The Sunday TimesBusiness

8th December 1996





Are power cuts likely?

We have been assured by Power and Energy Minister Anuruddha Ratwatte that there would be no power cuts next year. The whole nation would hope that it is correct. It is however, not clear whether we would not have power cuts irrespective of rainfall conditions next year or whether he expects good rainfall conditions to prevail. If we are able to withstand inadequate rainfall next year and have uninterrupted electricity, it has to be owing to enhanced power generation capacity this year. The public would like to know how many megawatts of new electricity have been generated this year.

The power crisis in the country is not an issue of power this year or next year. The power cuts this year were a startling and dramatic reminder of the looming energy crisis which was to come sooner rather than later. The country has been very largely dependent on hydro electricity throughout its history. Yet hydro electricity generation had been stagnant since 1992 at around 1400 megawatts, but the country's industrialisation, rise in per capita incomes, changing lifestyles and urbanisation meant a progressively increasing demand for electricity.

It is estimated that the demand for electricity in 1996 had increased by around 10 per cent The static hydro electricity generation coupled with poor rainfall and increased demand resulted in the serious power cuts this year. But even if rainfall had been normal it was a matter of time before the power crisis hits us. Will it hit us again next year if the demand for power expands by a further 15 per cent and the weather Gods fail us? The country deserves to know how much electricity has been generated, what power installations are in the process of being installed and the planned electricity generation for the next five years. The Ceylon Electricity Board has a duty to keep the people informed now. Giving excuses at a time of power cuts would be totally unacceptable.

It is true that a power cut next year will not affect us in the same manner as it did this year. This is owing to a large number of organisations installing their own power generating systems.

In fact, many of them now do not use the national grid as they find it economical to use their own generators rather than pay according to CEB tariffs. But a resolution of the problem by each one having his own generators is neither the way national problems should be resolved nor the most economic. We hope that the country's power generation would be adequate so as to not require installation of generators by individual users.

A national plan to cope with the increasing need and demand for electricity would no doubt require a greater diversification of electricity sources. Certainly new sources of hydro power should be explored and the environmentally least damaging locations for such generation should be explored. Further, depending solely on hydropower is unrealistic. This is so for several reasons. The capacity to expand hydro electricity may be limited. Reliance solely on hydro electricity means that we are too dependent on rainfall. Since hydro electricity is generated as multi-purpose projects, the generation of electricity has to be moderated according to the needs of the other users as well. Therefore thermal, solar, coal and wind power sources should be explored. There has to be a balance between the consideration of the cost of production of these energy sources and environmental concerns. Environmentalists would have to admit that enhanced power is critical. On the other hand, those planning power generation could look at the least damaging sources for such generation. The technology and the location could affect the extent and nature of environmental damage. As long as least damaging feasible options are used environmentalists should be satisfied.

If an energy crisis were to emerge again no one would be willing to accept the inaction of the previous government as sufficient justification. Having faced an energy crisis this year, if the government has been unable to develop adequate sources of power, then it alone has to be blamed. Have the government and the energy authorities acted promptly and effectively to ensure that we do not have power cuts in the foreseeable future? Will we have adequate power generation to attract investors to expand their activities?

IDEAS Keen to promote socio-economic growth

By Ruwanthi Ratnayake

Focusing on the small and medium business community a group of senior Sri Lankan professionals will launch a programme called Initiatives in Development of Entrepreneur Approaches and Strategies (IDEAS) on Wednesday to promote socio-economic growth in the country, a founder member said.

"We believe that given the necessary encouragement and back-up Sri Lankans from all walks of life have the strength and the will to achieve high economic standards." IDEAS founder and former Treasury Secretary Tilakaratne said.

The IDEAS is a non-profit organisation which is aiming at promoting self reliance by creating community based development projects mainly among small and medium business people, a former Central Bank Senior Deputy Governor Dr. Tilakaratne said.

According to him IDEAS has 3 operating arms which consist of consultancy services, management training and development and entrepreneur community development. Of these, consultancy services and management development and training, cater to all levels of business and are the main source of income to the organisation. The funds generated by these 2 channels enable IDEAS to focus on its main goal of small and medium entrepreneurship and community development.

Among the consultancy services provided are institutional development, infrastructure and economic studies and surveys. The IDEAS members are also supported by a special panel of qualified consultants who offer services.

The management training and development arm offers management training programmes at all levels.

The IDEAS has already conducted workshops on secretarial functions, high level management and customer care which have all been oversubscribed , Dr. Tilakaratne said.

In the case of small entrepreneur and community development, the funds generated by the other 2 operating arms of IDEAS will be credited to a revolving fund and used to support community development project and entrepreneurship. According to Dr. Tilakaratne IDEAS not only identifies and supports the small entrepreneur but acts as a catalyst for numerous institutions already available to assist entrepreneurnial development. In addition, IDEAS is a source of information in technology and management.

In assisting small and medium business.IDEAS will identify projects and help entrepreneurs in its operation. In addition it will provide managerial expertise to those who identify their own project, but lack know-how. The experts provided by IDEAS will first work alongside these small businessmen and thereafter gradually help the entrepreneurs to work independently.

According to founder member and former Director, National Institute of Business Management, Lalit Godamanne, the members will be visiting Kandy to talk to many of the small and medium entrepreneurs who are facing difficulties. This visit has been organised by the Export Development Board. "We are going to talk to these people and listen to the problems they are facing, " he said adding that this trip to Kandy will be mainly to talk to the small businessman which will help the IDEAS team to give them proper guidance in future.

Thinking aloud on privatization worldover

By Asantha Sirimanne

With the preliminary work nearing completion in major state owned entities such as Sri Lanka Telecom and Air Lanka there is increasign optimism that substantial amount of revenue could be realized in 1997 through privatization.

The Sunday Times Business spoke to Jardine Fleming Asian Head of Privatizations Roger Sharp who visited Sri Lanka recently.

Mr. Sharp had led the 1993 British Airways, Australian $ 665 mn bid for a 25 per cent stake in Qantas which was said to be the largest Airline equity deal up to that time. Other major privatizations Mr Sharp was involved in includes Telecom New Zealand ( NZ $ 1449 mn) and Air New Zeland and the sale of renewable forests ( New Zealand $ 4 bn)

He was put in charge of JF privatizations covering South East Asia and the Indian subcontinent six months ago with the ending of a major series of privatizations by the New Zealand government.

Q : What has been JF's privatization experience in Asia and India ?

A : We recently jointly led a capital raising for the Indian Development Bank ,ICICI which raised US $ 220 mn for ICICI.

This year we have had 15 different privatization mandates from 7 different countries. What we try to do in Sri Lanka is to give a different perspective to the government and PERC. While it is important to see what happened in Europe or Latin America it is also very important to focus on what is happening in your own region. You are all competing for the same capital. If you are competing for the same capital you have to see what your neighbors have done and find out how you can do better. We are currently mandated with two others to lead a major privatization of VSNL (an Indian state telecom firm).

Q : It fell through once ?

A : Yes it fell through once. We have now been asked to assist. We have been working on it for a couple of years now and have resurrected it. This deal would be worth US $ 500-600 mn. We have just started on a Philippine cellular operator and are just completing a major Chinese telecom deal. We also achieved the sale of UD $ 898 mn of Pakistan Telecom.

Q : But you had problems there ?

A :Well the government achieved an attractive price very quickly. Our mandate was to advise the government .We got the money raised very quickly. If you look at all telecom transactions we have been involved in 30 per cent them. We have been involved in 55 per cent the 20 largest privatization's in Asia.

Q : What are the privatizations that you are interested in Sri Lanka?

A : We are strong in the major sectors that privatization is occurring. Telecoms; power; insurance and banking; transportation and oil and gas. We are working earnestly to obtain a role in some of those privatizations. When a public float eventually comes in Sri Lanka Telecom we would like to assist the government. We would of course be one of many who are looking for a role.

Privatization is an intensely local affair. One of the real reasons we have been so successful is that rather than jet in people from New York in a jumbo jet we have large local operations, like in Sri Lanka. It is quite dangerous to fly in from a foreign country and assume that because you have done a privatization in one country you can do the same in another. You can quite easily make mistakes. So you have local people who are supplemented by people from overseas who have expertise. But you have to have local people who can ensure that the subtleties of privatization are dealt with. There are a lot of interest groups and interested parties who need things explained to them.

Q : Deutsche Telecom went public last week, there are also others coming up. Do you think there are too many telecom issues around?

A : There are going to be telecom privatization from this region over the next four years from a number of governments. Another secondary market offering of PT Telecom stock in Indonesia. Korea Telecom in the next 18 months to two years. This would be about US $ I billion. The Singapore government has just sold down more of its holding in Singapore Telecom. Pakistan Telecom is looking for a strategic partner. In Sri Lanka Telecom a strategic shareholding is being offered. There are a lot more coming from the private sector.

The fund manager in London or New York or Frankfurt will receive three prospectus of say VSNL, PakTel and Sri Lanka Telecom.

Sri Lanka will have to differentiate itself in order to compete. It will have to appeal, relative to competitors.

Q : So how can we compete - other than by pricing ?

A : If one assumes that SLT gets the right strategic partner it would get commercially focused. If it gets commercially focused it will install more telephone lines. It will get rid of delays. It will perform very well financially. There won't be conflicting government social policy objectives.

Selling a strategic stake to a shareholder with commercial objectives before an initial public offering ( IPO) is good.

Q : Is selling to a strategic investor with management control with a minority holding unique?

A : Sri Lanka is leading Asia in many respects. Pakistan is doing the same thing with Pakistan Telecom. There are very few Asian countries where governments are prepared to let control be transferred. Most privatizations in the Asian context are sale of a minority holding with the government retaining control. That is the fundamental difference. I actually think what Sri Lanka is doing is quite advanced and quite clever from an Asian perspective. It just happens that Pakistan Telecom is looking to acquire strategic shareholder for PakTel at the same time. But those are the only two Asian countries.

Q : How would licensing private operators affect SLT? Especially when you look at the Malaysian experience you find that a lot of the value added services had been licensed out to private operators and the earnings of the Telekom Malaysia has been falling as a result. Would the same thing happen here?

A : If you look a penetration rates of one telephone for 100 person that leaves enormous room to grow. Even if the market is being de-regulated SLT will be able to grow significantly. There is an opportunity to do major roll out of telephone lines and increase the number of connections.

The network operator also has to provide interconnect services to all operators. New operators need to connect with SLT. SLT would therefore earn a return. Of course with competitors it would become more efficient, but that is obviously one of the objectives of the privatization programme.

Q : In New Zealand Telecom after privatiztion didn't they come up against some problems?

A : In New Zealand one of the conditions of sale was that a free local calling service be maintained. That was politically and socially motivated. Social objectives were met.

But the major problem after privatization was how new operators would come in and interconnect with the network. Competitors like Mercury in UK and Optus in Australia, had to be able to connect at a rate that enabled them to function. There was no formula for the price Clear - the competitor in New Zealand - was going top pay.

In New Zealand we did not have a regulatory officer for Telecom. We had what was called a light handed regulatory regime'. What it meant was that it was very free market sort of approach. Each phone company is required to disclose a lot of information and the Commerce Commission, which is trade practices body, can theoretically take action in the case of high charges. This threat is supposed to keep price rises in check. Ultimately the problems were solved after a lot of negotiations. In Australia there is a regulatory officer. In fact the first regulator later moved onto Hong Kong where he was the regulator .

Q : What about Air Lanka. How does that rate ?

A : Five or ten years ago a cornerstone of aviation strategic policy was to invest in other airlines and to form a global airline group. That position has changed as airlines have found it hard to make their capital work by taking minority positions in other carriers. It is not easy today to attract airline investors. There are about 25 airlines in this region looking for capital at the moment. Very few, probably 3 or 4, are likely to secure significant investment from other airlines. In fact there are moves by mega carriers like British Airways to enter into non-equity strategic alliances rather than committing capital. The deal we did with Qantas was one of the last major airline transactions to have occurred. Since then BA has announced its intentions to form a Trans-Atlantic alliance with American Airlines without equity. British Airways is franchising its operations around the world instead of investing equity. BA was one of the last big investors in airlines.

Q : Where can we expect investment from ?

A : It is more likely that, entrepreneurial groups or regional airlines are the most likely candidates. You will see carriers within two or three hours flight time willing to take a reasonable shareholding. But in general the trend had changed. It is no reflection on Air Lanka or on the government. It is the way the world is at the moment.

You have to be aware that airlines may also invest for defensive reasons than for expansionary reasons. For example the Singapore Airlines bid for Qantas was clearly for defensive purposes. BA from London wanted to build up a global network. Singapore arguably wanted to develop a regional network but probably also wanted to keep a major competitor out. There are all sorts of dimensions to consider. If strong management skills can be brought in I believe Air Lanka could be made profitable relatively quickly.

SEC Buckled by conflict of interests

By Asantha Sirimanne

The Securities Exchange Commission has been unable to meet due to conflicts of interests forcing members to keep out, The Sunday Times Business leans.

Meanwhile disturbing reports are emerging that some members may have sat in on meetings without declaring their interests earlier, resulting in questions being raised on the desirability of allowing members with interests in listed companies to sit as Commission members.

Responding to questions at a seminar last week SEC Director General Arittha Wickremanayake revealed that several attempts had been made to convene a meeting to discuss an appeal by Asia Capital on their takeover bid of Vanik, but five members could not be present to form a quorum in the nine member Commission.

SEC Chairman C. P. de Silva said some members had stayed out of Commission meetings due to their interests in one or more of the parties involved in the Vanik Asia battle and some were out of the country.

Commissioners Riyaz Mihular and G. C. B. Wijesinghe members of top audit firm who are auditors to some of the companies involved while SEC Chairman C. P. De Silva is Chairman of Lanka Orix Leasing Company. An LOLC associate Prudentia Investment is a minority shareholder of Forbes Ceylon which Vanik is interested in acquiring.

Another Commissioner, Central Bank official was .said to be out of the country.

When the Asia Capital issue had been first discussed however there had been a quorum, Mr. Wickramanyake said.

Some of the five members had been too busy' to attend SEC meetings resulting in the SEC being unable to meet, officials said.

Observers believe that the time has come to appoint full time members to the Commission, who have no interests in listed companies or brokerage houses. Appointing partners of top audit firms could also be particularly disadvantageous as they audit a large number of listed firms and would be forced to stay from Commission, thereby limiting their value.

"We should consider having a more functional SEC where people would not be too busy and have independent members so that conflicts of interests does not arise, former Ceylon Chamber of Commerce (CCC) Chairman G.S.Chatoor said.

Mr. Chatoor was speaking at a seminar on listing companies on the Colombo Stock Exchange organized by the CCC.

Other options included expanding the membership of the SEC. Mr. De Silva said reducing the quorum could also be considered.

"This is something we should take back from this forum and work on," Mr. Chatoor said.

When questioned Mr. Wickramananayake said he also believed that the time has come to appoint full time members to the Commission.

Observers believe that adequately remunerated professionals should be appointed to the Commission if Colombo is to aspire to be an international financial services centre. If the SEC was hamstrung and was unable to take decisions due to conflicts of interests in the future each time a takeover battles took place Colombo's ability to regulate itself would come under serious doubt, they say.

Stock market operates second board

The Second Board of the Colombo Stock Exchange is now in operation and all listing applications in future would be channeled into one of the boards depending on their qualifications, CSE Director General Dylan Moldrich said.

Existing companies had been given time until end 1998 to conform to the new requirements and remain on the main board or be re-assigned to the second board.

Companies on the Main Board would have to be capitalized at Rs 75 mn or above, have 25 per cent of their shares in public hands, have at least 300 shareholders, CSE Deputy General Manager Rohan Fernando said.

Second Board companies would be only required to be capitalized at Rs 5 mn on listing, issue 10 per cent of shares to the public and have at least 50 shareholders.

Main Board companies were required to have an operating record of 3 years though exception would be permitted on a case by case basis.

Companies making initial offers on the Main Board would have to publish full page advertisements on newspapers (compared to quarter page for the second board) as well as a specimen share application form (second board companies need not publish specimen applications).

While main board companies were required to release quarterly financial statements, second board companies needed to do so only at six monthly intervals.

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