19th August 2001
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Recent events are making Sri Lanka a destination
only for the adventurous and adventure tourism may 
be the only way to exploit it. While foreign arrivals
are dwindling, a local clientele of international school 
students and affluent young corporate executives 
combine to make eco-tourism a lucrative venture
for Adventure Sports Lanka Ltd. 
Pic. by M.A. Pushpakumara.
Discovering the magic of white-water

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Mirrror Magazine

Mind your Business 

Faint-hearted foreigners
With a virtual fear psychosis gripping the business community, everyone anticipates that fresh overseas investment will slow down to a trickle.

But the more disturbing news is that even overseas investors who have established business houses are now contemplating fleeing this troubled paradise.

Among them are a designer label garment manufacturer and a leading consumer goods retailer.

Greens see red
After the lady had a tete-a-tete with the business community about the current state of affairs in the country, some in the green camp wanted a similar meeting.

Messages were sent out to the captains of industry but not surprisingly, the response to the invitation was muted.

We wasted our time once and we do not want to do so again said some while others said that they will attend only if the reds too are present to outline their proposals! The meeting, of course, is yet to materialise.

Interesting indications
The steep rise in interest rates has now levelled out, partly because of the uncertain political climate in the country.

Now there are indications that the rates might dip and substantially at that, with the state banks taking the lead.

However, the big bank is closely monitoring developments and is yet to give the go-ahead, we hear.

Port ponders retirement plan

By Dinali Goonewardene
The Sri Lanka Ports Authority (SLPA) is considering a voluntary retirement plan for employees to combat problems of excess labour and to increase efficiency, officials said. Aid agencies including the World Bank, Asian Development Bank and the Japanese government have offered the SLPA aid to implement these proposals, improve the regulatory environment and increase efficiency in container transhipment. However, proposals put forward by them are still at an initial stage of discussion and the offer has not been accepted as yet.

The SLPA is trying to work in consultation with SriLankan Airlines and the Central Bank who have implemented similar early retirement schemes, SLPA officials said.

The World Bank offered a similar aid package to increase efficiency three years ago but pulled out when a ministerial guarantee that recruitment would be halted was not forthcoming. Political appointments have long been the bane of the overstaffed port with 2,000 employees being recruited in 1997 and 4,300 in the run up to the General Election in October 2000. 

However, the SLPA put paid to recruitment after the appointment of Mr. Ronnie de Mel as the Port Development Minister.

Development initiatives by the SLPA have included the purchase of a new dredger costing US $13 mn for maintenance and the extension of six gantry cranes to increase handling capacity. The new dredger, built in Holland, will reach the Colombo port in October when work is expected to commence.

A new shift system aimed at increasing efficiency met with opposition from employees and was temporarily halted following a wildcat strike which has led to discussions with trade unions. A project to deepen the basin of the port to 16 metres from its present depth of 14 metres is also expected to get underway in September. The contract which has been undertaken by a Japanese firm is expected to be completed in six months.

Although transhipment volumes at the Colombo port grew by 72 percent from 1995-1997 there has been negative growth from 1998-2000. 

Port sector analysts attribute this to the absence of major development work from 1996-2000, concurrent to a trend towards larger vessels which were deterred by the depth of the basin at the port. However, a recent surcharge on insurance premiums for vessels entering the port could have serious repercussions on transhipment volumes, as the number of ships calling at the port continues to dwindle.

People's Bank in derivatives market

People's Bank signalled its entrance into the fledgling derivatives market with the structuring of an Interest Rate Swap for Aitken Spence's power generation project in Matara.

Ace Power Generation, Matara, has a floating rate US$ 10.8 million loan pegged to the three months' London Inter-Bank Offer Rate. 

Since dollar interest rates have reached historical lows following the US economic downturn, the company had opted to convert its floating rate liability to a fixed rate in order to guard against future interest rate increases. To fix its floating obligation through the derivative deal, the company is receiving three months' London Inter-Bank Offer Rate (LIBOR) (from the People's Bank) and is paying a fixed rate for a period of seven years to the People's Bank.

Derivative deals, even though very popular in the developed markets, have failed to take off in Sri Lanka except for a few isolated deals in the past. 

People's Bank Chief Executive Officer, Derrick Kelly attributes this to the lack of awareness and the "trading culture" in Sri Lanka." 

Many Sri Lankan companies try to maximise current profits and are not concerned about future risk management, he said. He added that the bank is trying to carve a niche for itself in the derivative market as a part of its restructuring process.

Aitken Spence chairman, Ratna Sivaratnam said the company is considering a similar derivative transaction for its Anuradhapura power project, which is currently held up due to political obstacles.

Big birds to land free

By Diana Mathews
The Finance Ministry has decided to waive landing charges for aircraft carrying more than 200 passengers, in an attempt to provide a much needed boost to the tourist industry.

Chairman of the Ceylon Tourist Board, Renton de Alwis, identified the latest measure as a confidence builder for the tour operators. "We are currently pushing for the removal of the 200-passenger limit for charter flights. We need to encourage carriers like LTU and Condor to build up capacity and visit Sri Lanka", he said. Meanwhile, the Sunday Times Business Desk learnt from reliable sources that a leading commercial bank had voiced concern about the high number of loan defaults from tourist related industries. 

Bank officials have said that many small-time businesses supplying services to hotels had got their orders cancelled and are now unable to service their loans for the time being. The bank has sought advice pertaining to the provisioning requirement.

The Central Bank provisio-ning requirement states that banks should provide 20% and 50% of the unsecured exposure for loans outstanding up to 12 months and 18 months respectively. The loans outstanding for more than 18 months should be provided for in full.

"The strict provisioning requirement can cause problems for the banks which have a high number of tourism related businesses that cannot service their loans until there is a revival of the industry," said Director- General, Securities and Exchange Commission, Dr. Dayanath Jayasuriya.

People's Bank CEO, Derrick Kelly said the bank is expecting a knock- on effect in the event of a prolonged tourist industry downturn. "We will have to wait and see whether the industry will pick up by November," he said.

Union Bank confident of turnaround

By Chanakya Dissanayake
Union Bank aims to implement drastic cost cutting measures and strict recovery action to turnaround problems faced due to a high number of non-performing loans. In an exclusive interview with the Sunday Times Business Desk, Union Bank's new managing director, N.B.S.B. Balalle said he is expecting a significant improvement in the loan portfolio within the next three months. "We are strengthening our recoveries department with new staff and enforcing the securities. The bank will leave no stone unturned to recover the loans," Balalle said.

As a turnaround strategy, the bank will be launching an aggressive deposit mobilisation programme shortly. "A deposit drive will improve our cost structure by reducing the necessity for high cost money market borrowings," he said. Union Bank is also focused towards achieving gradual credit growth through a concentration of retail clients. The branches, which currently engage only in fully securitised credit, will also expand their retail credit activities.

"We made a strategic decision to concentrate on retail credit and medium size corporate lending, as opposed to large commercial loans to minimise risk", Balalle said. He added that a strict credit appraisal system would be adopted in line with the loan expansion. Balalle initiated the cost cutting programme with a voluntary reduction of his salary and perks. 

Many commercial banks and institutional investors including the Employees' Trust Fund have also reacted positively by extending their credit lines and deposits. Although the National Savings Bank and the National Development Bank have in the past evinced interest in purchasing Union Bank, subsequent diligence studies have discouraged prospective investors. However, Balalle rules out the possibility of selling out in the near future. "We are very confident about the turnaround. Union Bank has key competitive advantages in its sophisticated IT systems and highly motivated young staff", he added.

Govt insurance needed if Ronnie fails, says shippers

The shipping community has requested the government to insure ships calling at the Colombo port for US$ 500 mn, if negotiations with London underwriters to remove the war risk surcharge fail. The request was made recently at a crisis meeting with Treasury Secretary, Dr. P. B. Jayasundara.

"If the government obtains this insurance and pays the premium, the ships calling on Colombo will not have to pay a surcharge," Vice- Chairman, Ceylon Association of Ships' Agents (CASA), Parakrama Dissanayake told the Sunday Times Business Desk.

"We feel US$ 500 mn would be an adequate amount to cover any incident," he added. Dissanayake also emphasised that they are fully satisfied with the new security measures initiated by the government to ensure the safety of ships.

A top level delegation led by minister Ronnie de Mel is presently in London in a last ditch attempt to persuade insurance underwriters to remove the war risk surcharge. The shipping crisis reached new heights last week following the announcement of a 400% increase in the insurance surcharge by underwriters based on "intelligence reports" of an impending attack on the Colombo port.

President of the Shippers' Council, Rohan Masokorala, alleged that the LTTE was attempting to destabilise the shipping industry by spreading rumours about an impending attack on the port among international insurers.

"The sheer size and the consequences of this crisis calls for President Kumaratunga herself to get involved. But so far only minister Ronnie de Mel has realised the gravity of the situation," Masakorala said on the eve of his departure to London for negotiations.

Following the additional surcharge several lines have quoted additional premiums between US$ 350,000 and US$ 480,000 per call. The surcharge initially quoted was between US$ $100,000 and US$ 150,000.

However, analysts are sceptical about the eventual success of the delegation. "Government needs to take some concrete security measures and then talk to the insurers. Merely meeting the insurers will do nothing to build confidence," an analyst said.

On Tuesday, APL Malaysia which was anchored outside the harbour decided to bypass Sri Lanka after its underwriters announced the premium hike. Hanjin Oslo which left Malaysia for Colombo had also turned back after the hike.

The leading shipping line, Evergreen, has also cancelled 22 calls out of 38 to Colombo. Its sister line, Uniglory, has cancelled all its calls for the time being. Hanjin and Hyundai lines have also announced cancellations of some calls.

Dissanayake has assessed a 65% loss in total capacity resulting from the cancellation of calls on Colombo.

Meanwhile, in a bid to mitigate the high cost of calling on the Colombo port, the government reduced the cost of fuel being distributed by Lanka Marine Services, the Ceylon Petroleum Corporation's bunkering arm. Colombo will now offer fuel at prices on par with competing ports such as Singapore.

Meanwhile, members of the coir industry sounded alarm bells regarding the crippling blow suffered by the industry as a result of the increase in the insurance surcharge with effect from yesterday. Mr. Sarath Wickremeratna, the President of the Sri Lanka Coir and Allied Product Manufacturers' Association said that the coir industry, which employees 40,000 directly and more than 400,000 indirectly, is in danger of coming to a standstill. They could also lose their traditional customers to competitors such as India, the Philippines and Vietnam. He added that since yesterday the exporters were required to pay an additional US$ 350 for each 20-foot container and an additional US$ 700 for a 40-foot container. This rate negates any possibility of profitability, as in most cases the profitability of a container is less than the surcharge. The country is now in danger of losing valuable export earnings in the region of US$ 50-40 million, which is the total value of the 15,000 TEUs exported every year.

The growing economic crisis facing Sri Lanka

Surely the Ministry of Finance and the Central Bank now recognise that we are facing a serious economic crisis? Is it still the official view that recent events and their impacts are a mild setback from which recovery is imminent? Are not the financial, trade and tourist impacts of the bomb blast devastating? Surely an economic crisis of serious proportions is on our hands. Are we not facing severe external and internal shocks that are likely to leave the economy in ruins?

The facts are dismal. The outcomes of the bomb blast were more widespread than initially expected. It was not merely the damage to the aircraft and a reduction in tourists traffic for a while, but a series of repercussions by the international community that has put the economy in peril. First there were the travel advisories and warnings, airlines not calling on Colombo and the vastly reduced flights of SriLankan airlines. These would have reversed the favourable developments that were witnessed in the first half of the year. An increase in tourist earnings of about ten percent in the first half of this year would be wiped out.

The story did not end there. Insurance companies raised their rates for both aircraft and ships calling on Colombo. The latter is even more disastrous than the former as it affects our exports and imports much more. The surcharge or increase in freight rates will affect the competitiveness in international markets.

It also comes at a time when our industrial exports are declining in any case. We are also facing greater competition in our main agricultural export, tea, where global supply is increasing. Freight rate increases wou-ld be deadly. On the import side further increases in prices imply that our raw material imports so vital for our exports would rise in price and result in the costs of products of most of our exports rising to levels when they become non-competitive in international markets. The impact on consumer prices is too simple to explain. Inflation, induced through higher import prices is inevitable.

We are facing this serious economic crisis in a confused political situation. A government preoccupied with remaining in power by any means is not focused on the economy but compelled to take short-term efforts at crisis management that will compound the economic problem in the long run. Business confidence is at low ebb. Risk aversion rather than investment will be the guiding principles of the private sector.

In this context, expected international assistance too would not be forthcoming. The international community will await the resolution of our political crisis. It is best for the government spokesman to assess the impacts of the current developments and apprise the people of the real economic situation. Perhaps that it is not necessary as the people, especially the business community have made their evaluation and have assessed the state of the economy. Official statements in the light of recent pronouncements may lack any credibility. 

Yet, a realistic appraisal and a clear statement on the hard realities of the economy are needed. The government for its part must act in accordance with that reality and be focused on the economy. For that an early settlement of the political and constitutional crisis is essential. The opposition parties too must act with responsibility to enable the government retrieve the economy from this crisis.


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