29th October 2000
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The town that never sleeps: Carnival by night, 
ghost town by day. Farmers flock to this rock 
city's nerve centre during the night where their
produce is snapped by eagle eyed traders to be 
transported to all corners of the country. 
Picture by M.A. Pushpakumara. 

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Hangover is over, DCSL looks to a sober future

By Dinali Goonewardene
Taking a steady step, probably in the right direction, with a clear vision distillery leader, the Distilleries Company of Sri Lanka (DCSL) is going to reduce its dependency on profits from the liquor sector.

The company is planning to achieve a target of 50 percent non-liquor revenue and is investing strategically in pursuit of this goal. 

"This would be prudent to ensure long term stability of the company considering the state's policy of discouraging liquor sales and the new world trend of promoting reduction of alcohol and tobacco consumption," Chairman, DCSL, V. P. Vittachi says in his annual report.

During the financial year 2000, the company invested in 20 percent of the issued share capital of Aitken Spence and Company Ltd, the blue chip with the highest exposure to the hotel sector. Aitken Spence also has a hand in cargo handling, power generation, property development, insurance and plantations. 

Profits to the tune of Rs. 79 mn from its associate Aitken Spence and Company Ltd were consolidated to DCSL's financial statement. The company had previously invested in a 43 percent stake in Balangoda Plantations and a 31 per cent share of Madulsima Plantations in keeping with its diversification policy.

Increases in duty caused a 23 percent rise in the prices of the company's liquor products.

"The volume drop due to this increase has lasted almost two years and is likely to continue," Mr. Vittachi said.

"It is obvious that the majority of volumes lost by DCSL have gone to other legal and illegal manufacturers, whose prices didn't increase as they use local spirits extensively," said in his review.

The company rails against the Excise Department and government for not taking action to arrest illicit and illegal liquor industries. "It is strange the that Excise Department does not even advise policy making bodies to renew only retail licenses which have sold realistic quantities of tax paid liquor. Renewing licenses based on performance is the only way to curb state appointed retail licensees from peddling large quantities of illegal arrack." 

During the financial year 2000 turnover fell 2.53 percent to Rs.8.7 bn. Profit after tax increased 3.38 percent to Rs. 416 mn. 

Meanwhile the company forked out 75 percent of its turnover as taxes. Return On Capital Employed was 26 percent and Earnings Per Share Rs.1.39.

Law Amendment

Computer programs: Rights protected

Sri Lankan laws have finally stretched their tentacles to protect computer programmes under the Intellectual Property Act, a seminar organised by the Law and Society Trust was told. Amendment Act No 40 of 2000, a sequel to the Code of Intellectual Property Act of 1979, protects the right to reproduction, translation, adaptation and governs any form of communication to the public. The amendment, which was passed by parliament just before its dissolution, affords computer programs the protection traditionally afforded to artistic and literary work.

A computer program has been defined as a set of instructions expressed in word, codes, schemes or any other form which is capable, when incorporated in a medium that the computer can read, of causing the computer to perform a particular task or achieve a result. Unless commissioned, the owner of the rights is the author of the program and his rights are protected over his lifetime and fifty years after.

The Act places limitation on "fair use" and allows one copy (such as a back up copy) to be made for private use. There is no formal requirement to register a computer program to be protected under the law and enforcement is possible through civil litigation or criminal sanction. The new amendment fills a lacuna in the law, which was perceived as a deterrent to investors in the software industry. 

Most software developers in Sri Lanka export their programs and are more vulnerable to foreign legislation. The law however is expected to aid the development of the software industry in Sri Lanka.

'Revive the sick, don't kill'

By Chanakya Dissanayake
A leading chamber is urging the government to adopt US Chapter 11 style reforms to our Bankruptcy Law. The alarmingly high number of "parate executions" carried out by banks on small and medium sector businesses, during the past few years has led to the chamber's strong lobby on the issue.

According to a study carried out by the FCCISL, during the six months, between February 1 and July 31, 2000, banks have foreclosed on 346 businesses. A majority of them being in the small and medium scale sector.

"Our objective is to protect genuine cases, not willful defaulters", said Secretary General, FCCISL , Samantha Abeywickrama.

"Parate executions have adverse effects not only on the economy but on the social environment as well.

"When a business is experiencing financial difficulties, we should first attempt to revive the business by restructuring it's operations. Parate execution is similar to killing the sick patient. What the economy needs right now is to care for the sick patient and make him productive," Abeywickrama added.

Chapter 11 of the US Bankruptcy Law provides a mechanism to restructure firms in financial difficulties. The management of the particular firm is assisted by an array of advisory services that include, management consultation, marketing strategy restructuring and additional funding.

There are also provisions to form a committee comprising of the firm's creditors and equity stake holders to assist the firm's reorganisation plans. 

FCCISL says that Chapter 11 style reforms can encourage the entreprenual spirit in the small and medium sector. 

It can also prevent the hammer falling down on many traditional businesses that are involved in light engineering and handicraft industry.

"Many declining traditional businesses can be saved and their employment sustained by proper restructuring, without resorting to parate executions". 

During the past few years the failure rate among traditional businesses has been high. Many of these cases have been genuine family run establishments affected by changes in the market.

It is also evident that banks could not be blamed for the high number of foreclosures, due to the fact that they are only trying to protect the stockholders funds. 

It is also a known fact that many banks are being burdened by acquired assets, which they failed to dispose of and realise their value. A Chapter 11 style reform can also benefit banks by reducing their forced sale risk. 

If accepted by the government, these win-win reforms can contribute towards reviving the business confidence that has been on the decline for many years in all levels of the economy in Sri Lanka.

CB warns of excesses

By Chamath Ariyadasa
The Central Bank has warned a few commercial banks including HSBC to check its dealings in foreign exchange due to the tight situation in the market. Central Bank has been concerned whether certain forward transactions have been of a speculative nature and not backed by actual trade.

A senior HSBC official told Sunday Times Business that they welcomed the Central Bank's concerns and that the particular transaction in question which went through last month was not speculative but a client transaction backed by trade. At present due to exchange risk, importers have to book forward and cover their trade positions. 

"If a customers say they want to buy dollars what one can do is to ask for supporting documents to ensure it is not speculative and discourage forward booking through adverse exchange rates," he said adding, "We have very rigid controls and dealers are not allowed to speculate." 

Foreign banks generally have multinational companies as clients to service. But large payments for petroleum and the CWE go through local banks. 

The rupee closed higher this week above the trading band set at 79.47 closing at 79.46. Some buyers preferred to pay higher for the convenience of buying on the market to producing documentation at the Central Bank.

Forex to open up

A Central Bank economist speaking at a FCCISL seminar last week said they are continuing to look at ways to make open market operations more market based and efficient.

Among the proposals are daily auctions through the repo and reverse repo windows and open market operations in the foreign exchange market. 

He said they were thinking of taking a more active stance from what he termed its present passive role. Presently the Central Bank guides the market through the repo and reverse repo windows. But with a system of auctions they could decide what quantity to offer letting the market determine the rate. The quantity offered would depend on an estimate of liquidity. As the call market could see volatility to meet the balance demand and they would consider having a floor rate and a higher reverse repo rate.

But markets are seeing a lot of uncertainty at the moment as two year treasury bonds picked up to 16.89 percent and three year bonds reached 16.93 percent this week.

These yields are above the reverse repo rate of 16% raising the unusual possibility that bond purchases could be financed through the reverse repo window. Market participants are waiting to see the response of the Central Bank on this. But auctions through these windows, according to observers, are off for the moment. The Central Bank had trials for a week in September but suspended them.

Open market operations in foreign exchange is another proposal, which is sometimes undertaken in countries like India and Pakistan successfully. "If they do it even in a small way it could push the rates down." Commercial Bank head of Treasury, Dula Weeratunga said.

But other analysts say unless the fundamentals are seen to, the direction of the currency cannot be changed in the long run.

Mind your Business

Yes No Ministers
There is already a lot of criticism about the number of ministers, but the allocation of duties to each one of them is causing more concern.

For example, the trading man wants some of the tasks entrusted to the one who is in charge of the ports and the industrious professor wants to handle some of the tasks handed over to the trading man. The ministries may not be re-allocated but the matter has now reached the lady boss who will have to sit down to the task of allocating each and every department and corporation, her harassed aides say...

Ad war turns sour
An ad-war had broken out between two milk food manufacturers after one of them reduced the prices of a product and the other allegedly cast aspersions on the price reduction.

More ads followed but the battle is being frowned upon by some regulatory authorities who say the campaigns are not very ethical.

Of course, these authorities lack the power to control the ad campaigns, so they have gently sounded out the ad agencies responsible, unofficially.

"Erů we can only requet erů"
The pay hike promised to the state sector before the polls has already been granted but there has been nothing of that sort in most of the private sector.

Some leading unions have made representations to the powers that be in this regard but the answer was that the state can only request the private sector to grant the raise- and that the latter cannot be forced to do so.

Now, several umbrella trade unions are pondering what they should do next- and most of them will agree to staging a strike to win their demands, if necessary but they will try persuading their bosses first... 

Huge cabinet could impair economic efficiency

The largest cabinet in the world can very easily end up as the most inefficient as well. The size as well as the allocation of functions in the new cabinet has serious implications for economic efficiency. The large size of the cabinet implies a huge cost burden in a situation when controls on government expenditure are imperative. The fragmentation and irrational allocation of portfolios would impair policy formulation and implementation. 

The inevitable conflicts among ministers and ministry officials in the implementation of projects would slow down the pace of action on many fronts. Very significantly these features would erode the confidence of the business community. International investors would see in this a lack of resolve to pursue vigorous economic policies. 

The International Monetary Fund (IMF) and the World Bank would lose their confidence in Sri Lanka pursuing a line of fiscal discipline. They would interpret the large cabinet and its irrational and disfunctional allocation of portfolios as signs of irresponsible government where political expediency subsumes economic concerns. The new government has made a bad start.

The obvious high costs of a large cabinet and a large number of deputy ministers is perhaps the least of the disadvantages. Nevertheless it is a significant one. It is not merely the salaries of a minister that adds up to the huge cost. The perquisites of office, the additional supporting staff,the security for each minister, office staff and perhaps increased international travel are among the components of the huge expenditure the public would have to bear. The additional security personnel would not only be an increased cost but also mean a strain on the forces, which we are constantly reminded are woefully lacking in manpower.

The most serious deficiency of the composition of the cabinet is likely to be the difficulties of ensuring speedy implementation of government policy. The Cabinet is not merely large, it has also fragmented ministries to ensure delays in the formulation and implementation of policies. 

Agriculture is a clear example of this. Agriculture, and related areas ,fall into no less than seven ministries. Besides a minister of agriculture, we have a minister for food and marketing development, another for plantations, another for estate infrastructure and livestock development, another for irrigation and water resources management, still another for Mahaweli development, a separate minister for land development and minor export agriculture. 

The country's agriculture, which has not had adequate focussed attention nor a consistent policy recently, is likely to suffer owing to this fragmentation. What this implies is that any agricultural policy would require formulation by several ministers and worse still implemented by several ministries and departments. The co-ordination required for this, the conflicts between ministries and the difficulties for officials as well as the public would indeed be horrendous.

The irrationality of dividing several related portfolios does not require to be argued .How could port development be separated from shipping? Aviation is not part of transport. How will Southern,Up-country,Nothern and Eastern development be organised when the constituents of that development lie under other ministries? On the other hand,the President has failed to appoint a full time Minister of Finance and Planning and plan implementation is in the hands of another minister. 

Much worse perhaps is that the size send composition of the cabinet would not inspire any confidence in the international community.Apart from investors, who would expect inaction in many sectors of the economy.Multilateral agencies like the World Bank and the IMF, will see in this a clear sign that the country has placed the economy and economic concerns on a back burner.These institutions, which have consistency and for a long time, argued the need for a slim and efficient government will no doubt be critical of the obesity that has characterised the new formation of the government.

The government has started on the wrong foot,sent the wrong signals,adopted a recipe for inaction and eroded the confidence of the business and international community.


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