9th April 2000
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Leasing Industry Growth in Sri Lanka

MLL's new securitised debt rated

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IFC investments in next two years could hit US $ 1 billion

The International Finance Corporation (IFC) has announced a US$ 38.5 mn facility to the National Development Bank (NDB).

Of this total US$ 35 mn would form a credit line and US$ 3.5 mn would be a convertible (into equity) loan, IFC's country coordinator, Sanjiva Senanayake told the media last week.

The loan facility is NDB's first long-term credit line without a Government guarantee.

NDB will use the funds to provide long-term finances to Sri Lankan companies.

Senanayake said that the Colombo office is in the advanced stages of negotiations for investments with several project promoters. 

IFC announced that it will increase investments in Sri Lanka from the current US$ 87 mn to US$ 200 mn in the next 12 to 18 months.

New investments, both by way of equity and loans, would be channelled to areas such as power, telecommunications, ports and water supply under infrastructure, information technology, financial services, exports and tourism, IFC's new South Asia Director Bernard Pasquier said.

"IFC is committed to the long-term development of Sri Lanka by supporting well-managed and ethical private sector investments. Peace in Sri Lanka will provide us a further impetus to substantially increase IFC investments here," Mr. Pasquier said.

"IFC is also convinced that Sri Lanka has what it takes to develop faster than the rest of the world or some of the leading emerging economies. Unfortunately, the north east conflict has plagued the country," he said.

He also said that the US$ 200 mn within the next two years would depend on how Sri Lanka's private sector observes the climate for expansion and diversification. Each IFC investment generally amounts to 25% of the project value which suggests if it realises the target amount, there could be new total investments in the country by the private sector to the tune of nearly US $ 1 billion within the next two years, Senanayake said.

A higher flow of IFC investment would also depend on how soon Sri Lanka improves its regulatory framework as well as further open up the economy.

Recently, IFC played an active role in the formation of the first dedicated private sector housing financing institution, NDB Housing Finance Ltd., while it was one of the founder shareholders of the latest commercial bank, the Nations Trust Bank and Duff and Phelps Credit Rating Lanka Ltd.

IFC's, present portfolio of investment in Sri Lanka stands at US$ 86.4 mn with US$ 21.7 mn in equity, US$ 58.1 mn in loans and US$ 6.6 mn in guarantees. Investments had gone into projects in private power generation, port operation, general manufacturing, tourism and the financial sector.

MLL's new securitised debt rated

Mercantile Leasing Ltd (MLL) will seek a credit rating to issue the third tranche of Rs. 250 mn in securitised debt next month. 

Last year, MLL entered into a Rs. 800 mn securitised debt issue with Citi National Investment Bank. The first two tranches worth Rs. 200 mn was placed in June and August last year. 

But subsequent issues were put on hold, after the government issued a directive to all state captive funds not to invest in private debt unless the issue is listed or has a credit rating.

"We decided to go for a credit rating for the balance [debt] instrument, after the circular was issued last year," MLL Managing Director, Ranjith de Silva told The Sunday Times Business.

The Rs. 800 mn issue is structured by Citi National Investment Bank and Deutsche Bank AG are the trustees.

Securitisation is the process of pooling together a group of receivables from financial assets and the issuing of fixed income instruments to investors based on the strength of the stream of cash flows. 

The transaction pools together a number of lease receivables arising out of lease contracts between the lessor (MLL) and the lessees. MLL will act as a servicer to collect the lease rentals and deposit them on receipt to the trust. 

The objective of securitisation is to create a bankrupt remote vehicle, where the lease portfolio assets are taken off MLL's balance sheet and structured in a way that the assets are sold to prospective investors.

A Special Purpose Vehicle (SPV) created for this purpose by the trustee, will break the pool (debt note) and place it with individual investors. The SPV collects the monthly rentals from MLL and repays the interest on a quarterly basis to investors. 

In any event if MLL goes bankrupt, the SPV can appoint a second servicer (another leasing company) and the investors will not be affected by the risk of MLL.

A credit rating will take into account, the investors' risk (depend on the issue having a higher asset cover of around 1:1 to 1:2 times), whether the SPV has the right to appoint a second servicer. The higher the credit enhancement the higher the credit rating.

Credit ratings also look at residual income. Since leases are given at around 18%-19%, and borrowings are around 14%, this leaves a 5% margin. This helps to build up cash reserves, which SPV retains during the tenure. The more cash reserves MLL will decide to keep, the more comfortable it will be to service the loan and the higher the credit rating would be.

If MLL collects their residual income at end of the securitisation (i.e giving maximum protection to investors), the credit rating would be high. If on the other hand MLL decides to take residual income during the course of the securitisation, the credit rating would reduce. 

Though incorporating several credit enhancement instruments issued by the SPV, the issue can have a substantial higher credit rating that will sometimes be higher than the originator (MLL), since MLL's risks are not associated in this risk portfolio. 

Credit rating also takes note of the asset quality of the lease. A quality diverse portfolio brings a higher credit rating.

MLL's shareholding structure underwent a significant change with the NDB Group acquiring a 30% strategic stake in 1998. Last week, the company announced a rights issue and detachable share warrants as a forerunner to a major re-capitalisation exercise to inject Rs. 340 mn as equity. 

The rights issue is on a 1:1 basis at the current market price of Rs. 15 per share with one detachable share warrant for every two shares subscribed, exchangeable in March 2001 at a 15% discount to market price, subject to a minimum Rs. 20 subscription price. The rights issue is fully underwritten by NDB.

Nayapana leads the way

Despite being the last Regional Plantation Company to be privatised, Nayapana Estate is set to be the first black tea producing unit to receive an ISO certification. 

It is understood that at least ten other estates mostly on the western slopes are working towards obtaining ISO certification. Industry officials expect at least 50 million kilos of tea to be produced in these factories this year. 

Officials said that this achievement would put Sri Lanka on a high horse as very few estates in the world have obtained ISO certification. We also understand that The Tea Research Institute is also working towards an ISO certification. 

The recommendation for ISO certification for Nayapana estate was made by Det Norske Veritas (DNA) Netherlands and the industry claims that approval is imminent. Nayapana estate is part of Elpitiya Plantations Limited, which is managed by a subsidiary of the Aitken Spence Group. 

No freedom of speech for economists in Sri Lanka

It was a virtual "free for all" at a historic meeting of Sri Lankan economists last week. The Sri Lanka Association of Economists (SLAE) and the Sri Lanka Economic Association (SLEA) came together on April 1 for the first time - after being rival groups for the past 15 years - to hold a joint annual meeting and the discussion invariably turned to the perennial problem of the "freedom of expression" for the country's economists. 

"I would think that the two associations of economists would be in a strong position to present their views and advise government on various issues," said World Bank country director Ms Mariana Todarova, who had earlier made a presentation on the need for an efficient public sector. 

But Dr. Nimal Sanderatne, now a senior visiting fellow at the University of Peradeniya's Postgraduate Agriculture Institute, said the reality was that public sector economists, particularly those at the Central Bank, could not make critical assessment on any issue. 

"I remember how I became a born-again economist after I left the Central Bank and went into research. My whole perception changed," he said, reflecting a well-known view that public sector economists are reluctant to freely express themselves on economic issues for fear of offending higher authorities. 

The two associations have mainly government or semi-government economists - from the central bank, treasury and universities - as its members and few economists from the private sector. SLAE President Dr Saman Kelegama was among those instrumental in bringing the two "warring" economists on one platform. He is executive director of the Institute of Policy Studies and a semi-government economist. 

Forget government economists. Even private sector economists, many of them attached to research units at local stock brokerages are also under a little pressure from government circles to "cool off" in their objective assessment of the economy. 

Official sources say the Central Bank hierarchy has been concerned over these assessments contained almost monthly in broker forecasts or research reports. Most brokers are forecasting moderate to lower economic growth and a continuing-gloomy stockmarket scenario this year. 

"What do they want us to do? Write sunshine reports instead of the facts?" asked one private sector economist. Last month, economists attached to local brokerages were invited to the Central Bank for a discussion on the economy, where they were presented with an assessment of the economy by the bank's research chief R.A. Jayatissa and Statistics Director Dr. S.S. Colombage. 

At the April 1 meeting, the debate on whether economists were free to express their views raised some interesting issues. 

Dr B. Hewavitharana, a reputed economics professor, said that he came in for a some "harassment" after he wrote a widely acknowledged book on the economic dimensions of decentralized government focusing on some of the problems that would arise under regional administrative setups. 

"I have had a few unpleasant problems after the book was published. What was more interesting is that many of my students and friends - holding top positions in government - were keen to attend the book launch but pulled out at the last minute probably worried that there presence would offend some higher official. In fact the book has been discussed and debated widely in other countries whereas in Sri Lanka there has been little or no discussion on an issue of vital importance," he said. 

"Some good reviews of the book that were written by two top economists appeared in the newspapers without their names as they were reluctant to be identified," he added. 

As for the associations, plans are underway to merge the two into one broadbased group of economists. "We decided to put aside the petty politics of the two groups and settle for one organisation that would represent economists," Dr Kelegama said. 

As to whether the merged group would be a more proactive association and raise issues of concern in the economy, in addition to singing the praises of government policy, is something that would be watched with interest in the months to follow. -(FS)

Public service excessive in size, weak in performance

Good governance and admin-istrative reforms have been buzz words for many years, but little has been achieved. Interestingly, The Annual Sessions of the Sri Lanka Association of Economists held on April 1st focused largely on the need to improve the efficiency and efficacy of the Public Service of the country, rather than the conventional concerns of economists. 

A weak protesting statement by a secretary of a ministry, that the public service was not so bad after all, was not convincing. The excessive size of the public sector, its inappropriate role, poor decision making, weak financial controls and accountability were the issues brought out by the World Bank Representative, Mariana Todorova. 

Her counterpart in the IMF, not surprisingly agreed with these observations and added further meat to the argument. He pointed out that the size and nature of the public service in South Asian countries, in particular, reflected the government led economic strategies adopted by these governments for a long time. 

Dr Nadeem UL Haque pointed out that " The large, growing and domineering public sector, while inhibiting growth and development was hungry for resources". This led in turn to the main thrust in administrative reform to be one of cutting down fiscal expenditure. As" reducing public sector employment was politically risky, expenditure reduction measures often relied on nominal wage freezes, which eventually translated into real wage cuts". 

This in turn led to, slowing down of administrative reforms, increased perks, bribery, and the better public servants leaving the service. The public service has ended up being neither adequately remunerative nor rewarding for the honest and the achievers. Lee Kwan Yu once said of the Singaporean public service, that if you offer peanuts, you get monkeys. So the issue of good remuneration is at the core of administrative reform. And therefore downsizing and removal on unnecessary government structures become an important strategy to achieve excellence in the public service. Quality human capital is then at the core of the needed reform. 

But as another speaker pointed out, the quality of our public servants would also reflect the quality of our education. So the long run solution is also dependent on a qualitative improvement in our education. Since this is a long run strategy and administrative reforms cannot wait for this to happen, a short term measure is necessary. The recruitment of a core of public servants at the highest levels at market wage rates is one possible way of meeting the immediate problem. The issue of administrative reforms has been a much discussed issue, yet little has been done. The voluminous Report of the Administrative Reforms Commission has it all. Yet how little of it has been implemented. One is therefore compelled to ask whether administrative reforms is a subject confined to academic discussion. 

Taking the mystery out of cellular phone technology

The 1990s was the decade when everyone got a Cell phone. How it worked was not a concern as long as it connected them with the world while on the road. But today, the technology used decides all. Digital technology has moved in and taken over from its predecessor, making AMPS technology pre-historic. Cellular companies in particular have been quick to embrace this revolution. In Sri Lanka the cellular industry took off with the entry of Celltel Lanka Limited providing AMPS connections. Since then three others have entered the market. Two of them already operate fully and partial digital networks. The pioneer Celltel is now making a move towards a digital future while the youngest of the four has announced plans for its convergence into the digital era.
By Michel Schluter- CEO Celltel Lanka Ltd.
A cellular mobile phone network is just like an ordinary telephone network, except that the final link from the network to the user is wireless (over the air) rather than through a cable running underground or over ground. The basic concept of a mobile network is simple. A mobile phone network has a switch, base stations. The base stations cover a geographical area varying from a few kilometres to many kilometres and in that area mobile phones can work. If you look at a plan showing these base station areas, it looks like a honeycomb of cells. 

It is from here that the word " cellular" got described. The switch is linked to the base stations and also has links to the public telephone system and other telephone networks. This allows calls to be made across all networks.

The first mobile phones arrived in the early eighties and this was a turning point in telecommunications. This technology used radio access (voice, travelling at a set frequency over the air), quite like a radio set receiving music over an FM channel. 

This meant that the telephone was no more now at a fixed point like in a home or office but was actually mobile in the area that the base stations (cell sites) covered. The benefits of this, which was to make and receive telephone calls anywhere, appealed to the business people first - the original market.

With the capacities of networks increasing, costs kept falling and the mobile phone started becoming a mass-market product. At the end of 1997 there were 210 million users of mobile phones worldwide.

The first generation cellular networks used analogue wireless technology. Each call used a narrow frequency and therefore multiple frequencies were required to carry more than one call. These networks were very successful and in the mid nineties had 43 million subscribers worldwide. But as the demand for mobile phones kept growing, the frequencies available were not adequate to accommodate all the users.

This created the second generation of technology. The new digital wireless technology that was adopted allowed many calls being supported within the same frequency. 

This used a different technology called time division multiple access. This provided other benefits as well. It improved security against unauthorised eavesdropping and allowed value added services to be developed quickly as the consumer demand increased. The first digital services came in the early nineties. This digital technology developed simultaneously in Europe, America and Japan.

Unfortunately each developed its own standard. In Europe GSM (Global System of Mobile Communications) standard was adopted which allowed international roaming because all the countries of Europe adopted the same standard. In America D-AMPS was developed as an evolution from the American Analogue AMPS. In Japan PDC (Personal Digital Cellular) became the digital standard. Simultaneously in America another standard called CDMA was also developed and therefore America started using two digital standards - D-AMPS and CDMA. Today GSM so far is the most successful standard with more than 280 GSM networks in more than 120 countries and over 150 million subscribers. D-AMPS was available in over 34 countries with more than 15 million subscribers and PDC having more than 30 million subscribers in Japan. From this it is very clear that GSM is the most popular and today it has greatly been fuelled by roaming where consumers are able to use their numbers in most parts of the world.

The next step in mobile communications is the third generation technology which will open the door to multi media services on the handset. 

With the growing trend of data traffic (including internet usage) growing faster than voice calls on fixed telephone networks, cellular consumers are demanding faster and faster access of data, graphics, internet, video on their mobile handsets. This is supported by changes in working habits, wherein people are more and more working away from office and working with more and more data stored in office computers.In the future data speeds are likely to be enhanced using new emerging technologies like general packet radio switching (GPRS), and evolved data aides for GSM which could take up speed upto 380 kilo bits per second.

A simultaneous technology development is the wireless application protocol (WAP). This technology empowers mobile users to easily access and interact information intensive and graphic intensive services like down loading Internet pages real time. In simple terms this would mean that a customer could be able to browse the web even through his mobile handset. 

This means that with third generation (3G) technology the cellular networks will have the same power and capability of fixed line phones or cable in allowing fast, reliable communication, information and entertainment to mobile handsets. The tens of million of people who surf the Internet do so because of the vast information and entertainment available. Imagine being able to access the same content over a mobile phone. E-mails could be sent and received with graphics and video clips attached. News would be interacted with users able to select which clips to see Video conferences, video images on the handset are not far away. 

E commerce on the net is anyway poised for explosive growth wherein banking services, stock trading, electronic ticketing, shopping for goods and gaming are going to be very popular.

The same E commerce on mobile phones with internet access through WAP technology is likely to fulfill the need of consumers wanting to be independent of all fixed installations be it be or may it be a Bank, a shop a fixed telephone line, the stock broker etc., Customers will book and pay for air tickets, movie tickets etc., via their mobile phones after having decided date, time and price through the mobile phone. Which means no queues for them, no ticket pick-ups, no risk of cash.

A GSM phone being a protective private terminal would be far more secure compared to even a fixed telephone line and therefore may become the preferred mode of payment even when shopping over the internet, to the extent that even utility bills payments could be through the mobile phone as well. Mobile phones will also act as digital wallets wherein goods purchased would automatically get debited either to the customers telephone bill or to his or her credit card through the mobile phone. All these services will make the mobile phone as integral a part of human like as the watch they wear, the wallet they carry or the credit card they use. The effects of all this will be electrifying, triggering the creation of new business opportunities for customers which will write a new chapter in the story of telecommunications which has prompted the industry to say that mobile phones were just the beginning, the best is yet to come.

We at Celltel as part of the Millicom Group are already preparing ourselves for this new way of services. In Sri Lanka with the presence both in cellular and Internet already, we are well placed to offer the exciting new applications as they unfold in the rest of the world. With Celltel Infinity, GSM launch around the corner Sri Lanka can look forward to being a participant in the forefront of the history of mobile communications as it unfolds itself. 

Cement industry asks for protection from dumping

The local cement industry has expressed concern over the absence of anti- dumping laws to protect them. They say that these laws are vital to protect cheap and substandard imports entering the market. 

Future investments and development of the local cement industry will depend on an increase in import tariff or a ban on certain imported cement they said. Officials claim that the import of bagged cement at below cost of production prices was squeezing their margins. Although reported requests have been made to give some form of protection to the industry, nothing has materialised so far. 

Puttalam Cement Company Limited (PCCL) in particular are lobbying to increase the present tariff of 10 per cent charged on all cement and cement based item imports to 35 per cent at least. Company officials said at a media briefing last week that they had submitted the proposal to all relevant government authorities, but had no response so far. 

Prior to this years budget when the 10 per cent tariff was introduced, cement and cement raw material imports were charged a three-tier tariff. Accordingly, clinker was charged 5 per cent, Bulk cement at 7.5 per cent and 10 per cent for bagged cement. 

The industry said that cheap cement was coming in from countries that were affected by the Asian economic crisis that plagued the region two years ago. They said that companies in the hard hit countries were now getting rid of their backlog as the demand for cement plummeted with their respective economies during the crisis. 

Officials say that local production was sufficient to meet local demand sufficiently and that imports were not required. They say that they even could meet any increases in demands comfortably, as the industry was not producing to full potential. 

PCCL, a member of the Holderbank Group and the only cement manufacturing plant in Sri Lanka said that it was considering investing a further Rs. 1 billion for further improvements. Company officials said that they wished to take their present investment of Rs. 6.5 billion to Rs. 10 billion within the next five years, but said that most of it would depend on the outcome of their proposal. 

Despite this issue, industry officials said they might go ahead with the their investment plans if the Indian market grows as anticipated by them.

They feel that demand for cement would exceed supply as a result of the Indian economy's accelerated growth in the coming years. They said that Sri Lanka, being a very close neighbour could exploit the situation. They say that if the all goes well in India, they could recover their investments. 

PCCL last year lobbied to remove the Goods and Services Tax from the local industry. They claimed that the local cement industry at various stages of operations was charged high taxes, including GST, while the import duties for bulk and bagged cement was quite low. They said that cement importers made no investment, had insignificant costs and provided temporary employment to a very few. However, they did not have to pay GST while PCCL was paying non-recoverable GST. The government in its recent budget imposed GST on the cement industry allowing PSSL and other value adding cement plants to recover the tax they paid during the production process.


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