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4th June 2000

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Utility rates go up: Lankan growth under threat

Economists were kept busy revising their growth figures, after last week's price increases on utilities blew up their growth forecasts revised just three weeks ago.

A steep hike in electricity, gas, telecommunications and a heavy defence bill will escalate inflation and retrain this year's industry growth, economists warned last week.

Water prices are also tipped to increase by 20 per cent next month, officials said. Ironically the Water Board defended the hike saying that the extra revenue is required to offset the extra money it has to pay the Ceylon Electricity Board.

A 'shell shocked' 30 percent liquid petroleum gas hike will effect millions of households, and around 30 manufacturing industries. A 5.5 percent electricity tariffs hike together with a 25 percent surcharge for those who fail to comply by reducing their energy consumption by one fifth would affect small and medium manufacturing sector, analysts said.

This, combined with a 20 percent increase in telecommunication charges and the recent increase in defence levies will erode exporters margins further, analysts warned.

Last month, the Central Bank predicted annual inflation to be around seven percent, but analysts warned the figure could be around 8 percent, due to higher costs in food and transport. Escalating cost of living may push workers to demand for a wage hike.

But power cuts are threatening the industrial sector. Islandwide power cuts enforced in 1996, hit the industrial sector and saw GDP growth drop to 3.8 percent.

The Central Bank is predicting a 5.5 percent GDP growth this year on the back of better performances in the industrial and export sector. However, private sector economists predict GDP growth between 5% and 5.1%.

Interest rates are also edging up as the government increases its domestic borrowing to bridge the budget deficit and fund the defence bill.

The defence budget recently raised to US$ 880 mn, which in turn accounts for around 6 percent of GDP.

Deputy Finance Minister Prof. G L Peiris moved a parliamentary motion last month, to increase state borrowing limits by Rs. 20 bn and raise the official treasury bill limit by a further Rs. 10 bn to Rs. 135 bn. The upward movement on interest rates would put further pressure on industry and exporters. Todate, the rupee has depreciated by 3.6% in the spot market. Traders expect central bank's annualised depreciation to be 6.6% while the spot market annualised depreciation is tipped to by 8.6%.

A stronger dollar would be beneficial to exporters. On Friday, the dollar was trading at Rs. 74.91.

A late arrival in Sri Lanka Telecom's (SLT) proceeds may push rates up further. SLT's IPO was expected to bring in Rs. 30 bn (US$ 400 mn) and help reduce the budget deficit. The revised budget deficit is targetted at 8% of GDP.

With the down ward revision of telecom and internet stocks, the increased country risk and the country being placed on a war footing may dampen enthusiasm on the foreign placement of SLT's issue. The question mark now hangs on the pricing and timing of the issue, analysts said.

A delay in SLT's IPO and a lower than anticipated inflow of money may create additional fiscal pressure. Despite a hike in excise duties and defence levies to supplement revenues, the bulk of the additional financing requirements is expected to be met through domestic borrowings, leading to upward pressure on interest rates.


Shell to cost cut by 40%

Shell Gas Lanka Ltd (SGLL) announced it would have to cut costs by 40 per cent to make a profit, despite last weeks mind boggling Rs. 105 price increase in LP gas. The company muscled up by an entourage of its top brass sat in a long defensive line justifying the price hike at a media conference. Flanked by the companys top officials, Country Chief, SGLL, Idris Jala said world LPG prices were expected to rise further in the upcoming winter season. In response to media queries regarding further rate hikes in Sri Lanka, he said the privatisation agreement permitted rates to be jacked up further if world LPG prices increased by 30 per cent in a months time. The company is also permitted to increase prices by Rs. 25 twice a year. Shells annual average increase in sales is approximately 20 per cent, Jala said.

In the aftermath of an increase in the price of domestic cylinders to Rs. 470, company officials told shell shocked journalists that the recent price increase would only help the company to break even. However they said Sri Lanka had a relatively good purchasing power parity and future price increases would pave the way to profitability. Shell was able to levy higher prices than Sri Lanka in countries such as Vietnam who have a lower purchasing power parity. We see light at the end of the tunnel company officials said. However the company was forced to exit the Chinese market in 1999 when there was no ìight at the end of the tunnel.

The company has set itself a cost reduction target of Rs. 80 mn for the current year and will put into action a 100 point plan to reduce cost. The 100 action points are designed to reduce controllable cost while eliminating non- value adding activities. Reviewing procurement contracts and awarding contracts based on competitive tendering is now company policy. A special focussed results delivery team has been mobilised to identify savings in operations and logistics.This follows a staff reduction programme in December 1999 which saw the company release 112 employees in a voluntary severance scheme.

Shell has also commenced tendering out the supply of LPG to Sri Lanka in a bid to overcome adverse trading conditions of high contract prices of LPG. SGLL has awarded the supply contract to Petredec and Shell Gas Trading whose bids were most competitive and will save US $945,000 per annum through this move.

However the high interest cost of financing its new gas terminal and increases in global LPG prices have left the company reeling. Global LPG prices increased from US $140 per ton from January to May 1999 to US $ 280 during the same period this year. Loan interest on the new terminal is US $3.4 mn per annum.

The company made a loss of over Rs. 500 mn from January to May 2000. Its accumulated losses since commencing business operations in December 1995 are Rs. 1.25 bn. In an election related move the government granted the company a subsidy of Rs. 400 mn in 1999 but even this did not result in a turn around. The subsidy was given to prevent the company increasing prices in 1999 as it is permitted to do under its monopoly agreement when world LPG prices rise over 30 per cent in a month.

Shell Gas Lankas monopoly ends in December 2000. Shell Overseas Investment has a 51 Per cent stake in SGLL while the Government controls the balance equity.


New plans from new SEC Chief

The Securities and Exchange Commission (SEC) has come in for some flak by market players for dragging its feet on strengthening their regulatory powers.

SEC's new Director General, Dr. Dayanath Jayasuriya says that the long awaited amendments to the SEC Act should be ready in the next few months. The Tamil translation is now being done, he said.

He however said that the delays were not unusual and part and parcel of the exasperating laws delays in the country.

The amendments would give more teeth to the regulatory body, widening their spectrum of powers to margin trading, credit rating agencies, under writing, investment and portfolio management and the depositary system. After the translation the amendments have to go through another consultative process, he said. Some of the SEC rules are also being changed - most urgently the Takeovers and Mergers Code for which a new committee has to be set up to study amendments, he added. The Sunday Times Business spoke to Dr. Jayasuriya on his new appointment and plans for more effective regulation.

See interview


Plantations go up

By Dinali Goonewardene

Plantation companies recorded an improved financial performance in the first quarter of 2000 on the back of strong tea prices and improving rubber prices.

However an impending wage increase in the industry is expected to be effective for the first quarter but has not been factored into the performance. Industry officials said an estimate of the wage increase was difficult to estimate and account for without an agreement being reached. Wage negotiations have been postponed for the moment.

Meanwhile a Net Sales Average (NSA) for tea of Rs. 133 during the first quarter of 2000 compared favourably with the Rs. 109 NSA last year. Balangoda Plantations recorded an after tax profit of Rs. 58.7 mn, an improvement of 13 times YOY. A higher intake of bought leaf and strict expenditure controls contributed to improved performance, company officials said. However crops fell below budgeted estimates although there was an improvement compared to the same quarter last year.

Talawakelle Plantations recorded a 300 percent increase YOY to register profit after tax of Rs. 50.9 mn.

Agalawatte Plantations recorded a 127 percent increase YOY to record after tax profits of Rs. 5.2 mn. Rubber prices in the first quarter of 2000 were better th an in the first quarter of 1999, General Manager, Finance, Shriyantha Perera, said. The company is exposed primarily to the rubber sector. Tea crops also increased by 10 percent.

Watawala Plantations increased Profit After Tax 363 percent YOY to Rs. 47 mn while Madulsima Plantations' PAT increased 253 per cent YOY to Rs. 28 mn. Kelani Valley Plantations PAT increased 292 percent YOY to Rs. 36.6 mn while Kahawatte Plantations PAT improved 196 percent to Rs. 30 mn.

The plantation sector index was the first to be hit when the the war footing was announced in May. Retailers brought the sector index down to 189 on May 5. However improved corporate results resulted in the sector kick starting the recovery . The plantation sector index rallied to 225 by the May 10 and was 231 when the market closed last week.


Mind your business

In suspense

The state is looking at all possible ways of saving money for the war and more drastic steps may be taken. And these include the suspension of duty free permits for the import of motor vehicles for public servants, they say. The move is likely to generate some discontent, so it will not be implemented until the polls and even then it will only be a suspension, officials say...

Power corrupts

The possibility of a surcharge on electricity tariffs and power cuts has taken many by surprise especially since there were earlier assurances that power cuts will never occur again. But insiders say the possibility was foreseen for some time now but that no action was taken deliberately. The reason was that plans to build a power plant north of Colombo were opposed vehemently by residents and environmentalists. Now the idea is to gather public support for the plant with the imposition of power cuts and then go ahead with it...

Hitch a hike

More about the tariff hikes: the hike in phone and electricity tariffs has hurt many industrialists and garment manufacturers, the backbone of the economy for some time now, are among the most affected.

Their profit margins have already dwindled in the face of some severe competition from overseas manufacturers and they can ill-afford the increased overheads. Some of the major manufacturers have appealed to the authorities to consider an exemption but the request is likely to be refused because a chain-reaction is feared...


80 percent of subscribers sheltered

Suntel is also expected to raise their tariffs in line with Sri Lanka Telecom's (SLT) 20 percent tariff revision. However, Lanka Bell is yet to decide on a tariff revision. SLT officials defended their 20 percent tariff revision saying that the hike sheilded around 80 percent of their subscribers.

The rates and rentals were raised in a way that it would not increases the overall bill but in fact bring it down in many cases, SLT Head of Customer Services, Christie Alwis said. (See graph).

Unlike their previous tariffs, SLT has simplified the time band from four bands to three, with a new incremental method introduced to calculate the unit rate (see table)

Present Units Rs. Previous Units Rs.
<100 1.40 <200 1.10
101-300 1.40 201-500 1.65
301-500 2.20 501> 2.25
501> 2.80           
Rentals Previous        Present
Residential 180      200
Business & officials 300      360
Officials Relgious 45      50

Relgious 45 50SLTs tariff revisf ion is part of their tariff rebalancing and revenue increasing stratagy listed in their agreement between the government and NTT.

Hence, SLT is obliged to bring down IDD tariffs to meet international tariffs and increase local call charges to sustain revenue. IDD call rates have dropped by around 40 percent since the begining of the restructuring process three years ago, SLT Head of International Division, Mrs. Pat Abeysekera said.

Netizens are in luck. Internet service providers (ISP) are tipped to reduce their tariffs. The revision comes in the light of technological advances and over crowding of the market forcing ISP's to remain competitive. However, users continue to complain of low speed and unreliable connectivity. ISP officials said that most of their equipment were being upgraded to cope with the increasing demand but the size of the market and the increased number of service providers made it unattractive to invest. Industry watchers say that Sri Lanka might follow international trends and merge to provide a better service and operate profitably.

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