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26th July 1998

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Mind your Business

by Business Bug

Bangkok - Doom

Tour operators and travel agents were in for a rude shock last week when civil aviation authorities announced enhanced penalties for those offering cut-price tickets with hefty discounts over and above the permitted five percent.

This discount business had been undergoing what agents call the 'Bangkok boom' ever since South East Asian economies collapsed and their currencies were devalued.

But all the regional travel this brought about will now come to an end with these new regulations, those in the travel trade complain.

Booming Debs

Debentures are the hottest topic in town.

All the debentures so far issued have had phenomenal success, what with low interest rates, a depressed stock market and everybody not knowing what to do with cash in hand.

The Stock Exchange is expected to receive a flood of applications for debenture issues from listed companies seeking to improve cash flow, brokers say.

And, at least seven more debenture issues will be on offer this year, they say.

Too Much

Usually they say more the merrier, but sometimes too many cooks can spoil the soup.This might be true is the case of private radio stations, where the number is now more than what you could count on the fingers of both hands.

Established operators are now complaining that advertising revenue will be divided among all of them now, and if more stations were to be allowed, all stations will be affected.pSo, they have appealed to the government to impose a ceiling on the number of stations and say enough is enough.


Watawala Plantations management issue

Minority shareholders misled?

By Mel Gunasekera

Minority shareholders are pointing an accusing finger at Watawala Planta tions majority shareholders setting themselves up as the new management with a sizable management fee.

The Watawala board passed a resolution on June 3 appointing Estate Management Services (Pvt) Ltd (EMSPL) the majority shareholder to manage the plantation.

The plantation has so far been managed by the board without a management fee. While this is common in other plantations, Watawala minority's stakeholders allege that this disclosure was not made in the offer for sale document, unlike in the case of other plantations. They say they were misled.

'Business Times' learns that SEC has initiated an inquiry and written to PERC seeking clarifications on the issue. The offer document says, "The company is presently managed by a board of directors consisting of eminent and experienced persons in the plantation industry with a managing director being in charge of the day-to-day operations"

Shareholders say the appointment of EMSPL is a clear case of the majority shareholder using his powers to take an unfair proportion of the profit for himself at the expense of the minority shareholders.

The managing agents would be paid remuneration calculated at 4 per cent on turnover and 7.5 per cent of operating profits. Based on Watawala's 1997 annual report, EMSPL is tipped to earn approximately Rs. 65 mn as management fees.

Brokers identified Watawala as an attractive buy, because the company didn't need to fork out a management fee, giving it a competitive edge from a lower cost structure and the attractive dividend yield.

The annual report says that EMSPL has not been charging any fees for managing the plantations, "having regard to the difficult conditions which prevailed in the company."

The 'difficult conditions' were due to Watawala carrying forward a loss of Rs. 159 mn from December 1995, Watawala CEO V Govindasamy told 'The Sunday Times Business'. Though profits for December 1996 and 1997 were Rs. 85 mn and Rs. 225 mn respectively.

He said that since privatisation, the company has embarked on an aggressive development programme, for which no fees were charged. "We have also brought in foreign experts to develop the estate," he said. "We have acted in a transparent manner and informed the shareholders of our decision to charge a management fee, so that it would not be a surprise for the shareholders next year.

"All our efforts are geared towards increasing the profit, of Watawala," he said.When questions were raised on this issue at the recent AGM, the directors are reported to have said that it was a privilege of the board to appoint whomever they thought fit to manage the company

Minority shareholders said they were not disputing the privileges, but questioned as to why the major shareholder was being appointed to the task. They said, if the directors felt the management team appointed did not do a good job, the directors should seek professional consultants, an not appoint themselves to manage the estate.

Shareholders also allege that at the time the resolution was passed EMSPL were the only people on the board. The government's 19 per cent stake had been sold to Vanik Incorporation.

The management fee also took watchdogs and facilitators Securities and Exchange Commission (SEC), Colombo Stock Exchange (CSE) and PERC by surprise.

While the SEC already initiated an inquiry and written to PERC seeking clarifications, PERC themselves are reported to be unaware of a managing agent or a fee. Unlike the other privatised regional plantations, the Watawala prospectus did not mention these vital issues, SEC sources said.

Questions are being raised whether EMSPL, at the time of the IPO, had any indication of charging a management fee, like the rest of the plantations companies.

When contacted SEC Director General, Kumar Paul said "the SEC is writing to the company requesting further details, on the conditions that brought about the transfer of management to EMSPL."

If the management cost is higher than what Watawala is paying to its directors, then the shareholders may think that EMSPL is skimming of their profits, brokers said. On the other hand, if the managing agent reaps higher profits, then the shareholders have little to complain.

Observers say non-disclosure of facts is a very serious matter. The entire equity market depends on available information. Nobody is disputing the management right to charge a fee, but they should disclose their intentions from the inception, to let investors be aware of it, they said.

Watawala Plantations is owned by EMSPL (51 per cent), Vanik Incorporation 25 per cent, the public 14 per cent and plantation employees 10 per cent.

The owners of EMPSL are SKS Exports (Pvt.) Ltd. (49.62 per cent), Tata Tea Ltd. India (29.69 per cent), Sabras Investment and Trading Co. Ltd. India (16.19 per cent), Coffee Land Ltd. India (3.12 per cent) and Pickle Packers (Pvt.) Ltd. (1.38 per cent).

'Business Times' learns that even the directors who were up for re-appointment were not present themselves at the AGM citing they had other commitments.


Malaysia woos Lankan investors

By Feizal Samath

In an interesting about-turn, Malaysia - once a top Sri Lankan candidate for foreign investors - is now hoping to entice top Sri Lankan conglomerates to invest in that country and take advantage of location and infrastructure facilities.

"I have invited companies like the Ceylinco group to invest in our country, in Cybercity. I would like to organise an investment tour for the CEOs (chief executive officers) of at least the 10 top firms including the John Keells group and Aitken Spence to take a look at the opportunities in Malaysia," Malaysian High Commissioner in Sri Lanka, Shamsudin Abdullah said.

Cybercity is a giant information technology city developed in Malaysia that has succeeded in roping in some of the world's best IT firms like Microsoft. Abdullah told the Sunday Times Business in an interview that given the shrinking economic conditions, after the East Asia crisis, and low costs of setting up an operation, the "time is ripe for foreigners to invest in Malaysia."

He said that the emergence of Sri Lankan investors in Malaysia would bring the countries closer now that Sri Lanka is a new member of the G15 group of countries.

It was Malaysia that backed Sri Lanka's membership for inclusion in the G15 (a group of south-south countries) and the entry has raised Colombo's profile in the international arena.

"We felt it was an ideal time for Sri Lanka to become a member particularly because of its role in international diplomacy and its long-term involvement in the non-aligned movement," he said.

Last year's East Asia crisis crippled Sri Lanka's efforts of getting substantial investment from Malaysian businesses. During President Chandrika Bandaranaike Kumaratunga's visit to Kuala Lumpur with a business delegation late last year, an MOU (memorandum of understanding) was signed between the two sides for investments in Sri Lanka worth 1.5 billion ringgits(about 500 million US dollars at that time).

Investments were to be mostly in infrastructure, and the Renong group, one of Malaysia's biggest developers, was to build a new highway to the south from Colombo. The region's financial crisis however has dashed hopes of Malaysian investment and most of the prospective investors to Sri Lanka are now busy putting their houses in order and consolidating their positions at home.

Abdullah says that the Malaysian government has also discouraged local companies from investing overseas in a bid to recharge the stricken economy.

While some developments are on hold in Malaysia as the country tries to get over of the crisis - after refusing an IMF (International Monetary Fund) re-structuring package - some key projects like Cybercity and the Commonwealth Games are on stream.

Abdullah said that though there is a general downsizing of the expatriate workers who number two million (about 10 percent of Malaysia's population), the country continues to hire good professionals from the Asia, including Sri Lanka, and the west for its development.

Malaysia has undertaken an austerity drive in the public sector where ministers and senior government officials are taking a significant cut in salaries, and other public officials are taking cuts that are in keeping with the salaries they get. The national budget for all ministries has been cut by 20 percent across the board and mega-projects have been re-scheduled.

Abdullah said that the Malaysian government, following a request from Colombo, has agreed to allow housemaids to be employed there and two Malaysian doctors were recently in Colombo to check out the medical facilities available for medical certificates to be provided for housemaids seeking employment.

He said so far there is no limit placed on the number of housemaids to be recruited.


Coke gets a new fizz?

F&N Coca-Cola (Pte) Ltd., Singapore has acquired full control of Pure Beverages Co. Ltd., as part of their global restructuring operations to develop Coca-Cola's bottling operations in Sri Lanka.

The deal was concluded last week with Mr. Ana Punchihewa selling his stake in Pure Beverages and resigning from his post as Managing Director, market sources said.

F&N Coca-Cola is a major bottler for the Atlanta based Coca-Cola Company in the region. Based in Singapore, F&N is a joint venture between the Coca Cola USA and Fraser & Neave Ltd Singapore. Together with its subsidiaries, F&N is responsible for soft drinks operations in Singapore, Malaysia, Brunei, Nepal, Vietnam, Cambodia, Pakistan and Sri Lanka.

F&N purchased a 30 per cent stake in Pure Beverages in 1994, at Rs. 75 per share. Thereafter, F&N increased its stake to 82.74 per cent in FY 1995/96. In January 1996, Pure Beverages increased its issued share capital by Rs. 56.7 mn at a premium of Rs. 8 per share through a 3:1 rights issue. F&N are believed to have purchased the entire stake paying a premium of Rs. 2 per share market sources said.

The acquisition is part of Coca Cola's global policy of buying into bottling operations through their regional offices, to ensure their investments are marketed aggressively. F&N has already acquired the Pakistani bottling operations, but progress in other countries have been hampered due to shareholders unwillingness to relinquish their shares, brokers said.

Speculation is rife in the market that F&N's next step would be to de-list Pure Beverages.


Primary Dealers face the axe?

Some primary dealers may face the axe when the Central Bank's proposed legislation to create subsidiaries for dealer activities becomes effective next year.

The new legislation states that primary dealers need to form a separate public limited liability company with a minimum capital of Rs. 150 mn. The capital requirement would be gradually increased to Rs. 200 mn in the year 2000 and Rs. 500 mn in 2003.

Dealers warn the weeding out process on capital alone, may not attract the right people. They say the commercial banks began with a Rs. 50 mn capital requirement, but it took a few years for the market to develop. They felt that the Rs. 150 mn requirement may be too much for interested parties as the market is stable and the margins are fairly low at present.

"The capital requirement is excessive, and a target of Rs. 500 mn is too ambitious for a market like ours. We can be ambitious but with a moderation," another primary dealer said.

The share ownership of the subsidiaries has also created a stir. The new regulations stipulate the ownership would be in accordance with the provisions of the Banking Act, which limits the individual ownership to 15 per cent.

The 15 per cent limit on commercial banks is because they accept public deposits. This is unnecessary, as non-financial institutions do not accept public deposits, dealers said.

Although CB says existing dealers could join and form a separate company, the dealers themselves are not eager, unless it's a 40/60 per cent ratio ownership. Observers say, the new company should generate a minimum 25 per cent after tax profit if it is to be a viable concern.

This may not be possible if the ownership is limited to a minority stake. The CB would also evaluate the performance of each primary dealer semi-annually. CB is seeking World Bank assistance to formulate a surveillance system to conduct off-site and on-site surveillance.

Observers say the new regulations would attract dealers who are interested in fixed income trading and non-active players may lose their license even if they do succeed in getting into the system. There are 18 primary dealers, including 7 non-financial institutions.

Observers say CB is hoping to drop foreign banks, as they do not contribute significantly to primary dealer activities. CB is also keen to limit primary dealers to around 8-10.


Industrial Exports dip

imageThe economic turmoil in the region has taken its toll on Sri Lanka, with industrial export growth slowing down to 2.9 per cent in the second quarter of 1998 from 4.9 per cent in the first quarter, a leading brokerage said.

The decline due to intensifying regional competition, steeper-than-expected currency depreciation, imagecoupled with the imposition of GST, will only intensify cost-push inflationary pressures in the coming quarters, CT Smith Stockbroker report said.

The 4.9 per cent export growth in Q1 1998 (in US $ terms) compared poorly with 13.6 per cent for the corresponding period in 1997. Ceramics, value-added rubber and coconut products declined by 31 per cent. Given the intensifying regional competition over the next few quarters, we expect industrial exports to remain sluggish in Q3 and Q4, CT Smith says.

The slowdown in overall exports was offset by the strong performance in the agriculture sector, imagewhich grew by 16.7 per cent, largely from strong tea prices. However, weak tea prices will see export revenues decline from this sector. "Thus we expect overall growth in exports to be in the range of 5-8 per cent in 1998 (revised down from 12 per cent)," CT Smith says.

The currency depreciated sharply by 3.06 per cent in second quarter to close at Rs. 65.70 to the dollar. The decline was due to the weakening of regional currencies against the dollar during this period. Despite the slide, the Central Bank's defence was not aggressive and the repo rate remained marginally above 12 per cent.

The slowdown in export growth and increasing inflationary pressures will cause the currency to weaken during the year. This and the devaluation of the Pakistani Rupee by 4.2 per cent will add pressure on the Sri Lankan Rupee in the third and fourth quarters. "We expect an overall depreciation of the rupee of 12 per cent+ during the year", CT Smith says.


SAPTA and SAFTA : do not expect too much

With SAARC summit three days away economist Dr, J.B. Kelegama takes a look at the economic advantages and disadvantages of SAFTA and SAPTA

Q: What do you think of SAARC?

A: Co-operation among neighbouring countries in all matters - political, economic or social - is a good thing; it is of natural benefit and should be actively promoted.

Q: Do you think economic co-operation important?

A: Yes. Economic co-operation is important. Neighbouring countries have much to learn from one another. India, in particular, is more advanced than others in industrial and agricultural development.

Other countries can learn much from India, borrow her local technology - which has been adapted from the past - utilise her educational and scientific services and train people in these institutions.

Q: What are your views on SAPTA?

A: Preferential trade is widely practised in country groupings in Asia, Africa and Latin America. In Asia we have the ASEAN and SAPTA. These groupings in developing countries are based on the European Union.

Preferential trade in countries with equally developed production bases - as in Europe - can be effective. But perpetual trade among developing countries with undeveloped or disparate production structures have shown little success in recent years in Asia, Africa and Latin America.

Trade preferences may reduce the price, but to benefit from them, the exporting country must produce a wide range of exports, and they must be of good quality and competitive in price, and the co-operating country should be able to supply them regularly.

Most developing countries are not in this position and consequently, trade preferences remain on paper - they are not utilised. Trade preferences have rarely been successful in expanding trade in developing country groupings.

Take SAPTA and Sri Lanka. How many products is Sri Lanka producing in adequate quantity and quality and at competitive prices for the large Indian market?

Q: Surely Sri Lanka's exports would benefit?

A: Sri Lanka exports to India are very few in number and small in value. Preferences for spices, rubber and few manufactured goods would not make a difference in the country's trade. Can you tell me one Sri Lanka product which has expanded its sales in India on account of trade preferences. I cannot think of any.

Secondly, we have supply constraints on most of these exports. For example we cannot increase the supply of spices within a short time if Indian demand increases.

Further Indian demand for these products is limited or largely inelastic. Low prices on account of trade preferences does not necessarily mean India will buy more from Sri Lanka.

Sri Lanka has still to set up industries to produce manufactures for which there is a rising demand in India.

Q: What is the future of SAFTA?

A: According to the decisions made at the SAARC Summit in Male South Asian Preferential Trade Association is to be transformed into a South Asian Free Trade Area by 2001. The basis of this decision is that free trade is beneficial and promotes development. This is however not true.

All the developed countries in the world, developed their industries by restricting foreign inputs by tariffs and quantitative restrictions. The East Asian Tigers or newly industrialising economies were no exception.

South Korea and Taiwan emulated the Japanese model of growth and used protection widely to build their manufacturing industries. India has developed her manufacturing industries by limiting foreign competition.

I cannot think of any country that has industrialized on the basis of free trade; Hong Kong and Singapore are exceptions as a good part of their trade is entrepot trade and there are special factors which explain their prosperity. Free trade is advantageous to those countries which have well developed agricultural and industrial sectors but not to the others.

Q: What about Sri Lanka's economy under SAFTA?

A: Free trade in South Asia is the surest means of killing indigenous industry and food production. India for instance can produce almost anything at lower cost than Sri Lanka and flood the Sri Lankan market both in manufactures and foods. Even with the existing tariffs, Indian chillies, potatoes, onions, pulses and rice are cheaper than Sri Lanka products. It is the same with industrial products like textiles, footwear, plasticware, aluminium utensils, iron and steel products.

Few local industries will be able to withstand the competition from cheap Indian goods.

Take the cost of production for instance. In the garment sector, Sri Lankan labour cost per hour is $0.35 while in India it is $0.27 in 1993. This is only an example.

If local industries are killed by competition thousands will lose their jobs.

Q: But the SAARC Chamber of Commerce and Industry has stated that they will urge the governments to have SAFTA by 2001.

A: This is difficult to understand as industrialists are generally hostile to free trade. In India, the local industrialists were clamouring for protection after the liberalization of the previous government.

The present government in response to this demand raised all import duties by 8 percent in the last budget and increased the duties on hot rolled steel coils, paper and paper board. Wrought copper were raised even more and the Indian industrialists were pleased. Similarly Sri Lanka industrialists are complaining against competition from cheap imports and demanding protection. So it is not easy to understand the demand for free trade of the SAARC Federation of Chamber of Commerce and Industry.

Q: Can you say something on Indo-Sri Lanka trade?

A: India is the largest market in South Asia. It is also the largest supplier of Sri Lanka's imports. In 1997, for instance, Sri Lanka's imports from India were Rs. 33,023 million while Sri Lanka's exports to India were Rs. 2,582 million.

Thus you will see how competitive India is in the Sri Lankan market and how uncompetitive Sri Lanka is in the Indian market.

India without free trade has become the largest source of imports for Sri Lanka. Just imagine what would happen when there will be free trade!

Q: But will not Sri Lankan consumer benefit from lower prices?

A: Yes it is true that the Sri Lankan consumer will benefit from lower prices of imports resulting from free trade. But this gain has to be compared with the cost of free trade in the form of closure of domestic factories and as far as the loss of employment of thousands of workers and farmers.

Already some farmers have committed suicide as they were unable to dispose of their produce in the face of competition from imports. Higher cost of imports in the absence of free trade is a necessary price the consumers have to pay to keep thousands of producers of agriculture and industrial products employed.

Q: Are you suggesting that we reject free trade?

A: I think that it is premature to have free trade in a developing country like Sri Lanka which has still to build up its local industries and upgrade its agriculture.

We can liberalize trade selectively as our industry and agriculture progress as South Korea and Taiwan did.

Once our industries and domestic agriculture can stand on their own feet and can also compete with other countries, then we can think of free trade but not earlier. In fact introducing free trade at this juncture is like putting the cart before the horse.

Q: Does SAPTA have future potential?

A: Let us face it, SAPTA suffers from inherent shortcomings. First its mutual trade on intra-trade in only about 3 and 4 percent of the world trade of the member countries, and therefore too small to have a significant impact on their economies. Sri Lanka for instance export more to ASEAN than to SAPTA.

Second SAPTA trade is asymmetrical: While all the member countries buy a substantial part of their imports from India surprisingly India buys only a small part of the exports of these countries.

As mentioned earlier Sri Lanka's imports from India are nearly 13 times the value of its exports to India.

Third, while India's production structure is geared to meet the requirements of neighbouring countries, production structures of other countries are geared to meet the demand of countries outside SAPTA.

Take, for instance the leading export of Sri Lanka, Bangladesh and Nepal - garments - These are made for America and Europe. Further, more investments are taking place to expand the production of garments and the regional trade complementarity will decline further.

Sri Lanka's second major export, tea is produced mainly for the Russian and Middle East markets. One of the highest importers of tea, Pakistan - which is in SAPTA is buying most of its tea from Kenya and little from Sri Lanka.

Fourth, it does not matter whether we trade with our neighbouring countries or not, so long as we sell our exports at the best price we can get and buy our imports at the lowest possible price.

Division of trade from traditional trading partners to neighbouring countries is of no benefit to us unless it results in better prices and better markets.Finally Sri Lanka's tariffs are the lowest in South Asia and there is no point in reducing them further. In any case, import tariffs are being reduced in all the countries on the directions of IMF and WTO, whether there is SAPTA or not.

I think we are attaching too much importance to SAPTA and SAFTA - out of proportion to their alleged usefulness. Further India the key member of SAPTA is more concerned about protecting and building up her indigenous industries than on liberalizing trade under the new "Swadeshi" policy.


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