20th July, 1997


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Mirror Magazine


Playing field uneven for big timers

Though Sri Lanka has been progressively lowering direct taxation of income, some companies in the formal sector who pay high rates of indirect taxation are complaining of unfair competition from small manufacturers and importers who escape the tax net.

The Richard Pieris group which has several companies engaged in making high value added end products from local and imported raw materials says it is facing unfair competition in rubber, plastic and furniture sectors.

“In all these fields we face unfair competition from a plethora of ‘informal’ enterprises which do not appear to pay taxes at all,” Chairman Henry Pieris told shareholders in the latest annual report.

“In the light of this situation, which must confront all industrial enterprises, real industrial growth becomes more difficult to achieve.”

The Group as a whole had paid Rs 345 mn as taxes and duties to the government during the last financial year on a turnover of Rs 2,098 mn. This amounted to 40 per cent of total value added within the group.

“If our formal industrial sector continues to be discriminated against in this manner, the country will soon be riddled with uneconomical industrial units thriving on tax evasion,” Mr. Pieris warned.

Last year the group closed plants and shed labour to remain competitive. A foam rubber plant in Nawinna had been closed with the loss of 31 jobs.

Demand for moulded and extruded rubber products had also fallen last year due to low cost substitute products forcing prices to be cut. Despite this sales had fallen by a 30 per cent.

A voluntary separation plan had been set in place resulting in a further 105 employees resigning from manufacturing and service centres.

With the economy gaining momentum, coupled with high technology and improved productivity the group is aiming to improve on its Rs 193 mn profit (Rs 139 mn after minority interest and extraordinary items) last year.

The group says it adds value to 8000 metric tons of rubber representing 8 per cent of the country’s output.

“This clearly demonstrates the group’s dominance in the rubber industry, and we are capable of converting more and more of Sri Lanka’s raw rubber into finished products, contributing to increased domestic value addition and foreign exchange,” the group said.

“Unfortunately we cannot reach out fill potential unless positive and active support is extended to the government to control and discourage unfair and unethical practices adopted by domestic competitors,”

According the data released by the consultancy firm Econsult, Sri Lanka has the highest level of government revenue compared to GDP in South Asia at around 20 per cent, while in neighboring countries such as India it had been below 14 per cent during the past 20 years.

Richard Pieris Groups says the disparities between the formal and informal sectors appear to be growing. In the furniture sector for example smaller firms were under invoicing imports in addition to evading turnover taxes.

Analysts say the proposed value added tax (GST) would help reduce the cascading effect of turnover tax and reduce disparities if smaller businesses could also be effectively brought into the net.

Richard Pieris says smaller companies were not only gaining unfair advantage by evading taxes but ignoring other regulations, such as those relating to environment.

The group has set up a new company, Arpico Flexiform, to produce flexible polyurethane foams. The plant was carefully chosen to be environmentally friendly and designed to reduce waste to the minimum, the company claimed, but competitors appeared to be unhampered by these concerns.

“It is disturbing to note that competitors in the field appear to manufacture with little or no control by environmental authorities, the group observed.

Role for domestic credit in economy

Domestic credit growth may play a much more important role in investment and economic growth than previously thought, the consultancy firm, Econsult has suggested.

“Weak credit growth has reflected and to some extent explained the weak South Asian investment performance,” Econsult said in its latest monthly report.

“As a percentage of GDP, domestic credit rose an average 39 per cent in the second half of the 1970’s top an average 48 per cent in the first half of 1990’s.”

Over the same period domestic credit in Korea, Malaysia, Philippines, Singapore and Thailand has risen from 32 per cent to 60 per cent of GDP.

“Interestingly the odd one out of the East Asian block, the Philippines, has experienced significantly slower credit growth and, not surprisingly, has also experienced a correspondingly slower rate of economic growth.,” the report pointed out.

However Econsult admitted that credit growth may result from strong economic performance, but maintained that the opposite was true in the East Asian experience.

“There can be little doubt that it also conditions such an environment,” it said.

Econsult stressed that it was not merely the level of credit but its availability to the private sector that mattered most.

“Most of the credit expansion in East Asian countries could be accounted for by an expansion in credit to the private sector, whole in South Asia the government accounted for a major par t of the credit.

During 1991-95 credit to the private sector in East Asian countries were 56 per cent of GDP while it was only 25 per cent in South Asia.

However in recent years, credit to private sector has been rising slowly in Sri Lanka. Bangladesh in particular starting from a low base has shown growth and has also been helped by low government borrowing.

Mind your business

by Business Bug

Bank does rescue act

A textile mill which was in dire straits financially had planned a leveraged buy out to see them through.

Not many were willing to take the plunge, but finally a partly state owned bank agreed to come to the rescue

Now however the merchants in the bank are having second thoughts and the mill is worse than ever......

Foreign cover for uessels

Terronst attacks on merchant vessels plying on the northern seas have taken it's toll.

Now very few shipping lines want to take the risk and even fewer insurance companies are willing to take on a premium for this risky business.

So, we hear the government is thinking of inviting overseas insurance companies to take over....

Turnover levels remain poor

With the CSM stabilising at ASPI 820 levels due to profit taking by mainly retail investors, a marginal decline in the indicies is expected. There was also a strong presence of domestic institutional interest in the blue-chip development banking sector.

Widespread interest by retailers was prevelant in the Finance/Kegalle/Grain Elevators/ and Royal Ceramics as well as low price shares such as Bogala/Docks/ Forbes.

However the turnover levels recorded for the week’s trading in comparison to previous weeks’ was very poor (Avg 50 million).

This was mainly due to lack of significant foreign presence as in previous week; furthermore whatever presence by foreigners there was mainly in blue-chip favourites like DFCC/JKH/Sampath.

However it is apparent that as fixed income yields continue to remain unattractive, lack of attractive profitable investments domestically will spur further interest in equities.

The Lighthouse Hotel share issue offering 22.5 million Rs 10 shares to the public closed last week with about 6 million shares taken. As it is fully underwritten the promoters are assured of the required capital.

As the issue is backed by NDB/Sampath/DFCC and Hayleys it is expected that the shares would perform substantially better than the previous IPO’s quoted in the past two years in this sector, which would enable more IPO’s in this sector to be quoted.

Compared to the sub-continental markets the CSM seems to be quite expensive with a P/E in the region of 15 (1997/98).

Finding bargains among blue chip companies is far from easy as the past three months, but value is available in stocks which are in the margin of being considered as blue chip.

These companies would be the next growth area in the coming weeks and months.

The unit trust investments seem to be a very secure proposition for small-time retailers to come into the market - as some of the unit trust prices are below par-value. By analysing the portfolio held by the unit trust a low risk moderate to high gain investment could be made. Normal growth fund has been launched. This fund should infuse more capital into the market to sustain high volume levels. This raises the number of unit trusts to six.

Recommended: The Finance/Kegalle/Sampath/KDL/Ceylinco Insurance/Blue Diamonds/Ceylinco/Seylan.

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