The Public Enterprise Reform Commission has moved to set up authorities to regulate privatized monopoly utilities, PERC sources said.
As in Britain where regulatory authorities have been set up to monitor privatized utility industries (Oftel, Ofgas), work is underway to set up gas, electricity and telecom authorities in Sri Lanka.
The need for effective regulation of privatized monopolies has assumed increasing importance in the wake of the post-privatization experience of Ceylon Oxygen, Shell Gas Lanka and details now being revealed about the sale agreement of Lanka Lubricants Ltd.
While Ceylon Oxygen was criticised for raising retail prices until the entry of Industrial Gases (Pvt) Ltd which forced prices down, Lanka Gas too came under fire for raising retail prices soon after its takeover by Shell.
PERC had also been criticised for preserving the gas monopoly for five years under private ownership. However PERC has defended its position by pointing out that the move had resulted in a higher price for the government and some protection was necessary as Shell Gas intended to make a large investment in the country.
Shell was also involved in a controversy where the Ceylon Petroleum Corporation was forced to burn off nearly Rs 2mn worth of gas in March this year, as Shell gas had not taken delivery of the product. PERC investigations however had revealed that it was an isolated incident resulting from a production variation and steps are said to have been taken to prevent a repeat occurrence.
PERC chief Rajan Asirwatham has said that the sale agreement to Shell had built-in safeguards such as a price ceiling of 10 per cent a year.
PERC sources said such clauses were intended to be a stop-gap measure until the regulatory agencies were formally set up.
Shell Gas for example was required to pay US $ 20,000 annually towards the setting up of a Gas authority and ADB funding has been obtained to set up an electricity authority. US $10 mn had also been obtained to strengthen the office of the Director General of Telecommunications into a fully fledged telecom regulator.
Environmental policies and regulations are relatively new to Sri Lanka. A common perception in the private sector is that the requirement of environmental compliance, when compounded with the many other problems faced by industry (high interest rates, stringent labour laws, inflation etc.), is an impediment to industrial growth.
In the early years of environmental regulation, private industry had a hard time accepting the powers of the Central Environmental Authority (CEA). In true Sri Lankan style, many people thought that if they ignored and/or complained about the CEA long enough, it would go away.
It is very encouraging, therefore, to see that private sector groups are now initiating their own programmes to help their members understand, respond to, and articulate their views on environmental regulations, policies, and laws.
The Ceylon Chamber of Commerce recently held a "Forum on Environmental Technology and Technical Expertise Available in Sri Lanka." More than 15 local environmental engineering and consulting companies had displays at this "trade fair". The Federation of Chambers of Commerce & Industry of Sri Lanka also recently held an "Open Forum on Industry and Environment" at which industrialists and environmental regulators met to discuss some critical industry problems arising from environmental regulations.
Elsewhere in this section it is reported that the two chambers also collaborated with the Ministry of Transport, Environment and Women's Affairs, the CEA, and a donor agency to produce an information pack titled Making Compliance Easy. The good thing about this pack is that it gives simple information on sources in Sri Lanka (sources of funding, tax concessions, technical expertise) to help the private sector comply with environmental regulations.
The function of information dissemination about sources of environmental assistance is an important one. Funding sources like the Pollution Control and Abatement Fund which is available through the National Development Bank and three other banks may not be widely known by industrialists.
Another encouraging development is the establishment of a strong environmental component under ITMIN Ltd. (the new Industrial Technology and Market Information Network located on the CISIR premises). At a fee, this environmental component, called CleaNet, will provide industrialists with access to detailed information on a broad range of environmental technologies available in Sri Lanka and abroad. CleaNet seeks not only to provide information about environmental solutions but also to follow up and sell the total solution in the Sri Lankan market.
These signs that the private sector is initiating projects and programmes to improve industrial environmental management are very encouraging. The most significant aspect of this trend is that being environment-friendly it is now not being seen solely as an impediment but more as an opportunity. There are many opportunities in these areas that the private sector should take advantage of. Two areas that can be successfully (and very profitably) developed are ecotourism and waste recycling.
It is in the interest of our private sector to buy into these environmental opportunities now. Access to international markets is soon going to be heavily influenced by compliance with certain environmental standards. Many large international retailers now require their suppliers to obtain ISO 9000 certification. This has encouraged many manufacturers in Sri Lanka to put a lot of effort into obtaining this certification, which is an internationally accepted standard of high quality.
Under the new World Trade Organisation (WTO) the mark of quality required will be ISO 14000. This will require that manufacturing is done using process that do not damage the environment. This might irk many members of the private sector who will see this as yet another non-tariff barrier (NTB). The similarity to an NTB is undeniable. However, the fact is that ISO 14000 is poised to be the certification that gives our exporters access to the most lucrative markets in the world. We should, therefore, encourage export-oriented industries to begin working toward "cleaner production" now. In trying to achieve this objective, end-of-pipe treatment should not be the first option that industries look at (because this is the most expensive option). They should first look at the composition of their inputs and the efficiency of their production processes and identify areas where they can minimise waste (this option is not only cheaper, but also will most often reduce costs).
The Chambers should lead the way in increasing industry awareness about issues like ISO 14000 and should also involve key agencies like the Export Development Board, the Industrial Development Board, and the Sri Lanka Standards Institute.
Lanka Lubricants Ltd. (LLL) a Ceylon Petroleum Corporation spin-off privatized by the previous government, will open for public subscriptions next month, issue managers Merchant Bank of Sri Lanka said.
Caltex Corporation, which acquired control of LLL is a joint venture between Chevron Corporation and Texaco Inc. with combined business volumes which exceeded the entire gross domestic product of Sri Lanka, MBSL officials said.
However it transpired that Caltex Corporation of USA which bid for a 51 per cent stake of the company and subsequently acquired control, has still not paid the Sri Lanka government the full purchase consideration.
Asked why Caltex could not afford to pay the purchase consideration outright, and had to ask for an easy payment procedure from a Third World nation smaller than itself, MBSL Chief Changa Samaraweera said the two issues were not related.
"The two issues can be confused", LLL General Manager Ron Hopkins said. "Caltex can afford to pay a large sum, but it will also negotiate the best deal it can get".
He added that Caltex had come in at the initial stages, when privatization had been in its infancy and risks were greater, and the terms may seem to be attractive now. But LLL at present is a different organisation after the changes made by Caltex. In addition the bid was evaluated on the nett present value of the installment payments accepted by the government.
According to the contract for sale signed with the government in 1994, the next instalment is due in 1997 he revealed. However officials declined to reveal additional details of the agreement or conditions agreed to by the Sri Lankan government at that stage.
LLL was the first company to 'epitomize characteristics of a textbook example of a successful privatization', an MBSL statement said.
Profit after tax had grown by 86 per cent to Rs. 142mn in 1995 from only Rs. 77mn the year before. Turnover (nett of indirect taxes) has risen by 28 per cent to Rs. 1,395mn from Rs. 1,087mn in 1994. However, Mr. Hopkins said only around 6 per cent of the growth had come from increased volume sales, and the balance had come from price increases.
After the Caltex take-over, nearly Rs. 100mn had been invested in the company out of retained profits and short term borrowings to upgrade plant, boosting capacity from 20,000 tonnes to 40,000 tonnes depending on product configuration.
The company expects additional capacity to be utilized for exports to India, Bangladesh and the Maldives as well as catering to shipping lines calling at Colombo. The company has recently introduced a premium brand 'Havoline', blended in Sri Lanka which will also boost future profits. In addition the company had sole rights for lube oil business in Sri Lanka until mid 1997 when the market is expected to be liberalised. Even then however it had secured exclusive sales rights to the CPC dealer network which will prevent competitors from penetrating the market, officials said.
As a result, the company would trade above the manufacturing price earning multiple. MBSL analyst Channa Kurukulasuriya said, at present, based on historical earnings of Rs. 4.76 per share LLL at issue price had a PIE of 10.50 slightly below the current manufacturing PIE of10.9.
In addition to the possibility of making capital gains in 1996/97 LLL's policy of declaring dividends of 10 per cent every quarter resulted in the share having a dividend yield of 8 per cent based on the Rs. 50 offer price. This was twice the market dividend yield.
Mr. Hopkins said the company had started dividend payments during the last quarter of 1995, coinciding with the transfer of 10 per cent of the company to employees. He said this will assure a constant return to the employees and prove to be a strong motivational factor.
The company also had strong cash flow characteristics and low investment needs in the near future, making the share extremely attractive.
Mr. Samaraweera said detractors had criticised MBSL when it had bid a price of Rs. 50 when PERC called for underwriting bids, but LLL's strong performance had demonstrated that they had made the correct decision.
"I think there are far less critics today because they are a little bit frightened with the results of Lanka Lubricants under Caltex management", he said. "Regrettably there are those in our own market who would like to drag this share down because they do not like to see a share of this nature being successful." A 39 per cent stake of the company comprising 11.7mn Rs. 10 par shares worth Rs. 580mn is offered to the local and foreign investors, at Rs 50 per share.
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