Business
9th July 2000

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The Olympic Committee recently decided it was time to
shoot some pool. And right on cue, a number
of pool cafe's sprang up in Colombo.
"The inclusion of pool in the Olympic
games has created a market for us,"
Partner, Q's Pool Cafe, Gayan Kannangara said.
"We are creating awarness of the game
and plan to bring down trainers and have
competitions," he said. His strategy involves
shooting this game from its up market niche
to an affordable middle market within the
reach of an average youngster. Membership
of a pool parlour costs between Rs. 2,00 to
Rs. 6,000 per annum. Running costs vary
between Rs. 100,000-150,000 monthly but
depends on the locality and size of the pool parlour.

Contents Index Page
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News/Comments
Editorial/Opinion
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Sports
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Mirrror Magazine

Another telecom operator on the cards

The government will go ahead with its plans to licence a second international telecom operator with an obligation to provide telecom services in the rural areas.

Plans are also underway to auction the latest as UMTS (Universal Mobile Telecommunications System) frequency spectrum, the telecom watchdog said last week.

The regulator has commissioned David N Townstead of USA under a World Bank sponsored programme to draw up the National Telecommunications Plan for the next five to ten years. "There are no pre-conceived thoughts about what areas the Plan would cover, but we are keen that it will mainly address the long waiting list problem in the rural areas," Telecommunications Regulatory Commission (TRC) Director General R D Somasiri told the media.

As at end May, SLT's waiting list from rural areas stood at 241,636. Since privatisation, SLT is not obliged to provide universal services. The government's current policy is to licence the second international gateway after August 2002. The government's present thinking is to link the second operator with a national commitment to supply lines to the rural areas, Somasiri said.

"We are also reserving the UMTS spectrum to auction. Frequencies are national resources and the monies could be used to improve the country's debt service ratio," he said.

UMTS is capable of delivering up to two million bits/sec (Mbps) bandwidth. This is 200 times of what is currently possible on a mobile phone. It will allow a steep change in the delivery of fast internet services, promising such new benefits as; real time high quality video calls, fast internet and intranet access, near broadcast quality video and audio on demand, enhanced quality voice, fax and e-mail etc.

Spectrum auctions are popular cash cows. The UK government netted in £ 22bn by conducting the world's first third generation spectrum auction last month.

Somasiri said that the government would not allow the price to reach dizzy levels as they were concerned the operators were able to finance and expand their network.

"There should be a compromise with the right price. However, I think ideally there would be between two to four operators who will be given the licence." Despite a few discreet inquiries from international operators for a UMTS licence, the government would start issuing these licences after 2002.

As at end May, SLT had:

Islandwide — 614,264 lines
Metro areas — 295,383 lines
Waiting list in Metro — 44,274 lines
Waiting list in rural — 241,636 lines

(Source: TRC)


Mind your Business

Sons of the soil

The good professor has promised an investigation into the bid to gain control of the bank that is supposed to belong to the sons of the soil but the issue is very likely to be canvassed before the courts of law. But others in very high places believe such an exercise could have disastrous consequences not only for both parties involved in the conflict but also for the entire banking sector. So, there will be a concerted attempt by the state to try and intervene and bring about a settlement acceptable to all, we hear...

Our Bird in red

The bird of paradise, now managed by the emirs has been hard hit by the drop in tourist arrivals, more so after the recent bomb scares. Therefore, it is now trying to spread its wings in a bid to cut its losses and is looking at many cities to add to its destination list. Also on the cards are special packages for tourists who hope to take wing to Sydney for the Olympics. Despite all these plans however, projections for the near future are not very optimistic and the bird is still likely to be in the red...

A package of another sort

Last week citizens were treated to a package of 'concessions' by courtesy of the government which said it was trying to make life a little more easier for the common man. The wage increases and price reductions on offer are negligible considering the overall impact of the recent price hikes and this has been pointed out to those who matter. Now, a second, more substantial 'package' to redress economic hardships is being contemplated but that will be closer to the poll...


Commerce Department initiates safeguards

By Dinali Goonewardene

The Department of Commerce will work towards drafting Safeguard Measures to protect domestic industries who may be hurt or threatened by a sudden surge of imports. The new regulations will embody the World Trade Organisation (WTO) agreement on safeguards, Commerce Department officials said. Work on the new rules will start when the current Anti- Dumping and Counterveiling Duties laws being drafted, are complete, officials said.

Safeguard measures may involve the imposition of a duty or be a quantitative restriction limiting supply. Safeguard measures are applicable to products irrespective of their source and are not taken against specific exporters.

However in order to implement safeguard measures an investigative procedure to establish damages to local industries and a link between their cause and effect will have to be established.

Safeguard measures can be imposed for up to four years and extensions are permitted for a maximum of eight years.

Safeguard measures cannot be imposed on products originating from a developing country unless more than three percent of imports can be sourced to it.

The Safeguard Measures due to be drawn up are expected to complement the Anti-Dumping and Countervailing Duties Bill to safeguard domestic industries. The legislation has fast become vital in the aftermath of the Free Trade Agreement with India, with fears that imports may wipe out local traders. However the prohibitive cost of implementing the Anti- Dumping and Counterveiling Duties Bill has left business circles wondering if the legislation would become sterile.


New funds for DFCC

By Ruvini Jayasinghe

DFCC Bank last week finalised a new line of credit for DM 60 million from KfW (Kreditanstalt fur Weideraufbau), CEO Nihal Fonseka said.

The DM60 million or Rs. 2.3 bn. will be extended on a loan transfer agreement, following a project agreement between the Government of Sri Lanka (GOSL), DFCC and KfW.

The loan is to be repaid by December 2014 at interest rates linked to the AWDR average weighted deposit rate). DFCC will make the repayments in local currency to the GOSL, thereby shifting the risk of the rupee's movement against the DM to be borne by the government. In fact all DFCC's credit lines are denominated in rupees.

This is the third line of credit from KfW, a German development bank owned by the German government.

The new line opens up opportunities for long term finance for new projects and expansion of present facilities, in the private sector.

"The KfW loan will enable DFCC Bank to strengthen its source of long term funding while maintaining its funding cost low thereby providing a capacity to assume high risks inherent in project financing," Mr. Fonseka said.

According to the loan agreement, local businesses could finance upto 100% of the their direct and indirect foreign exchange portion of an investment in fixed assets. Alternately for locally purchased machinery, financing is permitted upto 80%, for construction costs up to 70% and for initial working capital relating to investment up to 40%. Import duties incurred in the purchase of plant and machinery will not be financed, the bank said.

The environmental conscious KfW has drawn the line with regard to enterprises producing or processing asbestos or other hazardous substances and investments promoting the use of ozone layer depleting substances (CFS). The only exceptions are investments that lead to an elimination of asbestos use, hazardous substances or CFCs.

The Bank is targeting the following manufacturing sectors subject to eligibility criteria and economic viability. The sectors are: food and beverage, textiles, wearing apparel excluding footwear, leather and leather products including footwear, wood and wood products, paper products, printing, publishing and packaging, chemicals and chemical products other than aand plastic, rubber products, plastic products, non- metallic products including pottery, china, and glass, fabricated metal products, machinery and equipment including electrical items, transport equipment and instruments, construction industries, transport , storage, and communications.

Under the agreement the bank is expected to monitor the project funded through the KfW credit line. Bank officers will inspect sites to ensure that operations conform to sound financial and engineering practices. Projects obtaining KfW funding will have the bonus of DFCC expertise in finance and technical inputs.

The DFCC Bank also has programs to train entrepreneurs and potential entrepreneurs, with KfW assistance. The program has resource personnel from the German CEFI program which is an action based teaching and learning process tested in over 70 countries.

As the bank grows and matures it has to also stand on its own feet, which means that the exchange risk cover provided by the GOSL and concessionary lending from its stakeholder the ADB could end.

Last year the bank went to the international debt market for funding with a floating rate note (FRN) for US$ 65 million guaranteed by the ADB.

Although lines of credit from foreign funding sources like the ADB will not dry up, interest rates could be closer to market rates. We have recognized for sometime the need to diversify our funding base", Mr. Fonseka said.


Better policy for fertiliser required

By Chanakya Dissanayake

High world prices and the recent currency devaluation has resulted in a downfall in the fertiliser industry which was plagued with short sighted government policies for many years. Government yesterday responded to the situation by increasing the subsidy given to Urea (N). Sri Lanka imports more than 90% of its fertiliser requirement which is mainly made up of nutrients N, P and K,

Executive Director of CIC Fertilisers, Vasantha Gomez said that out of the three main nutrients(NPK) imported only urea(N) was subsidised since 1977. This has resulted in a lop sided increase in fertiliser usage in the country with only urea usage increasing. " This can be seen as a policy decision taken for administrative convenience, because for higher yields a mixture of all three main nutrients (NPK )are essential. But the farmers are mostly using urea and over the years this has not increased the yields especially in paddy cultivation. If the government wants to increase productivity then it should consider dividing the subsidy between the three nutrients rather than offering it only to urea which has been counterproductive in terms of yield increase."

Agriculture experts explain that benefits from proper fertiliser usage is evident in the tea industry where yields were increasing steadily. The tea industry's fertiliser usage is 133% of the recommended quantity. Both rubber and paddy industries report a low usage of fertiliser compared to the recommended level and report static yield increases for the past few years.

The urea subsidy is decided by the National Fertiliser Secretariat in consultation with the importers on a monthly basis. It takes into account the cost and freight charges that prevailed during the month. Importers protest that this historical cost concept has resulted in massive losses due to the volatility of the world fertiliser prices which fluctuates several times during a month. " We have no choice but to absorb losses, we cannot increase the price because of the Rs.7,000per MT max. price regulation. During this year alone our losses from urea imports amounted to Rs 15 million. On the 30th of May the National Fertiliser Secretariat decided the subsidy on cost and freight charges of US$ 128 per MT But the prevailing real cost was over US$ 140 per MT. Last month the cost was decided at US$ 136 per MT but due to the currency devaluation the real cost has gone upto US$ 145 . This is a good example of why we make losses selling urea at the regulated price of Rs7000 per MT", said head of fertiliser imports Maclaren's Mr Sarath Silva.

In an attempt to ease the burden on the fertiliser importer the government increased the subsidy for urea from Rs. 7,965 per MT to Rs. 8,872 effective from July 5th. Importers say that this increase does not bring a relief because it is only applicable

to LC's opened after the 5th of July. " Even today we are unloading a shipment of 12000MT, which will be sold at a complete loss because it is subsidised at the April subsidy level.

The trade cycle is nearly 3 months for fertiliser imports, that means all our current stocks and stocks arriving in the next two months will be undersubsidised." said Mr. Vasantha Gomez.

The state of the fertiliser industry is of paramount importance to the Sri Lankan economy because it directly contributes towards high agricultural productivity which will result in a growth in GDP.

Sri Lanka has been indulging in research and development of new agricultural methods which emphasise on proper fertiliser usage to increase yields.

Agriculture experts point out that any future short supply of essential fertilisers will reverse the gains achieved on agricultural productivity.


Muddled thinking on devaluation ?

The discussion on the devaluation continues to hold centre stage in na-tional affairs. It will continue to be so for several weeks. The main thrust of the discussion would no doubt be on its impact on prices rather than its corrective possibilities of the grave balance of payments deficit. People are more interested in prices than trade deficits, the government is more interested in politics and prices are a driving force in politics.

Though the problem is economic, it is economics that flies out of the window to give place to politics.. Everyone knows that a devaluation or depreciation of the currency raises prices of imports. In fact the correction on the import side of the balance of trade is expected to be through increased prices leading to a curtailment of imports. But that is bad politics, so the government cushions off the price increase by subsidies of various sorts and an increase in the incomes of the lower and middle income groups. If this cushioning off is adequate, then there will be no curtailment of imports on essential items as envisaged by the devaluation. There is always an economic argument to support this line of thinking. It runs like this. The subsidies would only help the poorer sections and not raise the price of only essentials, other imports or "luxuries" will cost more and therefore there will be a curtailment of imports. The biggest impact it is argued would be from a growth of exports.

This year itself exports are expected to grow by US 150 million. That is in fact insignificant compared to the increase in our import bill. An increase of this magnitude is about 3 per cent of our exports and most likely about 1 per cent of our anticipated import bill. If our imports are not likely to be curtailed by the depreciation, nor our increase in exports likely to be significantly large, the trade gap is likely to be huge. The most ironical part of the recent measures is that the wheat price is being reduced after the devaluation. This would no doubt bring down the price of bread and other wheat flour products. We will then increase our consumption and import of wheat. And that is in a context of increasing wheat prices in the international market, though not a pronounced one as in the case of crude oil. The irony is compounded by the fact that our own paddy producers are unable to sell their paddy. The crisis in paddy marketing has reached a stage when paddy farmers are threatening to burn their stocks in some parts, while in others they may even stop cultivating.

Certainly at the current farm gate price levels, paddy farming is no longer viable. The government agreed to buy at Rs. 14 per kilo, but what farmers can actually get is Rs.9 to 10 per kilo. The devaluation could have assisted in solving the problem through market forces, by increasing the price of wheat and therefore of rice. Instead this impact has been blunted by administratively decreasing wheat flour prices. Left to market forces the devaluation by increasing prices for wheat flour would have increased the price of rice and thereby helped the farmer. The government might find that in as far as the move on wheat prices are concerned, it has neither indulged in good politics nor good economics.

In fact the government has not learnt from its own earlier blunder, when the wheat flour and bread prices were reduced in order to keep to an election promise, made to please urban voters. We can expect the mistake to be once again rectified after further damage to the paddy producer and the trade balance. What is exceedingly strange is that the government's economic advisers put forward the argument that the devaluation would help producers. And yet the largest community of producers are struck down by this move to subsidise wheat flour!! It is difficult to know whether this is muddled thinking or lack of co-ordination in policy formulation. The answer is surely in the politics of an impending election.


Heavy investment in plantations short-sighted decision

Mr. Arjuna Mahendran is a Director and Head of Economic and Sector Research for ASEAN and South Asia at S.G. Securities Singapore. He was Deputy Director, Fiscal Policy at the Ministry of Finance in Colombo from 1990 -1993. He also held the posts of Secretary, Financial Sector Restructuring Committee, Finance Ministry and Director Industrialisation Commission during this period. Earlier he held the posts of Head Money and Banking Economic Research Department , Central Bank and System Analyst Data Processing and Automated Clearing House. He was also an economist at the Mahaweli Authority. Mr. Mahendran has a BA and an MA from Balliol College Oxford and an MSC from the London School of Economics. On one of his frequent visits to Sri Lanka Mr. Mahendran made a public address on what ails Colombo's Stock Exchange. The Sunday Times Business spoke to him of the CSE, our economy and other subjects following his presentation. Excerpts from the interview

From the Business Desk

STB: In a recent presentation in Colombo, you said that certain companies made a mistake by investing heavily in the plantation sector. Could you elaborate on that statement?

AM: In 1997, our blue chip companies should have invested much more into more profitable ventures like internet companies and software development and less in cyclical commodity sectors. We already knew that software was going to be big. Indian companies like Infosys, Wipro, Satyam were already making waves and were household names in India. But we were ignoring all that and did our own thing. It isn't too late for us to start a big investment push into these sectors now.

For centuries we have known that tea is a very cyclical commodity. Managers of our large public and privately-owned conglomerates, people who travel widely and have access to the best information in the world, unfortunately made such short sighted decisions to invest heavily in plantations.

The blame is also on the government. It should not have gone through a single-sector privatisation in one shot. They embarked on it when the war re-commenced. In 1995 the war started and by 1997 they virtually doubled the defence budget to Rs. 50 bn. To finance that, they embarked on a massive privatisation programme. But they should have looked at the financing more carefully. Rather than dump the entire set of estates in one go, they should have simultaneously gone for an IMF loan to provide the extra finance needed.

An IMF programme would have maintained the discipline needed to keep sight of re-structuring the economy while funding the war effort. Privatisation was a quick fix and the government lost sight of the country's development priorities because funding the deficit became easy. This is where we have gone wrong.

Because we have delayed the deepening of our capital markets and delayed investing in technology, infrastructure and education from 1994, the economy is now in this state, growing at about 3.5% to 4.5% every year. Whereas, upto 1997, we were growing at about 5.5% to 6% it will become progressively difficult to maintain higher growth rates.

STB: You mentioned that John Keells was wrong in getting into plantations. But there is an opinion that if they didn't get into plantations — being former planters themselves - the sector would have lost on the expertise of these companies?

AM: John Keells had a GDR issue in 1994 and some of that money went into buying plantations. While they have a thriving software business, I wish they had invested earlier and in a bigger way in technology and electronics manufacturing.

Plantations are low profit activities. So the ROE's ( Returns on equity) are low. Foreign investors look at ROE's and the yield gap - that is the difference between the rate of interest you can get on a treasury bill and ROE's on your equity. What has happened here is that our interest rate on treasury bills is around 10%, and ROE's are 15%. So in effect there is a very low yield gap in the Asian context.

Why are our ROE's so low? Because these companies have dumped too much money in plantations. In fact John Keells is better hedged than the other conglomerates like Hayleys and Aitken Spence which do not have significant exposure to the booming technology sector. The government should have stepped in to encourage these large firms to tie-up with other Asian giants and ride the current technology wave.

STB: The Central Bank is estimating an average 5% growth this year?

AM: I don't think so. When you think of it there are two problems. The manufacturing sector is going to face more competition, particularly from Indian imports. The FTA (free trade agreement) coming into effect will affect the local manufacturing sector in the short-term. Our non-exporting firms cannot compete due to our high domestic interest rates.

Garments are still fairly strong. But I don't think tea prices are going to revive significantly to spur output. Tea is cyclical - one year it goes up and for the next four years it is depressed. In 1997 we got fantastic profits, now the sector is under performing. So where is the growth going to come from?

From 1994-96 the economy grew strongly because tea prices were picking up and the garment sector was expanding. Now the garment sector has got mature and the smaller firms are falling out. Therefore growth will start tapering out from this point onwards.

The other worry is the port sector - it's very worrying. In 1999, container transhipment was down by 9%. I believe for the first six months of this year it has fallen even faster. The port of Colombo is our most lucrative economic activity and has been our mainstay for many years. It doesn't directly go into our trade numbers but makes a significant contribution to the services sector, and provides a lot of employment directly and indirectly.

STB: What are your views of the present dismal situation in the stockmarket?

AM: A few months back, I was surprised at the way People's Bank irresponsibly dumped their DFCC shares into the stockmarket, driving share prices to historic lows. In Hong Kong in 1997, when the market was falling the Hong Kong government went in and bought shares to support the market. Now our government is doing the opposite. When the market is falling, they are selling shares adding to the depressed sentiment. So from the foreign investors perspective they feel that if the government is not interested in defending the market value of shares, why should they invest?

STB: But the government has always maintained that the stockmarket is not the pulse of the economy?

AM: That is an unfair statement. In countries like Malaysia and Hong Kong, the government is always protective of its stockmarkets to protect their shareholders. Our [government] treats the stockmarket like a class distinction. They think the market is dominated by rich players and therefore the poor people are not involved.

But there are international interests involved who ultimately provide us with the capital to build our economy. So we need to protect our stockmarket. I strongly disagree with the government on this cavalier attitude to the market.

STB: Do you think we should divorce the war from the economy and let economic development grow?

AM: I think so, as the private sector need not pay for the inefficiencies of the government.

If you look at various sectors like tourism, some hotels have flourished despite the war. If you talk to the people at Mt. Lavinia Hotel, the small new hotels down south etc they would say that they can manage. They are not worried about the war. They are busy marketing their niche hotels. I was reading the London papers recently that the head of Sainsbury's comes to Sri Lanka every year for Ayurvedic treatment. So if things are marketed properly I don't think this sector would be too affected.

But it is marketed very cheaply. Aitken Spence and John Keells tourism business margins are very thin because they have tied up with big tour operators who squeeze their margins. The guys who do well are the one's who sell their niche products. They tell the tour operators you take it or leave it.

My point is that I don't know why the private sector is harping on the war. There are wars going on in other countries like Lebanon, but the private sector is doing well there.

STB: But what about the war expense, that itself is a huge slice in the overheads?

AM: Not if the companies stick to high-profit strategies and fund these from off-shore borrowings or retained earnings. But I agree that it is difficult for small start-up companies and those not in the export sector.

Sri Lanka is currently spending about 6% of GDP on the war which is not a large amount by Asian standards. The main problem is that the government tax to GDP collection rate is very low. Very few individuals pay taxes in this country. Also, tax loopholes to companies not involved in exporting should be scrapped.

To solve its war financing problem, the government keeps resorting to higher indirect taxes and higher borrowings which cause high interest rates. Sri Lanka at present, has the highest prime lending rate in the whole of Asia. It's high because the government is borrowing so much.

I believe budget deficit figures understate the magnitude of the problem. Defence purchases are funded off the budget through suppliers credits and loans from the Bank of Ceylon and People's Bank, and these figures are not reflected in the actual budgetary numbers. Looking at the rate of reduction in our foreign exchange reserves, we are probably importing around Rs. 100 bn worth of defence equipment though the budget numbers show much less. The press was muzzled when they highlighted how much of this money was being wasted.

STB: Another excuse for the stockmarket not to perform well is that our market is illiquid. Do you subscribe to that view?

AM: I don't think so. Our market is illiquid because companies are not making adequate profits. An international investor looks at a company if it is profitable, and tries to spot those whose growth will eventually result in more share liquidity.

Why is the market illiquid? It's a chicken and egg thing. We are not attracting investors to our market, because our profits are not high, so people are not coming to the market and therefore the market is illiquid.

So, which do you do first? First you become profitable and then the foreigners/locals will put their money. They put their money in 1992 and again in 1994 because companies were profitable and our market became liquid for two or three years. Then the profits started easing off and the liquidity began to drop.

Low P/E's (price-to-earnings ratios) are not a sufficient reason to invest. What we have to look at is our ROE or ROC (return on capital), basically assessing how companies are using their assets to generate profits. And given the country's risk situation, what are our domestic interest rates, and are our company returns adequate to provide a substantial premium to local interest rates. That is how investors approach this.

Our problem is that our local interest rates are too high and our company profitability is low. So there are low yields and really no story to sell foreign investors who typically drive emerging markets.

STB: What is your assessment of the BOI's attempts to boost exports?

AM: Originally when the GCEC was set up in 1997, there was a very straightforward incentive package and only non-traditional product exporters got tax holidays. Nobody else got tax holidays. Then they started extending these tax holidays to other areas like flagship projects such as the World Trade Center, basically for infrastructure projects. In the process, our focus on the export drive got diluted.

While conglomerates were putting their monies into plantations and the stock market, FDI (foreign direct investment) was going into shopping malls, condominiums, restaurants, massage parlours etc. or into spurious companies set up merely to get duty free permits to import luxury cars.

STB: The BOI would argue that these investors would not come here if we didn't give them these concessions?

AM: But why give concessions to restaurants and condominiums? Such projects will come anyway, you don't have to give them concessions like duty free cars. It's ridiculous.

The other thing is that the BOI doesn't follow-up rapidly on interesting proposals. In 1997 the Malaysians came and they wanted some land to set up industrial parks and build the Colombo-Kandy highway. Then the Asian crisis came and they pulled out. Now that the crisis is over we must make an effort to get them back.

Bangladesh has started an export processing zone exclusively for Korean investors in Chittagong. Phillippines have given a large part of Subic Bay to the Taiwanese for electronics factories. Thailand has got a lot of Japanese automotive factories. Toyota four-wheel drive cabs for instance, are now made in Thailand, because the Japanese Yen is so strong and it's too expensive to make these there.

If you give these investors 500 acres or so on concessional terms, they will come and do up the infrastructure facilities and facilitate their own investors to come to Sri Lanka.

Malaysia now has a shortage of labour. Sri Lankans go there in search of work in large numbers, mostly illegally. They would love to come and invest here, if we give them land and they can run it themselves.

STB: What are your thoughts about the FTA?

AM: FTA looks nice on paper. But where is the movement of people which will eventually spur the growth of Indo-Lanka trade? For ordinary people to go to India there should be a ferry service not an expensive air connection. This will forge the people-to-people contact which will rapidly grow our trade ties. If there are security concerns to restart the ferry from Mannar, we should facilitate people connecting to the Indian port of Tuticorin from Colombo.

STB: What do you think of the conglomerates, do you think they have a future in the areas they are in at present?

AM: They can manage. They have to quickly ramp up their growth rates. My criticism of the private sector is that they were slow in linking up with the main business currents in Asia, particularly the technology wave currently under way. The Hayleys tie-up with AIG, for instance is the way to go in developing our expertise in the financial sector and insurance.

John Keells have made a start in infrastructure with the P&O port project. But I do hope some of the conglomerates will start seriously thinking about electronics manufacture. We have to change our mindset from being plantation managers and rapidly make the transition to export manufacturing.

The other major area we should push hard is in developing the tourism infrastructure in south India where we can share the benefit of our 20-year headstart in this field. India is still grappling on how to develop this sector and our managers can make a meaningful contribution as they have already done in the Maldives.

STB: What about productivity?

AM: Productivity has suffered in most non-garment manufacturing and agriculture because there is no technology flowing into the country in the form of foreign investment. If you look at the high tech that is being used by some of the garment manufacturers, the productivity is fantastic, because they have kept investing, absorbing new technology. You can't distinguish the two. Productivity and technology go hand in hand. Productivity in the plantations have gone up because there was a catching up process as we updated our methods. We have to extend this to non-plantation agriculture such as floriculture and organic food production which is a real challenge since no real investment has gone into it so far.

STB: Banking sector; have you had a look at the numbers?

AM: The banking sector makes money because of the inefficiencies of the two state banks. Our interest rate spreads between lending and deposit rates are high, and therefore margins are high. So the private banks have a free run. This is very good for profits. That is the only reason why you have such small banks in Sri Lanka, which are still viable.

In other countries there is a consolidation process going on. Even in India small banks are falling by the wayside. The Indian corporate debt paper market has grown tremendously in the last two years forcing banks to lower their lending rates. We have to quickly develop the debt market in Sri Lanka, but as long as the government keeps over-borrowing this will not take off.

More worrying is the complacency of the regulators during the recent Sampath Bank fiasco. Delays in interpretation of bank ownership laws by the regulators made for utter confusion in the stock exchange. While the move to merge banks is a positive one as Sri Lanka's banks are too small by international standards, it is the duty of the government to add clarity and provide interpretations of the rules. The lack of clarity has further eroded the confidence of investors in our market.

STB: How do you measure Sri Lanka's performance in the short to medium term?

AM: Tourism will do all right. What I am worried about is freight handling in the port of Colombo. Freight has been a huge invisible sector and we have to do something quickly about it or there will be a lot of adverse knock-on effects on the economy.

If we can tackle that and jump on the global technology revolution, the rest of it will fair well.

In a nutshell, we have to start looking at proper investment again. We have not had proper productive and profit-generating investment coming in over the last few years.


Factory Ordinance Amendment opposed

A move to amend the Factory Ordinance is being opposed by the Free Trade Zone Workers' Union.

The Union's General Secretary, Mr. Anton Marcus has written to the Labour Minister, Mr. W. D. J. Seneviratne saying that the amendments could lead to the eventuality of workers losing their jobs. He says that a 33% reduction in total employment is possible as a result of these amendments.

The Factory Ordinance No 45 of 1942 in its section 68 permits workers a 100 hours of overtime per year and six hours of overtime per week.

In consultation with the main labour unions and the apparel exporters unions (employers' unions) the labour ministry has proposed that the overtime regulations be changed to 100 hours per week instead of per year. The amendment was necessary to "conform to the laws of the land" required by the top US and EU labels who buy from Sri Lanka. With the growing commitment to environment protection and uplifting and ensuring proper labour practices and work environment, most brand names boycott countries that use child labour, violate labour laws of the land or destroy the environment in their factories. Since our labour laws on overtime was made over 50 years ago the government moved to change the law in consultation with the major trade and employers unions to be more realistic to the current demand in the apparel trade, Labour Commissioner, Mr. Mahinda Madihahewa told the Sunday Times Business.

The Commissioner said that the labour ministry had several rounds of discussions with the unions and although a final decision has yet to be made, a maximum of 80 hours of overtime for men per month and 50 hours for women between the ages of 16 -18 may be settled for.

Mr. Malihadewa said that there were at least 15,000 vacancies in the free trade zones and the Workers Union General Secretary, Mr. Marcus' fears were unfounded.

Chairman Apparel Association Mr. Lyn Fernando corroborated the Labour Commissioners statement saying that there was a huge shortage of workers in the zone and migration was common. However the protesting union's General Secretary Anton Marcus says that the three eight hour shifts now operated will become two 12 hour shifts with the proposed increase in overtime hours per month. Workers will lose out on this extra shift, he pointed out.

He also says in his letter to the Minister, " We do not believe the argument that "workers want the overtime, has merit. Workers want overtime because they need it to supplement their minimum wage if a living wage was paid instead they would not need to work so many hours of overtime.

If overtime was optional and workers had the right to accept or reject, up to a reasonable limit of time then those who wanted to work could and those who did not want would not be forced to.

Mr . Anton Marcus told the Sunday Times Business that their union was not against voluntary overtime maintaining reasonable hours.

Counter arguing his view the labour Commissioner told the STB that most of these young women factory workers were from the rural outstations and lived in congested rooms often sharing five to six to a room. They usually work for about five to six years and collect the maximum money they can before leaving the job to get married. During this period their aim is to optimise their income. Also because of their poor living conditions in the city they prefer to work long hours in the comfort of air conditioned rooms.

Meanwhile, employers are not happy with the government's request to increase the factory workers' salary by Rs. 400 in the light of a general price hike in the recent weeks.

The rupee was devalued against the US dollar to make exports more competitive in the international market. We cannot bear the additional burden of a salary hike employers said.

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