Omar said that the Association has proposed that textiles should be allowed into the country duty-free, so that both small and large-scale manufacturers could easily utilize them sans any tedious clearance procedure.

"Our proposal is not to kill the local textile industry. On the contrary, we want the government to augment the textile industry by offering them a 'conversion package' to help them give up manufacturing sub-standard fabrics and start making world class products", he said.

Mr. Omar further expressed satisfaction that the pre-shipment inspection scheme had been shelved.

He observed that in Pakistan, the PSI scheme has been an unmitigated disaster and that the country's entrepreneurs were now pushing their government to scrap the scheme.

He noted that in one instance, the Pakistani customs had filed action against one of the PSI companies for colluding with smugglers in bringing underinvoiced goods.

He added that the situation was such that today the customs have taken to investigating the PSI companies.

As for the performance of the apparel export industry last year, he said that in spite of the power crisis, exports have grown by 4 percent as at the end of November 1996.

"Our exports to the United States last year grew by 7 percent, while declines were registered by Korea, Hong Kong, Taiwan, Bangladesh and Pakistan", he said.

However, Mr. Omar said that countries such as India and Indonesia have registered a significant growth during the past year, showing that there was ample opportunity in the market for the expansion of the export apparel industry.

Vanik ready to act on Asia offer

The management of Vanik Incorporation has decided to act on the latest offer made by Asia Capital to purchase the company.

Vanik management hopes that this move will stem the flow of offers from Asia that are said to be at least partially aimed at disrupting a take-over of Forbes by Vanik.

"Since we have full confidence in our shareholders we have decided to allow the process to go ahead and let shareholders decide once and for all whether to accept or reject the offer," Vanik President Justin Meegoda said.

He said the move was made despite being advised by counsel that the offer could still be rejected due to legal defects.

Vanik believes that it has sufficient shareholder backing to prevent a change of its articles which are designed to restrict the registration of more that 10 per cent of equity with one shareholder.

Changing articles, Vanik says, requires 75 per cent support while Asia says it only requires the passing of an ordinary resolution. So far nearly 40 per cent of Vanik shareholders are said to have expressed written support for preserving the present status quo.

Vanik said it would inform its 15,000 odd shareholders Friday regarding the offer. Asia Capital then has 28 days to send a detailed tender document to shareholders of Vanik.

Vanik in turn would make it's observations and provide an independent advisory report to shareholders within 14 days of the detailed offer from Asia Capital.

"We will probably ask our auditors to provide an independent view," Mr Meegoda said.

Focus on consumer protection

By Ruwanthi Ratnayake

With government and private sector institutions placing greater emphasis on improving the quality of life of the people, consumer protection is receiving much attention, Leel Gunasekera, President of the Federation of Consumer Protection Societies has said.

Speaking on 'Consumer Protection and New Dimensions' at a seminar organised by the Society for International Development, Mr. Gunasekera said:

"The Federation of Consumer Associations has to be an effective networking organisation reaching the grassroot levels of our society. The common man as well as other sectors of society should be able to express their views on consumer affairs, with regard to price, quality and quantitative aspects of their needs."

According to a study there are about 4,000 voluntary consumer associations in Sri Lanka. The Federation of Consumer Associations of Sri Lanka was formed in November 1996 to bring together all the voluntary consumer associations. This was formed with the initiatives of the Ministry of Trade, Commerce and Food, Department of Internal Trade and the Fair Trading Commission, Mr. Gunasekera said.

Speaking on the role of state agencies in consumer protection, Trade Ministry Secretary, N. Weragoda said after 1977 consumer protection was mainly taken care of by two organisations - the Department of Internal Trade and the Fair Trading Commission.

The Department of Internal Trade Administered the Consumer Protection Act, Price Control Act and Weights and Measures Act, while the Fair Trading Commission administered the Fair Trading Commission Act.

After a study done in 1993 on Consumer Protection and Fair Trading in Sri Lanka, a recommendation was made that the Department of Internal Trade and the Fair Trading Commission would be more effective as an amalgamated body, known as the Commission on Consumer Affairs and Fair Trading. According to Mr. Weragoda, a Draft Bill has already been prepared for this purpose.

Further, an Act to revise and consolidate the law relating to weights and measures has been made operative under the Department of Measurement Units, Standards and Services.

"To make the most of these institutions, society must be made aware of the provisions that are in these Acts. The message must be taken to rural areas where people are ignorant of these acts," Mr. Weragoda said.

At present, the Society for International Development has decided to put out a leaflet for consumer awareness. Hence, the consumers may be able to take an interest in their benefits and get the best use of these institutions, he said.

Market focus

By Analyst

With foreign and retail investors cashing in on the recent gains, the CSM ASPI index was seen to be stabilizing at ASPI 620-630 levels. Foreign investors were mainly on the selling side, with net sales throughout the week. Local institutional activity was also prevalent with noticeable investments in Dipped Products.

Asia Capital vs Vanik tussle for control of Forbes resumed with much gusto for the second round of the corporate take-over battle; which in all probability would fail as the take-over offer for 90% of the Vanik is improbable at the offer price of one Acap + Rs. 8.00.

The take over offer seems to be a strategy used by Asia Capital to stall, Vanik bidding successfully for the controlling stake of Forbes Ceylon, which is the most cash rich company quoted in the CSM.

Vanik to conclude the purchase of Forbes, would have to prove ACAP's offer is non-sensical and only an attempt to stop Vanik acquiring Forbes.

In highly original circumstances such as the above scenarios, if there had been an accepted voluntary code of conduct with a panel of arbitrators the question of going to court wouldn't have arisen.

Privatization of state enterprises is likely to go ahead with some changes and it is expected that a large number of companies would be raising equity capital through their IPO in the coming months.

The lowering of the statutory requirement by 1% by the Central Bank is expected to release Rs. 10 billion to the banking sector, which may lower interest rates in the coming months, and a decline in T. bill rates will also help investors to switch from fixed income to equity markets. This is a positive sign for the market.

The proposed local government polls and referendum are to take place within the year. A temporary consolidation before an upward movement could take place in the CSM. Any improvement in the warfront before the devolution package is introduced could influence the market positively.

Investors who are able to invest for period exceeding one year could expect returns in the region of 20-50%.

Recommendation: Grain-elevators/Hayleys/Richard Pieris/DFCC/Vanik/MBSL/COMB.

Bottom Line

By P.M.N. Bandara

Haycarb Limited

The consolidated profit and loss account of Haycarb Limited for the six months ended 30th September, 1996 shows favourable operating results.

The group turnover for the period under review increased by 24% from Rs. 442.2 m. to Rs. 549.2 m. Increase of profit before tax was 15.7% from Rs. 73.8 m. to Rs. 85.4 m. However, increase of profit after tax was marginal, i.e. 4.2% increase from Rs. 63.1 m. to Rs. 65.8 m. Profit attributable to Haycarb Limited was Rs. 61.6 m. and this shows nominal increase of 1% over the same period in the previous year.

Shareholders' funds as at 30 September, 1996 was Rs. 735.8 m. This is an increase of 17.2% over the previous year figure.

Bogala Graphite

Bogala Graphite Lanka Ltd., was able to record Rs. 20.6 m. profit before taxation for the six months to 30th September, 1996 as against Rs. 26.6 m. loss incurred for the same period in the previous year.

Profit after taxation and goodwill written off was Rs. 18.5 m. as against Rs. 28.4 m. loss in the previous year. However, accumulated loss carried forward as at 30th September, 1996 was Rs. 96.0 m. as a result of accumulated loss brought-forward from the previous period.

Increase of turnover during the period under review was 65% from Rs. 47.5 m. to Rs. 78.2 m.

The Finance

The Finance Co. Ltd., recorded favourable operating results for the six months ended 30th September, 1996.

The following table shows the comparative figures together with the changes.

Mind Your Business

By Business Bug

Raining 'ifs'

The big question bugging industrialists is whether there would be a repeat of last year's power crisis this year too.

Despite assurances, a team of company bigwigs met the powerful boss recently to ascertain the exact situation.

The assurance was repeated: dependence on hydropower has been reduced from 80 percent to 60 percent and power cuts are extremely unlikely if predicted weather patterns materialise.

So, they came away disappointed, muttering that it was a big 'if'.

Development over progress

Who's the winner in the 40 percent stake?

That is the big question in banking circles and the big bank was studying the issue last week.

No final decision has been arrived at yet, but the grapevine says that development is being preferred over progress.

Two more to be axed

Now it is official: the bird of paradise will not be flying to Mandela country after the end of February.

But what's not official is that several other destinations are also being reviewed.

And, there is every possibility that at least two more cities will follow Jo'burg.

Export Awards

Presidential Export Awards Ceremony organised by the Sri Lanka Export Development Board will be held on January 28 at the BMICH at 4.00 p.m. The chief guest will be President Chandrika Bandaranaike Kumaratunga. Twenty two export awards for the years 1994 and 1995 will be awarded while 47 merit certificates are also awarded for the same period.

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