17th February 2002

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CWE and the proposed restructuring plan

By Peter Jayasekera
Attorney-at-Law and CWE chairman 1996-1998

The new Commerce and Consumer Affairs minister has spelt out the dynamics of the proposed restructuring of the CWE. According to him the C.W.E. will be made a holding company. There will be subsidiary companies for retail, wholesale and other general business. The company for retail business would be 49% owned by the private sector and 51% by the government. However, the minister has assured that the CWE will not be privatised.

The minister's intention may be noble and directed towards rescuing this national institution from collapse. There is no question the CWE has incurred losses from 1995 but it is necessary to examine the reasons and causes for such losses before any radical and far reaching restructuring as proposed is taken because the proposals of the minister tantamount to pure privatisation of the CWE de jure (in law).

If the CWE is to be converted to a holding company it would be necessary to pass an amending Act and register the CWE under the provisions of the Companies Act of 1982 as a company. Even though the government may hold the entire stock of shares, it could be sold to private individuals or a private company by an informed contract and by notifying the Registrar of Companies through FORM 63. This is a simple process.

The proposal of the minister is in accordance with the repeated demands made by the IMF and the World Bank that the CWE be privatised. In fact the IMF has sponsored a number of parliamentarians and similar political heavyweights on trips to the US, Latin American and EU countries extolling the virtues of privatisation. The views of the IMF and the World Bank on the CWE have very often been echoed by the Central Bank and the Treasury in their reports from time to time.

While one must respect the role the IMF and the World Bank are playing to assist countries like Sri Lanka, made hapless and helpless by the follies of their so-called own rulers and compelled to live on foreign assistance, any privatisation of the CWE at this juncture of this country's historical development would adversely affect the people of Sri Lanka particularly the poor and disadvantaged classes in buying their essential food items. Though the private sector in the US and EU countries are enlightened and have a highly advanced trade culture, Sri Lanka's private sector unfortunately hasn't still developed to that extent. In the old days under the mixed economic system, price control and the quota system regulated the market but under the present free market regime such controls are not acceptable. It is the CWE that performed the regulatory function and helped to control and stabilise the prices of essential commodities.


For instance, if the CWE shelves don't have potatoes, onions, dhal or sugar the prices of these commodities soar as private wholesalers take advantage of this crisis to increase their prices. However, when the CWE brings down the prices of these products, the private sector also follows suit. Recently the price of potatoes rose to Rs. 80 per kg but when the CWE imported and priced them at Rs. 40 per kg, private traders also priced potatoes close to this rate.

In addition to this, during times of crisis such as riots and national emergencies, which developed countries don't experience, the CWE and the Cooperatives protect the people by supplying essential food items and rescue them from the clutches of the private trade always seeking to make a fast buck.

The CWE also performs the public function of holding buffer stocks and thus prevent price escalations. By privatising the CWE in the present context and conferring these functions on a private sector company particularly there is no guarantee that this private company would act as a buffer against price hikes.

Real assets of the CWE

The CWE has very valuable real assets worth billions of rupees. In fact the Oberoi Hotel, at one time was entirely owned by the CWE through a subsidiary, Asian Hotels Ltd.

Under the UNP government of President Ranasinghe Premadasa it was privatised for a song. Still it is not known who the new owners are apart from the fact that it is a big local business group.

Then on August 12, 1994, four days before the August 16 general elections, three acres of prime land owned by the CWE and adjoining the Oberoi were sold to the new owners at Rs. 60,000 a perch when the going price per perch of land in that locality was Rs. 2 million. There is been no proper sale documents for this divestiture. Under the PA government a certain high official helped to regularise the ownership of this land though to this date the board of directors of the CWE has not signed any conveyance transferring the ownership.

The CWE now has valuable assets at Union Place, Vauxhall Street, D.R. Wijewardene Mawatha in Colombo, in Kandy. Anuradhapura, Galle, Matara and all over the island. These are very attractive assets for any body or group taking control of the CWE as a private asset and a calculating genius could swallow them overnight.

Privatisation reasons

The minister has given several reasons for the restructuring in the manner he proposed. One is corruption and fraud. These no doubt this existed in the CWE. I believe if the majority of the employees of the CWE are properly motivated this scourge could be eliminated or reduced to a minimum with a minister overseeing it effectively.

The losses incurred by the CWE in the recent past were not due to CWE being a public sector organisation but due to a subjective framework being introduced in the mid-nineties. The new minister must examine them before he proposes the restructuring, because this framework is the reason for the colossal losses it has incurred.

Disallowing wholesale

In the pre-PA (before 1994) period, the CWE earned profits. In fact in 1994-1995 after the PA took power the Treasury appropriated Rs. 500 million the CWE had as reserve profits. Unfortunately, the PA government restricted the trade turnover of the CWE to 10% of the country's trade turnover. This was perhaps to please the IMF and the World Bank. Then wholesaling was disallowed and the ensuing consequences were fatal to the CWE. With only packeted retail sales, how could the CWE maintain an establishment with 8,000 employees, 150 shops, and 46 reserve stores and a fleet of over 400 vehicles?

The CWE has existed on the wholesale business and in fact it had many monopolies for some items. It was created by Mr. D.S. Senanayake for wholesaling commodities to the cooperative network in the country. Thereafter, Mr.T.B. Ilangaratne gave the CWE a number of monopolies. While monopolies are taboo under the present market system, wholesaling by the CWE didn't run counter to the principles of the market economy. Disallowing wholesaling for the CWE was suicidal and affected consumers.


When the PA gained power, the practice of importing essential food items, except wheat, was changed. Wheat was imported from well-known suppliers on a quotation system. This ensured quality but in regard to other food items, imports were done on an open public tender system. Treasury advisors perhaps suggested this because it ensured transparency. It appeared to be fair and reasonable but it was a dead rope and the PA swallowed it hook, line and sinker. The IMF and the World Bank may have been delighted by it but it made imports costly.

Essential food must be purchased when necessary at the lowest price in the world market and fast before prices rise. The tender system required bureaucratic approval, advertising by tender worldwide giving at least six weeks to three months, opening the tenders about two months later (when prices have changed adversely) and then going through performance bonds, etc. The goods sometimes took three weeks to a month to arrive. By this time, competing private wholesalers have with the aid of modern communication received their goods at the best price available.

The open tender system was often abused by crooks and enabled international swindlers with their fraudulent agents in Sri Lanka to swindle the CWE with the help of some employees. They even get international surveyors to certify faulty products and ship them to the CWE.


Some Treasury officials were also responsible for the problems of the CWE. The CWE had no capital and operated on an annual Rs. 6 billion guarantee by the Treasury for commercial operations. However, it met all interests payment to banks.

On top of this the Treasury also paid a commission to the CWE for operating the wheat monopoly of the government by importing and overseeing the milling by Prima and selling the wheat flour through the Food Commissioner. According to the agreement between the CWE and the government, though the Treasury had to pay Rs. 1 per kg of wheat flour, Treasury officials gradually reduced this amount to 20 cents per kg and even sought to reduce it further. This was arbitrary conduct against the CWE, depriving it of income and increasing its losses.

When farmers protested saying they couldn't obtain meaningful prices for their products, the government asked the CWE to handle these functions which were earlier handled by the Marketing Department and the Paddy Marketing Board. The CWE was not suited for this, because these purchases were not business-oriented ones and resulted in losses.

I remember one such occasion where the CWE incurred a loss over Rs. 350 million or more by purchasing local chillies. The Food Security meeting with a Treasury representative recommended to the CWE to purchase chillies at Rs. 105 per kg. The entire local chillie crop in second half 1996 was bought by the CWE for Rs. 475 million. The Food Security meeting assured the CWE that a special surcharge of Rs. 35 per kg would be imposed on imported chillies in addition to the existing custom duty of 35%. But what happened? The Finance Minister removed the existing duty of 35% and Indian chillies flooded the market at Rs. 50 per kg. The CWE could only groan because a communique was issued by the Treasury that the existing duty was removed to reduce the cost of living. By this exercise CWE lost over Rs. 350 million. Such were the decisions that forced the CWE into loss-making situations.

Level playing field

It is necessary that the CWE should be liberated from these shackles. The foregoing matters that I have explained show that there is no level playing field and it is a myth to say that the CWE had an advantage over the private sector. The framework the PA imposed on the CWE was done on wrong advice by some bureaucrats and possibly under the pressure of the IMF and the World Bank.

Governments may come and go but the Sri Lankan community has a duty to protect institutions like the CWE.

Although the times have changed, the vision of D.S. Senanayake to create the CWE to serve the cooperative system was a sound one and it is valid even now. In India and in Scandinavian countries, the cooperative system still plays a very significant role in many sectors. Unfortunately in Sri Lanka successive governments have neglected this important system and had given it step-motherly treatment it does not deserve.

Some corrupt elements in the cooperative movement have also to be blamed for its devaluation. I know of an important political leader who held very arbitrary and derogatory views about the cooperative system.

How could these useful movements for serving the community be revived in this country? Instead of neglecting and scuttling the cooperative system the government and the community must revive it. The CWE could be linked to supply goods to the cooperatives. However, the government must provide the CWE with necessary financial guaranties if it were to grant credit to them. There are many public institutions like the hospitals and armed forces which could be encouraged to purchase from the CWE on a competitive basis which is not happening now. These institutions don't patronise the CWE.


There is also the network of private franchisees which former Trade Minister Kingsley Wickramaratne created and which delighted the IMF. I am certain that if the franchise traders are able to purchase their goods at competitive prices from the CWE, this system could be revitalised and redeveloped.

There is also a market today for Samurdhi families. This supply could also be linked to the CWE through the cooperatives.

The Minister's suggestion to open the CWE to other general trades is commendable. CWE shops should be opened in all towns and cities. That would ensure competition. These should be opened as expeditiously as possible. Though there were many requests from consumers for opening shops these were not allowed ostensibly due to political considerations. These new ventures could, if necessary be opened as joint ventures with the private sector, with the CWE holding the majority shares.

The minister should also consider joint collaboration and networking with similar institutions in SAARC countries both for wholesale purchasing and marketing so as to reap the benefit of economies of scale.

There were problems in the old accounting system. Computerising the system with new software is also necessary in order to prevent frauds.

Employees of the CWE should work together and protect this institution from swindlers, who are few and little, but a threat to the institution. Motivating the overwhelming majority of employees who are honest could minimise corruption and fraud.

The IMF and the World Bank should be praised for helping Sri Lanka during difficult times but they should not demand the privatisation of the CWE in the present stage of its development.

The proposal, in the circumstances, to make the CWE a holding company is not advisable. The political and economic consequences to the government and the society by such a measure at this time of the county's history could be very harmful. A few individuals would get enriched by seizing valuable real assets CWE owns across the country. Instead of privatising the CWE it should remain the public institution that it is. The CWE may be empowered to create subsidiary companies for joint collaboration with the private sector with 51% shares for the CWE and the private stock limited to 49%.

Labour reforms must facilitate competition

By Gotabaya Dasanayaka
Director General Employers' Federation of Ceylon (EFC)

Labour law reforms must necessarily be with the objective of facilitating national competitiveness. In doing so there is a need to understand the deleterious effects of current labour laws relating to generation of employment and attraction of investment, productivity of employees and enterprises and industrial relations stability.

Our (EFC) views are submitted with due regard to these factors and the importance of facilitating employment generation, employee/enterprise productivity and industrial relations stability. These are obvious pre-requisites for national competitiveness.

We also consider the importance of facilitating employment generation, employee/enterprise productivity and industrial relations stability, which are pre-requisites for national competitiveness.

The current labour law regime is essentially what existed prior to 1977 when industry was heavily protected through stringent import substitution measures. The free market economy that was introduced after 1977 calls for a more dynamic private sector driven national economic growth.

Globalisation demands the flexibility of enterprises to grow and adjust to an ever-changing market environment. National economic growth and stability also calls for massive private sector investment. Our current labour laws are rigid to the extent that they deny the desired flexibility enterprises require for growth and adjustment. They are also not conducive to attract investment and resultant employment generation. It is important in today's context to address labour laws for reform to permit greater flexibility for enterprises, attraction of investment and stability in industrial relations. By way of labour law reforms the EFC has, among other aspects, emphasised on three key areas. They are:

a) Laws relating to Labour Relations (Industrial Relations).
b) Laws relating to Termination of Employment.
c) Laws relating to Terms and Conditions of Employment.
d) Laws relating to Labour Relations (Industrial Relations).

The EFC recognises the right to freedom of association of workers and their right to collective bargaining. Collective bargaining must, however, be voluntary and not imposed on any party. Unfair labour practices need to be identified, not only in relation to employers but employees and Trade Unions also and parties held accountable for their actions. The right to strike needs to be regulated to the extent of requiring a mandatory period of notice of strike and a secret ballot or some form of consultative process among employees prior to strike action. It is also suggested that the definition of a strike be reviewed to restrict strikes to situations of industrial dispute. The enforcement of Collective Agreements needs to be guaranteed by the authorities. There should be no state intervention on matters agreed upon through collective bargaining. The enforcement of law and order in situations of industrial disputes is essential. Employers should not be forced into submission in industrial disputes due to a breakdown in law and order.

Termination of employment
Delays encountered in Labour Tribunals need to be minimized if not eliminated. The powers of reinstatement now vested with Labour Tribunals should be revised with a view to granting an alternative way of compensation to an employer who is required to reinstate an employee in service. The Termination of Employment of Workmen (Special Provisions) Act continues to remain an obstacle in enterprise restructuring and to investment in labour intensive industry. The outcome of an inquiry before the Commissioner of Labour remains an uncertainty and inquiries lead to delays and excessive costs. This Act needs to be urgently amended to provide for speedy, certain and financially manageable remedies.
Employment conditions
Working hours un der the different statutes which apply need to be reviewed for greater flexibility. The unrealistic restrictions on overtime work introduced decades ago need to be revised in line with the concept of reasonable hours of overtime as recognised by our Courts and in actual practice. Holidays need to be streamlined for an overall reduction and uniformity in the different sectors. Minimum wage fixation should be guided by a National Wages Council with due regard to macro-economic factors and national competitiveness. Wage fixation in excess of stipulated minimum wages should necessarily be left to industry through collective bargaining and due regard to market factors without state intervention. In addition to the above key areas, the following aspects also warrant urgent consideration:
In today's business envi ronment, where outsourcing and sub-contracting arrangement are a common feature to ensure greater efficiency in costs and services, it is important for our law to have positive recognition of sub-contracting arrangements and to identify the contractor or the sub-contractor, as the case may be, as the employer of those who work for him.

A simple, understandable labour code applicable across the board to the extent possible, incorporating all employment related aspects, is needed.

These views are not exhaustive. There are other obsolete and impractical provisions in our law which needs to be addressed. What has been discussed here are the more significant issues. These points are directed to supplement and facilitate socio-economic progress within the existing economic environment. 

What has been advocated does not in any manner impinge adversely on fundamental labour standards the country is committed to protect.

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