Hard choices for Sri
Last week’s disturbing headlines in newspapers
was a virtual ‘what’s on in Sri Lanka’ for anyone
visiting the country and to probably think twice before investing
or doing business here.
Who would want to invest in a country with headlines
that read- “Failed state”, “Navy gunboat downed’,
‘Peace or War?’ and so on? Thursday’s LTTE attack
on navy gunboats escorting a troops’ carrier was the worst
incident since the ceasefire began in 2002 and triggered alarm bells
that the country could be headed towards a war no one wants; at
least not the peace-loving public.
Are we going down the 1983-2001 road of destruction
again? There have been calls for chambers of commerce, industry
and trade to get their act together and create public awareness
on the need for avoiding a costly war. Both the LTTE and the government
must be urged to stop fighting. The ceasefire agreement for all
purposes doesn’t exist. The Sri Lanka Monitoring Mission (SLMM)
is a toothless mechanism merely issuing statements, warnings and
blame. Nobody cares any longer for statements that don’t result
in action. What’s the use of the SLMM saying the sea belongs
to the government when it cannot ensure – as an umpire in
the peace game – that it belongs to the state and no other
group? The head of the mission himself said the ceasefire agreement
exists but there is no ceasefire. That’s a serious indictment
on the monitors and calls for an urgent need for their role to be
re-defined instead of acting as mere spectators.
So where do we go from here? There are some large
business groups that have flourished even during the height of the
war due to strategic management and coming to grips with reality;
making companies work in a war-environment and not letting that
affect the business. If one needs lessons on resilience and how
to survive in a war-ravaged country, take a cue from small businesses
in Jaffna and other conflict areas that have struggled but firmly
kept their heads above water.
It’s the medium and small companies that
would suffer the most if war breaks out – in a way it already
has, for the military is not going to watch while it gets ambushed
by the LTTE. Attack by the Tigers in the future will be followed
by retaliatory strikes by government forces using all the firepower
at its disposal.
The annual reports season is already on and most
of the annual general meetings are being held by June 30 with company
reports going out to shareholders.
This time the ‘moans and groans’ from
the business community would be much more than the usual plea for
tax breaks, an even tax regime and a level playing field, among
The private sector is set to raise a lot of concern
about the political and security situation and how it would hurt
businesses particularly sectors like tourism.
Ceylon Guardian, the country’s oldest investment
group, in its annual report last week raised a very critical issue
– the need for the government to allow the private sector
and investment trusts to invest overseas within certain limits.
Ceylinco Group chief Lalith Kotelawala has repeatedly raised this
issue in the past on the need for Sri Lankan companies to invest
overseas particularly in the context of globalisation and the necessity
to raise the profile of local companies.
In the current context of an uncertain investment
environment where it’s anybody’s guess as to what would
start first – peace talks or a protracted war (instead of
the low intensity battles that are taking place now), the Central
Bank needs to look at this request more seriously and allow overseas
investments for local companies. On the other hand the bank’s
dilemma would be that in a war-like situation, export proceeds might
shrink and allowing money to flow out could create balance of payments
That’s why – and for many other valid
reasons – the government needs to do some hard bargaining
with the LTTE for both sides to get back to the negotiating table.
Sri Lanka simply cannot afford another war.
of uneconomic land rising
Serious crisis brewing for tea sector
Tea plantations in Sri Lanka are categorised under
two types of management systems – estates (large plantations)
and small holders. Out of a total of 181,000 hectares, 58 percent
comes under the management of large plantations whilst the remaining
42 percent falls into the small holders category.
A study of the statistics of the national production
level of tea reveal, that the large plantation sector contributes
38 percent (1,370 kilos made tea per hectare), while the small holders
contribute 62 percent (2,607 kilos made tea per hectare), achieving
a national yield of 1,006kilograms per hectare.
to large plantations
The cost of tea production in the plantation sector
in Sri Lanka is one of the highest in the world with the national
intake per tea plucker being very low mainly due to the retention
of low yielding old seedling tea and degraded tea land.
Of the total cultivated tea extent 81,592 Ha,
30 percent is uneconomical, yielding below 1000 kg/ Ha. per year.
The slab next to this uneconomical extent, which is 1001 to 1300
kg/Ha. may also fall into the stage of unproductive land by 2010
resulting in approximately 51 percent of the land becoming uneconomical,
in the corporate sector if the situation is not properly addressed
and if action is not instituted.
Three state organizations (JEDB & SLSPC) and
Elkaduwa Plantations Ltd manage 9500 Ha. of tea lands out of which
approximately 2,500 Ha are yielding below 500 kg/Ha where the average
expenditure for maintaining these areas is around Rs. 170,000 to
200,000 per Ha. per annum, which works out finally to a figure of
Rs. 500 million resulting in a severe impact on the three organizations’
in their productivity and viability, as the average yield levels
of the three organizations are below 1,000 kg/Ha.
While there has been a progressive increase in
low grown tea production by the stakeholders due to continued demand
from the Middle East and CIS countries, there has been only marginal
growth at high and mid elevations.
Re-planting in the high and medium grown estates
has not kept pace resulting in the corporate sector re-planting
stagnating at a point of 0.70 percent against the required industrial
standard of 2 percent, thus creating a massive backlog of uneconomical
and marginal tea lands.
|The strain is showing as far as Sri Lanka’s
tea industry is going, where the COP is among the highest in
It is thus clearly seen that the large plantation
sector is fast heading into a severe crisis situation due to the
high cost of production, which results in their inability to invest
on development programmes for the future sustainability of the industry.
This in turn will create a serious impact on the
massive work force of approximately 300,000 people and their dependents
numbering to as much as 1.2 million.
of marginal tea lands
Viewed in the above perspectives, regional plantation
companies, JEDB/ SLSPC and Elkaduwa Plantations are at cross roads,
looking for alternative strategies to put the prime agro assets
of the country back on track.
It is now increasingly evident that improving
both land and labour productivity is the preferred strategy for
the sustainability of plantations.
The traditional estate model/combining large holdings,
corporate ownership, high capital base and large labour force needs
to be replaced by the small holding or out-grower system, where
weaker areas could be gradually shifted to the workers for their
effective participation and thereby convert these areas to be more
productive land for the continuation of the industry.
The need for resurrecting the conventional estate
system, which has been introduced by the British is gradually becoming
inappropriate to meet the present demands of the corporate sector
of the tea industry. The present management should move away from
direct production and concentrate on processing, trading and marketing
while the field activities should be entrusted to the out-growers
and perhaps worker co-operatives where the land and labour productivity
are reportedly higher.
The regional plantation companies were fortunate
to obtain foreign funding, since from the time of privatization
until up to 2003, whereas the JEDB, SLSPC and Elkaduwa Plantations
were not fortunate to obtain these funds. The areas that were covered
by the donor funding is as follows:
a). Field development (subject to limitation)
b).Factory modernization (subject to limitation)
c).Social infrastructure development
The projects were as follows :
1). Plantation Reform Project - 1996 to 2003
2). Tea Development Project - 1999 to 2005
3). Plantation Development Project - 2003 to 2008 (ongoing)
However even the regional plantation companies
will find it extremely difficult to cope with replanting costs in
future, as the plantation development project has identified social
welfare and infrastructure development as the major project components.
of employment opportunities
In the corporate sector, large extents of uncultivated
lands could be cultivated, depending on its suitability. This would
eventually generate employment, finally eradicating poverty, improving
the status of social welfare. The diversification programmes will
provide further openings to enhance agricultural practices and finally
develop human resources with skills development towards productivity
thus achieving to growth and innovation in the plantation sector
with worker participation.
and poverty line
The negligence of the estate community and thereby
the lack of guidance about the changing world have plunged them
into deeper levels of poverty in financial and moral terms. Therefore,
the introduction of the out-grower system has three major benefits
for the worker and the management.
1) To increase the productivity of the resources
of the plantation.
2) To increase the labour force productivity on estates.
3) To create an enabling environment for the community to increase
The first objective would be to increase efficiency
of workers, utilizing them for better practices of land use by offering
a reasonable number of days for work, so that they are entitled
to all statutory dues which are presently being enjoyed by workers
(such as statutory dues and other benefits).
The second objective would be achieved by providing
the workers (future out-growers) land for a reasonable period of
time. ie. a minimum 30 years and treat them as lessees of the land,
for them to develop the land and earn an income from it (the present
regional plantations companies are on a lease term of 53 years).
The philosophy behind the concept is to motivate the out-growers
to look after their land well, as it would be their main livelihood.
This will create a situation where if they managed
the resources well they will be able to earn a considerable income,
which will be higher than their income earned as daily paid workers.
Therefore, they will tend to work harder, since, they have freedom
to produce more and more which will improve their livelihood, security
and thereby the third objective will be achieved.
The integration of estate workers with the neighbouring
villages would be important to maximize the productivity of these
On the other hand, there is an increased demand
for uncultivated lands in the periphery of the estates by the villages
to undertake cultivation, depending on the suitability of the land,
which will enhance their self-employment.
The introduction of the out-grower system to the
tea industry is a novelty which goes beyond the traditional corporate
management system of tea plantations, however it would not be an
easy change initially in designing and implementing this concept.
Therefore taking perceptions and the opinion of the trade unions
and other stakeholders of the industry into serious consideration
is a very important factor before the implementation of this concept.
Under a pilot out-grower system introduced at Elkaduwa Plantation
in 2005, where 500 worker families were provided with approximately
01 Ha. of land each, there were financial gains to the workers and
a major reduction in the losses to the management as well.
The maximum extent given for an out-grower must
be limited to 1 Ha. for a minimum period of 30 years with a royalty
payment of the land at Rs. 1/- per kilogram of green leaf harvested
by the worker.
The land selected for the out-growers are areas
consisting of approximately 5,000 tea bushes per Ha., which will
produce approximately 600 kg/ MT per annum, meaning approximately
200 kg of green leaf per month. With the prevailing market rate
of approximately Rs. 27 per kg of green leaf, this will generate
an income of about Rs. 5,400 per month per family. In addition,
a family of two workers will be offered work at 15 to 20 days per
month on the estate, which would result in an earning of Rs. 7,000
per month. The final earning per family involved in the out-grower
system would therefore be around Rs. 12,000 per month (out-grower
income + earning from estate work).
Assistance from the management to the out-grower
is as follows:
1) Fertiliser and chemical on credit.
2) Collection of green leaf and disposing at a reasonable price.
3) Accountability of the system.
4) Extensional services.
5) Establishment of nurseries to supply planting materials.
In conclusion, it is important to understand that
the out-grower system does not purely mean that the marginal tea
lands will be only maintained by the out-growers; they will in fact
be encouraged to infill/re-plant these lands with the ultimate motive
of converting these lands into high yielding fields within a period
of approximately 10 years.
(The writer is Director of the Plantation
Management Monitoring Division at the Ministry of Plantation Industries
and a former CEO of Elkaduwa Plantations Ltd and a former Director
General of the Sri Lanka Tea Board)
Ceylon Guardian urges regulators
to allow overseas investments
The Ceylon Guardian Investment Ltd, the country’s
oldest investment group, last week urged the government to allow
listed investment trusts (like Ceylon Guardian) to invest overseas
within limits, primarily in the SAARC region, in order to improve
the quality of returns to Sri Lankan shareholders.
The company said it plans to source funds regionally in the near
future as well as look at opportunities to invest overseas when
regulations permit. Ceylon Guardian also urged regulators to create
an enabling environment to encourage more IPOs that could lead to
a share owning democracy here.
Israel Paulraj, chairman of the company, in its latest annual report,
said they were encouraged by the increasing number of IPO’s
which improved the quality of investment opportunities available
in the Colombo bourse.
“We urge regulators and policy makers to create an enabling
environment that will encourage more corporates of a high calibre
to seek listing, in order to broad base share market activity and
create a share owning democracy,” he said adding that the
share market is a source of capital for new projects and as such
a catalyst for promoting entrepreneurship in the country whilst
also helping to attract much needed foreign investment.
The Ceylon Guardian Group, a subsidiary of Carson Cumberbatch Company
Ltd, posted after tax profits of Rs. 276.4 million for the year
to March 31, 2006, down from Rs. 575.7 million in the previous year.
However last year’s profit included an exceptional item of
Rs. 452 million, from the sale of Malaysian plantation land. In
the current year profit growth on operational activities after adjusting
for the exceptional activities saw an increase of 123.4 %.
The earnings per share (EPS) of Rs. 10.68 for the year showed an
impressive growth of 123 % compared to that of Rs 5.22 earnings
per share it earned a year ago.
“We believe that the capital market can become a great leveler
in modern society where greater retail ownership of shares would
not only have a trickle down effect on raising standards of living
but will also build a share owning democracy where Sri Lankan savers
support Sri Lankan entrepreneurs to build a strong vibrant economy
together,” Mr Paulraj noted, adding that listing of state
owned entities will also contribute immensely to the process of
capital market development since still large volume commercial activity
in the country is controlled by the state.
During the year under review the company made several strategic
investment decisions to boost its profits. Core activities focused
on investing in stocks of good companies at reasonable prices to
realize in long term.
Mr Paulraj said a dedicated investment management unit under Guardian
fund management limited was set up during the year under review
and the task of portfolio management was delegated to this unit
by the mangers.
The GFM’s primary task was to establish structured management
system and process including audit and compliance measures to manage
the portfolio within the strategic framework set by the board of
During the year under review the company also suffered heavily by
provision made in respect of the Sathosa Retail outlets investment.
The company’s investment in Sathosa Retail Ltd via international
Grocers Alliance Limited amounting to Rs. 51 million failed to deliver
the promises initially anticipated at the time of investment.
The company was compelled to make provision in the accounts thereby
reducing the current year’s profit by the same amount.
This is a one off effect on the bottom line profits of the company.
The directors of the company have recommended a first and final
dividend of 15 % on ordinary shares for the year ended March 31,
2006, which will be declared at the annual general meeting, scheduled
to be held on May 30.
Management tips at The Sunday
Times Biz Club
Ramal Jasinghe, CEO of Asian Alliance Insurance,will
share some important tips on management and a practical approach
to managing organizations when he addresses the monthly meeting
of The Sunday Times Business Club.
The meeting will be held on Wednesday, May 24
at 6 pm at the Pavilion of the Trans Asia Hotel which is the club’s
main sponsor. Co-sponsor of the event is Lion Brewery. Jasinghe,
a veteran in the field of marketing with over 20 years of experience
and having held senior positions in companies such as Union Assurance
and Union Carbide, has extensive knowledge and experience in managing
In addition to his role as CEO of Asian Alliance
Insurance, he serves in the Council of the National Chamber of Exporters
and the National Chamber of Commerce, and has been an Executive
Committee Member of the Sri Lanka Institute of Marketing for many
Mount Lavinia hotel gets PATA
The Mount Lavinia Hotel recently won the PATA Grand
Award for Education & Training for its Youth Trainee Programme.
|Picture shows Sanath Ukwatte, Hotel chairman,
receiving the award.
It was timely recognition of the hotel’s
many projects aimed at changing the perceptions of a large segment
of Sri Lankan society which once viewed tourism and tourism related
employment in a negative light. The recognition becomes unique as
the hotel celebrates 200 years of its original building this year,
a statement from the hotel said. Over the past decades the Mount
Lavinia Hotel has trained young men and women in the low to middle
income families in rural areas of the country.
Poor dividends from the best
Minority shareholders in quoted companies are being
marginalised because people seem to think that the only return from
stock market investments is the capital gains, if any. But no one
looks at it as a long term investment in order to get adequate and
A Colombo Stock Exchange newsletter published last
year says that if the directors of a company think it is better
to invest in another company, they need not declare dividends. I
think this is a very irresponsible statement.
In the Inland Revenue Act, Section 62 permits
the assessor to declare a dividend if he thinks the distribution
is inadequate. Although it was applicable to only private companies
earlier, it was made applicable to all the companies in a recent
budget speech. In that section, they say that determining what funds
are available for distribution, they must exclude any amounts used
to purchase existing businesses.
There is an inadequate declaration of dividends
among existing quoted companies. Many companies although declaring
dividends, have the capacity to declare more, rather than channeling
the funds into reserve accounts. Most of the time, this money is
being used for private purposes or to take over other companies.
They have created a cosmetic effect on the shareholders
by declaring dividends although not enough.
After examining many financial statements I saw
the potential of the businesses to declare more dividends. The businesses
have not grown in capital; rather in size through takeovers.
For example the Distilleries Company of Sri Lanka
Ltd in its interim statement for six months ended 30th September
2005 disclosed a final ordinary dividend of 50 percent for the year
which ended on March 31, 2005 amounting to Rs.150 million being
only 50 cents per one rupee share.
The company’s initial issued capital was
Rs.300 million and even by the end of 30th September 2005, it is
still at Rs. 300 million.
The company recorded Earnings Per Share of Rs
7.42 as disclosed in the statements. This shows the potential of
the company to declare more dividends than 50 cents when Earnings
Per Share show Rs 7.
This is similarly done by other companies such
as Hunters, Hayleys, Aitken Spence & Co. Ltd, etc. According
to my knowledge, these companies have the potential to declare more
than the amount declared which is unfair to the shareholders. However
not all companies fall into this category of insufficient dividend
Nestle is a company declaring maximum dividend
to its shareholders. Recently it declared a dividend of a high percentage
which is a very good dividend.
The Colombo Stock Exchange was built to create
a shareholding democracy and it is important for the companies to
act in the best interest of their shareholders.
Tax and Business Consultant