The Sunday TimesBusiness

9th June 1996




BOI incentives to all in some chosen sectors

by Asantha Sirimanne

The Board of Investment (BOI) will soon offer incentives to selected industries regardless of whether they are export or domestic market oriented, BOI Chief, Thilan Wijesinghe has said.

"The incentive structure will be shifted from criteria to products and incentives will be given whether a company is export oriented or not", Mr. Wijesinghe told The Sunday Times Business.

The present incentives of the BOI where projects are approved under Section 17 of the BOI Act is based on criteria such as 90 per cent export sales, minimum investment thresholds and the amount of employment generated.

However Mr.Wijesinghe stressed that the BOI will not reduce incentives for export oriented projects.

Even earlier, tax and other incentives were given to locally oriented manufacturers if they were pioneering industries. In addition, BOI incentives were also available to infrastructure and hotel sectors.

"For example we want to cultivate the inherent capability of electronic assembly in the country, and you are in the business of manufacturing or assembling computers. We will give you incentives regardless of any other considerations." Mr. Wijesinghe said

He said some industries were not at a stage where they were in a position to enter the export market immediately. "Take a software company, you cannot expect it to export 90 per cent of its output overnight. It must first be able to develop its resource base by supplying the domestic market." he said.

He said certain targeted sectors will be identified and clearly defined so as not to create market distortions. Earlier local manufacturers have complained that BOI companies were unfairly competing against them. These incentives will also apply to all existing industries in the sector.

"Cover the next two years we intend to harmonise the incentives available under the Inland Revenue Act, and BOI law," he said.

In addition the policy of treating the whole country as a free trade zone will also be abandoned. One of the drawbacks of this policy was that duty free items leaked to the open market hurting local industries, due to difficulties in monitoring. All new investments where concessions were available would only be permitted to set up shop within designated industrial zones.

Tea cheers: prices reach record heights

By C.P. Karunanayake

The economy at large may be in the doldrums. The country may be faced with strikes, power cuts and other disasters. Yet the tea industry, which is still the biggest net foreign exchange earner for the country, is doing quite well with Sri Lankan teas fetching record high prices. The weighted average price per kilo of tea from all the elevations, which was Rs. 92.83 in January this year, rose to Rs. 99.81 in May. This is an increase of 7.5% The highest prices for all the elevations were recorded in March and April. What is significant is that the prices for all the elevations showed increases. Furthermore many observers are quite hopeful of the trend being maintained in the near future.

The low grown sector which had showed significant rises in prices despite an increase in production this year performed remarkably well in April. Although the price of a kilo of low growns had come down to Rs. 112.70 in May, from it's peak of Rs. 113.03 in April, it is still a historically high figure. The medium and high growns showed price increases while their production figures declined. The price of a kilo of medium growns which was Rs. 78.21 in January this year rose to Rs. 90.75 in April. As for the high growns the price of a kilo which was Rs. 84.02 in January rose to a peak of Rs. 93.98 in April. The total production of all the elevations during the first quarter of this year showed a marginal decrease of 1.95% from last year's figure of 60,336,433 kg, to 59,159,095 kg, this year.

The high prices fetched by their teas have enabled tea factory owners to pay high prices to their suppliers. The highest price paid for a kilo of bought leaf which up to now is Rs. 20 was paid by one Mr. Alwis, the owner of Mothotuwa tea factory, to his suppliers in April. He is hopeful of these high prices being maintained in the future as well.

However everything is not hunky dory for the tea industry which nearly got paralysed due to the massive strike organised by the trade unions in the plantations. The present drought may also make its impact known in the near future. The quality of the tea produced by factories could be lowered due to power cuts. This is where the tea commissioner should step in to help the tea factory owner, who cannot afford to buy or run generators on his own.

The Tea Research Institute (TRI) which at present is understaffed should device ways and means of reducing the cost of production which is the highest in the world. The after sales service, if any at all, provided by local engineering firms who are suppliers of machinery to the local tea factories leave much to be desired. The industry particularly the small holder sector, also faces a shortage of labour due to migration of youth from rural areas to towns. All the players in the industry will have to seek solutions to these problems if they are to maintain the momentum of growth caused by the current boom in prices.

Every hour without power Lanka loses Rs. 20-30 mn

By Ruvini Jayasinghe

Every hour without power, is a loss of between Rs. 20 - 30 million, (at a rough estimate) to the industrial sector, FCCISL Chief Patrick Amarasinghe said.

According to the Central Bank's annual report, the industrial sector output per day totals Rs. 900 million, he said. During the total blackout, the industry suffered a Rs. 350 million loss per day, Mr. Amarasinghe added.

He was speaking at a forum last week on the crippling effect of the power cuts on the industrial sector. More than 75 members representing various industries, under the apex body of the Federation of Chambers of Commerce and Industry in Sri Lanka (FCCISL), spoke to the media on their individual and collective problems.

The power cuts have a trickle-down effect, and nobody, big or small, with or without generators, is spared certain losses, members pointed out. They explained that even though the bigger industrialists had back-up generators, or purchased them recently to beat the current crisis, their sub contractors, essentially smaller industrialists did not supply goods on time, due to the prevailing crisis.

This has affected primarily the export-based industry and their lead times. Most exporters have had to negotiate for delayed shipment dates.

"This is workable with our regular buyers, with whom we have a good rapport. But we cannot ask for longer lead times with our new or first time buyers. Even our regular buyers will hold out only for a limited period, not indefinitely", they said.

In a classic example of how a power-cut can affect a big-time industrialist, Chairman, Creations Lanka Ltd. and a senior Chamber member, Mr. Lyn Fernando, said that although in his factory back-up generators took care of the power cuts, a backlog of documentary procedures was building up in many institutions, including the BOI which had no generators!

The current power cut is likely to recur next year and in 1998, unless there is more than average rainfall in the catchment areas, Nalin Wickramaratne, Vice Chairman, Ceylon National Chamber of Industries and Chairman of their Power Committee said, calling for a one-year extension on duty rebates on generators.

But some members pointed out that duty waivers, will not be of much assistance to small-time industrialists who cannot afford to finance the import of a generator, costing at least a few lakhs. Some members even suggested that the CEB should subsidise or purchase outright generators for small businessmen.

A sample survey carried out by the FCCISL has shown that most industries are sustaining a 20% production loss a day due to the power cuts. In some cases the production loss is as high as 90%, Mr. Amarasinghe said. For example, a shoe manufacturer, unable to get his sub contracted goods on time, suffers a loss of Rs. 450,000 a day, he added. Some factories, about 20 todate, have closed down, because of the crisis, members said.

The import sector said that as a support sector to industry, they too are affected. "Whenever industry collapses, we too collapse" he said, contrary to popular belief that the import sector has not been severely affected by the crisis. Mr. Wickramaratne said that import quantity has dropped by 70%, registering a loss of 30% - 40% for the sector.

Fielding questions from the media on why the local private sector has not undertaken any power generation projects, members shot back that at least 3 project are stuck in the pipeline. Either bureaucratic delays, environmental lobbying or political pressure were holding them back, members alleged.

Referring to some aborted power projects members said that people (environmental lobbyists) seem to have forgotten that our country is surrounded by an ocean that can take care of pollution.

Members said that the power crisis hardly took them by surprise and denied allegations by the media, that they were caught napping on the issue. "We have been exerting pressure on the previous and present governments" they said.

"We first brought this issue up in 1993, calling for a national energy policy", they added.

Members added that the "writing was on the wall" as far back as 1980, on the future power crisis, while the national consumption grew 10% every year.

A World Bank study puts the total number of industries at 6,400 of which 400 are identified as large scale. However, the informal sector, is estimated the largest with 95,000 enterprises.

A power (energy) policy and a strong body to implement it was now vital, members said.

Constant decline in share prices

By Alam Usoof

The decline in share prices during the period May 1 to June 6 in most companies traded on the 'CSE' has been constant with daily turnover being very low and foreign net buying interest being minimal.

The 'CSE' ASP-Index has shed nearly 30 basis points during this period.

The macro-economic stability of the country has been jeopardised in the short run by strikers (CEB) and a drought which have resulted in power-cuts.

The long-term economic stability is threatened by no proper planning of the economy. Ad-hoc privatization of companies in a depressed market scenario, will lead to under-pricing the true value of the companies to be privatised.

If going ahead with privatisation is to obtain an immediate benefit of reducing public debt, then it seems to be a short-term answer for a long-term problem, with added complications.

Strikes in Sri Lanka seem to be a common occurrence after the present government came to office, which has resulted in some firms considering pulling out of the country. If the Workers' Charter is implemented some firms would probably close shop.

Unemployment is rampant and increasing due to lower investment in the manufacturing sector which could lead to youth frustration.

The South Asian Preferential Tariff Agreement (SAPTA) which is a preferential tariff scheme for SAARC countries is to be implemented towards the second half of 1996. If Sri Lankan companies are not geared to this new development our manufacturing industries will be threatened with cheap imports.

With the introduction of 'SAPTA', only companies which could utilize resources more efficiently would survive. Companies which are quoted in the manufacturing sector who have direct competition with firms in the Indian sub-continent will be affected. Firms like Central Industries, Ceylon Glass, P-Tex, Lanka Tiles etc., are some of them.

The treasury bill rates declined in the beginning of the period under review, but have started to move upward marginally from June.

If this continues it will affect new investors coming into the market as Risk free fixed income returns will be more attractive than Risk incomes like stock returns.

With the Indian market turning bullish after Deve Gowda's election to premiership the CSE may also be able to benefit through mutual funds and individual foreign investors investing in India, who may also invest in Sri Lanka due to prevailing low price earning ratios (PE).

The American Market which has been on a four year bull run is getting too hot to handle for many institutional and individual investors their market P/E is 20 which has resulted in high cash positions in their portfolios, with some investors looking for emerging markets (South America, Central Europe, South Asia). The dawn of 1997 may see a bullish time for these markets.

The dollar against the rupee has appreciated significantly for the short period under review (US $1 = Rs. 55) which will be a competitive advantage for export-oriented firms with higher rupee earnings.

For investors who are able to hold on to shares for 5 years (long-term), the CSE is a good investment. In the short-term the ASPI - could shed at least 50 points as 1st quarter returns in most companies are not satisfactory.

Trading house boost for Lankans in Australia

A Sri Lankan export trading house will be opened in Australia shortly, its promoters said.

"Sri Lanka Trade Emporium" will be set up in the commercial district of Sydney project promoters K & K Associates said.

"This will cater exclusively for Sri Lankan exporters who wish to find a market for their products in Australia," an official said. "This will have a permanent exhibition centre for Sri Lankan products and there will also be a business centre for the use of Sri Lankan businessmen visiting Australia," he added.

The trading house will be headed by an experienced Australian national who will have an in-depth knowledge of the domestic market.

The trading house will also engage in negotiations with foreign buyers on behalf of Sri Lankan exporters to obtain the best possible prices, advertise products, execute sale orders and participate in trade fairs, the official said.

In addition it will CO-ordinate with Sri Lankan exporters for the supply of tailor made products to suit customer requirements, help open letters of credit and help with shipping products to Australia.

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