2nd December 2001

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Unsound policies send COL up

By Dr. S. Colombage

Prices of most consumer goods, mainly food items, are rising exorbitantly. For example, the retail price of Kekulu rice in the Pettah market is Rs. 34 per kg, up by 36 percent from Rs. 25 a year ago. The price of beans increased from Rs. 40 per kg to Rs. 48, tomatoes from Rs. 26 to Rs. 56, red onions from Rs. 44 to Rs. 50 and dried chillies from Rs. 112 to Rs. 150. The price of potatoes doubled to Rs. 76 from Rs. 38 last year. The retail price of coconuts is Rs. 16 per nut, up by 60 percent from Rs. 10 last year. The price of Kellawella fish is Rs. 180 per kg, up by 16 percent from Rs. 155 a year ago.

Changes in the general price level are officially measured by using the Colombo Consumers' Price Index. (CCPI). This Index (1952=100) doubled from 1410 in Oct. 1993 to 2936 in Oct. 2001. Inflation began to accelerate since May last year and the annual inflation rate is now running at 14 percent. According to my projections, it will reach 16 percent by the beginning of 2002. This is much higher than the target inflation of 9.5 percent envisaged in the Budget of 2001.

The present high inflation is largely caused by imprudent policies and therefore, it can't be attributed to any world market price shock, which is normally used as a scapegoat by the authorities. In fact, international prices of some key commodities have come down. The import price of crude oil is down by 19 percent to dollars 25 per barrel from dollars 31 a year ago, white sugar is down by 10 percent to dollars 264 per mt from dollars 293 and wheat down by 8 percent to dollars 137 per mt from dollars 149.

A major reason for the high inflation is "too much money is chasing too few goods". The money supply rose by 13 percent during the last 12 months, as against near-zero production growth. Much of this monetary expansion came from a 50 percent increase in bank lending to the government. As the government spends without sufficient revenues, the deficit has to be financed largely by printing money. The result is a money-driven inflation, which could become hyperinflation if continued long enough.

The Central Bank's policy stance to allow the exchange rate to depreciate at a faster pace, as a solution to defend the fast depleting foreign reserves, also led to accelerate inflation. The rupee/US dollar rate depreciated by 10 percent from Rs. 73 in June 2000 to Rs. 80 in December 2000. In January 2001, the Central Bank introduced a rupee float allowing the market forces to determine the equilibrium exchange rates. Now the dollar value has gone up to around Rs. 94 reflecting an annual depreciation of 20 percent. The impact of this on import prices is tremendous. For example, the import prices of sugar and wheat, in rupee terms, increased despite the fall in their dollar prices.

Another major policy-led cause for high inflation is the increase in administered prices by the government since mid-2000. Administered prices of fuel, wheat flour, electricity, transport fares and public utilities were raised. These increases were justified by pointing out that the world market prices, mainly for crude oil, had gone up. Although international prices came down this year, a concomitant reduction in administered prices was not followed. The costs of the inefficiencies in key public sector enterprises like the Ceylon Electricity Board and Petroleum Corporation have been passed down to the ordinary consumer by raising the prices. These administered price adjustments were made mainly to satisfy the IMF to draw the standby facility. By overburdening the ordinary consumers with all these price increases, the government was able to draw a part of the credit facility last April. But this standby has now gone haywire with a reversal of policy reforms by the government to face the election.

Recent wage increases have tended to push up inflation further. On the eve of last year's general election, several wage increases and other benefits were granted to public sector and organised private sector employees in the latter part of 2000. In view of the forthcoming general election, more wage increases are being granted. All these wage hikes have cost-push effects.

The Central Bank attempts to cover up the high inflation by telling us various stories in its recent press releases. It says the price indices based on urban areas reflect a higher inflation, compared with rural areas. But it is difficult to accept this argument, as regional price disparities are insignificant now. Another argument put forward by the Central Bank is that the "underlying" or "core" inflation remained relatively low at around 9-11 percent. We should note that these are merely statistical adjustments used to eliminate any volatile price changes from the data series. Such sophistications are irrelevant to the ordinary consumers. They are more concerned about the prices that they actually pay when they buy their daily needs. Undisputedly, we are encountering a high inflation. Thus, the Central Bank has failed to fulfil its prime duty of maintaining price stability, in terms of the Monetary Law Act. In countries like Germany and New Zealand, the central bank governors are personally accountable for any increase in inflation above the target. It is a tragedy that we do not have such a mechanism here.

Low tariffs deter growth - Suntel

Suntel has come a long way ever since entering the Sri Lanka market as a private fixed phone operator in December 1996.

The company completes its fifth year in operation today and is looking forward to continued growth - despite concern about low tariffs - with bright prospects of a second international gateway that would reduce the costs of overseas calls.

Some of its achievements have been a 7-day delivery service, introduction of the concept of corporate account management for the management of corporate and business customers and a 24-hour customer care hotline.

Suntel is owned by Telia AB, the national telecom operator of Sweden, Sri Lanka's Metropolitan Group, TVG Asian Communications Fund of Hong Kong and Sri Lanka's National Development Bank.

Hugo Cederschiold, managing director, Suntel Ltd, in an interview with The Sunday Times Business talks about Suntel's event-filled five years, the issues, problems and concerns, and the future of the industry.

Excerpts of the interview:

We came in when the government decided to regulate the market in around 1995 and was issuing competitive bids for new licences.

Suntel was awarded such a licence in February 1996 and the government concept was that competition would increase the number of telephone lines in the country and provide the customer a better service.

How did Suntel view the Sri Lanka market at that time? What was the potential?

Sri Lanka is a good market - one of the reasons being the low availability of telephone lines. There was a huge potential for the market to grow. It was also viewed, then, in the context of Sri Lanka being a stable democracy. The big market potential and that we were going to provide competition were some of the reasons for investing.

How much did you invest at that time?

It was decided to invest US $ 100 million in the medium term. It took some time to build up and we have reached that now. There were also licence conditions set out that we should have 100,000 lines, we should have a call completion ratio of the network of 50 percent and we should be in all the secondary areas by the end of last year. These were the targets set.

It takes some time to do this. But we fulfilled all these licence conditions by the end of last year.

Were there any tough conditions in the licence agreement?

The toughest one was the number of lines and being in all these secondary areas. When the licences were given, one hoped there would be peace in the country and we could access all the areas in Sri Lanka. Unfortunately seven of these areas are not accessible due to the security situation but in 21 others we have access.

Considering the infrastructure, it is a daunting task to reach every nook and corner of the country in just five years. We have managed to have some presence in all areas that we have access to.

We are still looking at an islandwide network but would have to wait till the north-east problem is resolved.

What about conflict areas where the government is in control?

We tried to go to Vavuniya but we were not given permission by the Defence Ministry for security reasons. Jaffna is also a good market but again it depends on the security situation.

Are you happy with the progress made in the past five years?

Yes, we are. Suntel has had an impact on the telecommunication industry not only by the number of lines that we gave but also the influence we had on all the other operators because we set certain service standards like a 24-hour hotline among other unique features. These were new to the market at that time but has since then been followed by other operators.

If you look at the number of lines and how the telecom market has expanded, it is partly due to the NTT investment in SLT but also because of the competitiveness compelling others to "run faster" in the market.

How many lines do you have now?

We have close to 80,000 now, at an average of 20,000 lines a year. This year's growth has been slower because there are some problems. One of the problems is that there seems to be a tradition in the utility market that people don't pay their bills on time. It is a problem all operators have. We have to put a lot of effort into collection.

We have improved our collection but it still has a serious impact. If we don't get paid we can hardly invest. That's a serious problem.

Competition between fixed phones, mobile phones and payphone operators?

The payphones is another channel of selling our services. We provide the service and they provide the booths. There is no conflict between us. As far as the mobiles are concerned, there is not much competition with fixed phones as people want mobiles because they want to be mobile. They need a fixed line for high quality voice, data communication, Internet, etc.

However, in the future we would be seeing more use of mobile phones increasingly for the "simple" voice and the use of fixed lines more for applications like high quality data, high quality fax, etc.

There appears to be an increasing number in the use of mobile phones across the island including rural areas. Could it be cheaper because infrastructure costs are less?

In a way - yes. You install a base station and then sell the handsets. That's it. There is some competition and that's good because the fixed phones would be used for high quality voice and data transmission and mobiles, more for the common voice.

Interestingly one could see in the future a kind of mixture between mobile and fixed technology where they have the limited mobility concept, where a mobile phone could be operated within the base station area with no roaming facility. That's technically a simpler solution, fairly cost effective and cheaper.

Problems faced by Suntel in the past five years?

At the inception, we had a pretty hard time with Sri Lanka Telecom for some years. It has normalised now. Every party realises that in the telecom business, you have to compete with each other but also one has to cooperate. That is the natural tendency because we have to connect our networks to make it work. In the past year we have had a normal relationship with SLT, which is beneficial to the customer as it has improved call completion and interconnected between networks.

In this situation, regulatory issues become important. There have been many issues. For instance SLT took the regulator (Telecommunications Regulatory Commission) to court. This is not unusual as there would always be differences of opinion between the operators as well as between the operators and the regulators.

But most of these problems have been overcome. We have entered a more mature status, a more mature period in the market.

We are now looking at a global situation like India for example where they are deregulating the international traffic fairly strongly. The government should start to re-evaluate the whole telecom policy again. Private fixed phone operators have to use SLT's international gateway.

It is known that SLT has a monopoly upto August 2002 and after that the official position has been that a second line an international gateway will be launched. However, we don't know much about the process and when and how it's going to happen.

What would be the scenario if and when a second international gateway for communication traffic opens?

The official position appears to be that there should be one more gateway in addition to the SLT gateway, with some other operator getting the other one. If we get that gateway, we would invite others to use it too. If we don't get it we would go to SLT or the other operator depending on who gives us the best terms.

The whole reason why SLT was given the monopoly is that local tariffs were low while international tariffs were high. We have to re-balance it, bring down the international rates and raise local rates.

The process is not over yet. There should have been a tariff revision by the middle of this year, even earlier this year. But that has not happened. On the other hand, US authorities are bringing down international tariffs. International revenues are going down but this is not being compensated by a rise in local tariffs.

The government must be having some reservations on this issue as increasing local tariffs means a rise in the cost of living. On the other hand if this re-balancing doesn't take place, all operators will run into trouble. We won't be able to invest, as we won't have the money.

Are current tariff rates uncomfortable?

In the long run, they are too low. There has been an annual increase in rates of between 15 to 20 percent since 1996.

The last time there was a tariff revision was in July last year. It has been 18 months since then and a revision is long overdue.

I can understand the government's dilemma. They may want to keep the cost of living down.

The rates vary from operator to operator. The TRC doesn't appear to have any objection to an increase but ultimately it is a government decision.

Technically we can raise rates as we are not regulated. We just need to inform the TRC. But SLT being the market leader - has to make the first move.

Are the low tariffs affecting growth, profitability?

It is a loss of revenue and that will invariably affect investments. It is a very serious matter.

What about profits?

Profits are severely affected. We have been making profits for quite a few months now. But we don't know whether we will end up this year at bottomline profits or whether we will incur a loss. If it's a loss, it's not going to be big. There is a risk and the main reason would be the tariff revision.

Any impact on revenues from the current economic climate?

We have noticed lower usage and resistance is growing in the market, even before the Katunayake attacks by the LTTE. People became more and more careful and reluctant to invest. After the September 11 attacks in the US, we have also noticed a drop in the traffic.

People are very careful, not as liberal as before in investing. Companies are cutting down costs, taking away IDD facilities from certain employees. Ordinary household customers are also cutting usage.

We are forever looking at ways of enhancing revenues while cutting costs.

Can you increase the number of lines from the present infrastructure?

We have no problem increasing the number of lines. We have three switches and can take in some more lines. If we need another major expansion, we only need to install a fourth switch.

Any expansion plans? Are you cautious given the current environment?

Last year we launched in six new places while this year's expansion took Suntel to Badulla. We are now in the process of consolidation but I agree, we are a bit more cautious now on investments.

Any special plans for the 5th anniversary?

We visited corporate customers on Thursday, November 29. We are visiting household customers today and giving them a gift as a token of our appreciation.

Any expansion plans next year?

For the first few years we have been installing a lot of lines. But it would be good for us and our customers if we slow down the pace and spend time consolidating the network, improving the quality of the customer base, etc. If we keep on chasing more lines, we are bound to run into problems. It has happened to other operators.

We got the licence for wireless technology and that's what we have been using. But within that framework we have been using ISDN (Integrated Services Digital Network) and that's what we need for Internet access because it has high speeds.

Earlier a customer had to choose a dial-up line or a telephone, which could be slow and cumbersome, or a lease line, which is expensive unless it is necessary. The advantage in the ISDN is that it's a circuit-switch technology. You only use the capacity when you need it but at high speeds. We were the first to introduce it here. We have also introduced video-conferencing, which has become useful for the garment industry.

We also launched our own Internet service Suntel WOW as we felt we should take advantage of the Internet to provide a range of services.

We need to look more closely at the usage of the network because we have many lines where the usage is very low and in the long run that is not very tenable. We need to look at ways and means of stimulating more usage of the network.

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