30th December 2001

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Dividends of the peace process

By Dr. S. Colombage

The current cessation of hostilities in the north and east have raised expectations of peace and socio-economic recovery. The war, which has gone on for nearly two decades, has had a devastating effect on the economy. Many productive lives have been lost and many people have been injured. The annual defence expenditure of the government running to the tune of over Rs. 50 billion is a severe strain on the budget. The economic burden of the war incurred so far is estimated to be more than two years' GDP. Sri Lanka is ranked as a high-risk country in international credit and investment ratings and this has a negative impact on foreign investment inflows and tourist arrivals. Settlement of this conflict, therefore, is a prerequisite to attain socio-economic progress. But past experience shows that achievement of peace is not an easy task.

War reduces production and income growth in several ways. It reduces the growth directly by diverting the limited financial resources to military activities which otherwise would have been utilised for productive purposes. The war indirectly reduces production growth through the destruction of the capital stock. Production, mainly agriculture and fishing, in the war zone has been disrupted. Business confidence in the country has eroded partly as a result of the war.

Considering these repercussions of the war, we can expect various 'peace dividends' from a possible settlement of the conflict. However, the nature of such peace dividends or the economic benefits that can be drawn from peace is complex. The magnitude of the dividend depends on a number of factors like the time span of the peace process, output loss resulting from the war and sustainability of peace.

An immediate benefit of achieving peace would be the saving of government expenditure incurred on the war. Security-related expenditure accounts for around 5.6 percent of GDP. Of this sum, 4.6 percent of GDP is spent for defence and one percent for maintaining public order and safety. As the expenditure for public order and safety needs to be incurred even during peacetime, any drastic reduction in this category cannot be expected. As regards defence expenditure, there are no proper records of actual costs involved in the war. Military purchases were made outside the normal tender procedures. In the defence category, around 1.7 percent of GDP is spent for wages and salaries of the forces and these cannot be curbed immediately even if peace is achieved. But it would be possible to bring down the expenditure on goods and services, which amounts to about Rs. 36 billion or 2.8 percent of GDP. Depending on the success of the peace process, a gradual reduction in overall military expenditure can be expected.

A significant increase in production in the north and east cannot be expected until the capital stock that has been destroyed is restored. Empirical studies done in countries grappling with civil wars show that in the case of brief civil wars, the depletion of capital stock is not substantial. However, when civil wars are prolonged, the capital stock declines continuously. As the civil war in Sri Lanka has been prolonged for nearly two decades, the loss of capital stock is fairly extensive. Therefore, it would take a longer period to recover the production losses caused by the war. Public investments will have to be augmented to restore the capital stock and accelerate the recovery, once peace is achieved.

The war has crippled the tourist industry. Tourist arrivals fell by 14 percent in the last eleven months of this year. It is further hampered by the recent terrorist attack in the US and the current global recession. Nevertheless, the tourist trade has renewed its hopes of better prospects in view of the cessation of hostilities. Inflows of foreign investments to Sri Lanka have declined in the last several years mainly due to the depressed economic situation. The war further worsened the investment climate in the country. On average, annual inflows of Foreign Direct Investment were less than $200 million. There have been continuous net outflows of foreign portfolio investments from the stock market in recent years. Achievement of peace will help to boost investor confidence and thereby attract foreign investors. A possible revival of agriculture, fishing and tourism in the north and east will directly contribute to GDP growth, which is now running at a negative 0.6 per cent.

The potential to accelerate socio-economic progress depends, inter alia, on the sustainability of peace in the long run. We should also note that peace alone is not sufficient to achieve economic growth. The reason is that numerous impediments, other than the war, have constrained production growth in the recent pass. In particular, business confidence has been shattered by the weak macro-economic fundamentals emanating from the irrational monetary and fiscal policy strategies. These should be rectified. The delayed economic reforms also need be expedited. Upliftment of dilapidated infrastructure too is essential. Unless these measures are taken effectively, it would be difficult to restore investor confidence and achieve socio-economic progress even if there is peace.

Changing of the guard at Aitken Spence

With the retirement at the end of the month of Ratna Sivaratnam, chairman and managing director of Aitken Spence and Co. Ltd., leadership of the conglomerate will pass on to a new generation of executives.

Sivaratnam will be succeeded as chairman by Prema Cooray, the group's deputy chairman and managing director of Aitken Spence Hotel Holdings.

Both men have made significant contributions to developing the blue chip's tourism business, which today generates much of its profits. The change will also see Rajan Britto, a nominee of Harry Jayawardena, the company's single biggest shareholder, both of whom came on the Board of Management in April last year, becoming managing director of the group.

Sivaratnam, who was instrumental in taking the company into the tourism industry, has more than 40 years of service with the company.

He will remain on the main board, regarded as the domain of the main shareholders, as senior directors who retire have done before him.

"It's a super feeling," Sivaratnam said with a grin when asked about his retirement during an interview last week. "Two-thirds of my life has been given to Aitken Spence and work - dedicated, loyal service at the expense of my wife, family and myself."

"My immediate plan would be to put my feet up for three months," he went on. "But I'd rot and perish - while being in good health - staying at home and twiddling my thumbs. Therefore I'd like to make a contribution to my country and people in whatever way I can, free of charge."

Aitken Spence is one of the oldest companies in the island, having been set up as a trading company in Galle by two Scotsmen in 1868. Today, it has emerged as a diversified conglomerate with 35 subsidiaries and associate companies in the hotel and travel industry, power generation, cargo logistics, plantations, printing and packaging, corporate management services, shipping, freight forwarding, and warehousing and distribution. It has held the Lloyd's insurance agency since 1878.

The group is one of the largest inbound tour operators and the island's largest hotel operator with 1,100 beds in a network of hotels in beach resorts, the hill country, and the Cultural Triangle. It is also the fourth largest supplier of rooms in the Maldives. Sivaratnam joined Aitken Spence in 1960 as a junior executive with a monthly salary of Rs. 250. Its main business was shipping agencies, insurance, and plantations management.

It was Sivaratnam who was responsible for Aitken Spence's foray into tourism. He admits to have been "absolutely clueless" about tourism at the time but took on the challenge and set up the company's first hotel, Neptune, a three-star beach resort in Beruwela, in 1972.

This was the time when the company's main businesses were badly affected by the socialist-oriented policies pursued by the government. Plantations were nationalised, insurance made a state monopoly, and restrictions imposed on shipping agencies. "We were losing our business which we had operated for over 100 years," Sivaratnam said.

The series of setbacks suffered by the tourist industry - starting with the 1971 youth insurrection, the oil price shocks that raised the cost of air travel, the 1983 ethnic riots, and the second insurrection in 1988-89 - prompted Aitken Spence to venture into the Maldives.

Sivaratnam, along with deputy chairman Prema Cooray who succeeds him, was instrumental in this move which has proved to be decisive - the three resorts in the Maldives bring in the bulk of the firm's tourism profits.

Having realised the volatility of the tourism business, on becoming chairman and CEO in 1995, Sivaratnam aimed at getting into other businesses to balance the company's portfolio. A new 'core' business is infrastructure - the company has invested $38 million in setting up two 20 megawatt power plants in Matara and Horana.

Sivaratnam says the size of the investment is "more than the group's market capital - an outstanding and frightening thing." He says Aitken Spence ventured into the power business "not only because returns are good but because the country requires support in the development of infrastructure."

The company is in very good hands with the management team developed over the years, Sivaratnam said. "The vision as I leave today, for the next five years, would be to remain with our core businesses - tourism and related businesses, port-related business and infrastructure development," he said. "We're also venturing overseas - we're looking at South India, we're already in freight forwarding in Bangladesh and we're looking at Nepal."

Deputy chairman Prema Cooray agrees. "We've been looking in the last three years at India - Cochin and Kerala. Eventually we'll get there," he said.

The company wants to develop a network of complementary businesses in the South Asian region and has considered going into other Indian Ocean islands such as the Seychelles and Mauritius as well as Nepal and Bangladesh.

"We need an excellent airline network to make the theme work as a super combination and offer diversity," Cooray said. The company is thinking of packages similar to the current ones that include stays in Sri Lanka and the Maldives.

Cooray, who succeeds Sivaratnam on January 1, joined the company in 1976 as an accountant and hotel management executive overlooking the hotel management and the travel sector.

He was one of the first three executives to join Aitken Spence Travels when it was set up soon after the group launched its hotel business. He has been with the group for 20 years and was instrumental in bringing into the company's fold many of its hotel properties. In 1998 he was promoted to the Main Board - the first such appointment to the Main Board in 15 years, the last being Sivaratnam.

He became deputy chairman of the Management Board and CEO of Aitken Spence Hotel Holdings in April last year. Cooray describes Hotel Kandalama, the five-star 'eco-friendly' resort in the Cultural Triangle, as "our biggest achievement in the hotel sector."

The controversy around the project when it was opposed by environmentalists, "made us work towards excellence," he said, pointing out that it later won the Green Globe Award for ecological management. "We had many firsts in the field of environment and food," he said. "As a local team we are very, very proud."

Cooray is optimistic that tourism will recover from the setbacks of this year. "We were well poised this year to make great strides but suffered a temporary setback," he said. "I expect the numbers to start picking up to normal levels by July-August next year." If peace returns, he said, "we'll run towards Nilaveli where we have a 100 acre plot of land." Trincomalee has much potential with excellent beaches and opportunities for diving as well as a niche market in whale watching, he added.

"We've spent the last few years consolidating our core areas - tourism, cargo logistics and infrastructure development - power generation," he said.

"These are the main areas for future expansion." Cooray says he's proud of the quality of the company's staff and their commitment, adding that it values innovation and entrepreneurship.

"We can't afford to be what we were five years or even three years ago the world is changing," he said.

"We have to respond to the changes very fast. The emphasis is on the qualitative aspects of work rather than the quantitative."

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