23rd November 1997


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Govt. to patch-up textile firms

By Mel Gunasekera

The domestic textile industry, at loggerheads with the government following the duty waiver on imported textiles, has been asked to submit proposals for state assistance, but the Treasury is unlikely to back down from the budget proposals.

An estimated 140 large and small companies are believed to be affected the duty waiver. Textile industry sources say the companies were given till Friday to submit proposals, when they met Treasury's Deputy Secretary, Dr. P B Jayasundara last week.

However only three companies Kuruwita Textile Mills Ltd., Ran Fabrics (Pvt) Ltd., and the Nagindas Group had submitted proposals by Thursday, sources said. Textile industrialists meanwhile are complaining that the deadline is too short.

Of the three, two companies are not in good health and were even recommended to close down. The third manufacturer is doing well and has modernised his factory recently The government is considering lending financial assistance for the company, sources said.

The present government implemented a concessional credit scheme to assist the local textile industry during the last 3 years, costing Rs. 300 mn, on interest subsidy alone. The government had also made yarn duty free and exempted locally made-up garments from turnover tax.

Despite these measures, the local textile industry has not improved, as most of these industries have not re-structured and modernised to meet emerging market realities.

The previous regime too, bestowed grants and concessions to the domestic textile industry, and warned them to wake-up to the challenges or to close down.

However, the industry has carried on regardless, using antiquated machinery to produce fabrics that are not competitive in world markets, analysts said.

At present, apparel exporters use very little locally manufactured fabric, as it is of poor quality

"The fact that these manufacturers have received all concessions and failed to keep up, shows that they are unable to come up with a proper revitalisation plan. It's a case of inefficient management," one analyst said.

"The government cannot continue to protect inefficient industries at the expense of the consumer," he added.

Some textile manufacturers who have also diversified into apparel exports have taken a more positive view of the government's recent stance.

One manufacturer said the duty free regime has come a bit too early. "The textile industry should have been given a prior warning that duties would be abolished and the duties brought down systematically from 35 percent to perhaps the next slab of 20 to 15 percent," he said.

This view is also shared by UNP MP Mahinda Samarasinghe, who said that the government was looking at the textile industry in a very naive manner. "Our party progressively reduced the duty from 50 to 35 percent. Had we been in power, we would have reduced the duty to around 25 percent," he said.

"This is a situation like Gahen watunu minihata, gona anna wage (the bull attacked the man who fell from the tree)," Nagindas Chairman , Chiman Amalean said. "My machines and fabrics are far superior to those in India, if the government does not give us some relief, I will ship my machines across to India and start there," he said.

Sources say the government is not going to back down on this issue. The government has proposed a restructuring programme for the textile industry, which will be implemented through development banks and other financial institutions with the assistance of the government, to help these industries to modernise and to introduce new generation technology. BOI status too will be granted to set up large textiles factories to meet the growing needs of the garment industry.

A government official summed up the present situation of the domestic textile industry thus, "You can't have subsidised, inefficient industries continuing to be cushioned by the government, in this era of free market."

Diesel racing ahead of petrol

The last fuel price increase which widened the price differential between petrol and diesel has reduced petrol sales while subsidised diesel sales have increased further.

"Contrary to trends observed in the previous five years, the demand for petrol dropped by 3 per cent mainly due to the change in the relative price of auto diesel to other petroleum products as a result of the price increase," Central Bank said.

Total domestic consumption of petroleum products had increased by 16 per cent.

"This was both due to enhanced thermal power generation and increased demand for transport activities,"

Sales Liquid Petroleum gas had increased by 8 per cent, reflecting the increased use of gas for industrial purposes.

In September 1996, the prices of petrol, was raised by 25 per cent, diesel by 7 per cent and kerosene by 10 per cent due to high international prices and to reduce the subsidy on diesel and kerosene. The high profits margin on petrol, used for private transport, is used to cross subsidise diesel, used for public transport. However there is widespread abuse of the subsidy by affluent diesel vehicle owners.

In 1995 the government estimated that a vehicle using one gallon of diesel a day received a benefit of Rs 75,000 a year. Though the government had introduced a tax on diesel vehicles to correct the problem to some degree, it was not fully implemented due to resistance from interested parties.

Even the recent price increases however have not been sufficient to eliminate the losses on the sale of diesel and kerosene.

By end 1997 diesel and kerosene were sold at 20 per cent and 30 per cent below the cost of production.

During the first six month of this expenditure of petroleum imported had grown by 35 per cent to Rs 15,576 mn.

Average prices of crude oil had risen from US $ 18.58 in early 1996 to 20.24 in 1997. However crude oil imports had dropped sharply in the first half of this year due to the closure of the refinery in January and February for maintenance. Instead refined petroleum products had more than doubled to 674,000 metric tonnes from 302,000 metric tonnes.

LP gas import volumes had also increased by 10 per cent while the value rose by 43 per cent due to increased in prices.

Rush for garment factories

The proposed setting-up of 50 garment factories has been welcomed by apparel exporters. "The Sri Lankan apparel industry is doing well at the moment, so there is room for further new factories," sources said.

"There will be plenty of takers for the 50 factories, and I am sure they will be snapped up quickly," he said.

The various apparel associations have been hesitant to talk about the proposed new factories as details are very sketchy. "We are trying to see whether we could upgrade our present factories to one of the new 50 factories, which would enable us to modernise our existing factories to meet the challenge," an apparel exporter said.

"While we welcome the government's decision to abolish textile duties, we have to pay BTT and defence levy, for which we have to give a bank guarantee," President, Sri Lanka Chamber of Garment Exporters, Cassian M Fernando told the Sunday Times Business.

The association is urging the government to do away with the customs formalities, documentation etc. "We want to import fabric without documentation as every entry cost Rs. 1,000," he said.

A spokesperson for the Sri Lanka Apparel Exporters Association (SLAEA) sound the government's bold stance, is the most revolutionary thing to assist the apparel industry. The domestic textile industry is catering to domestic market and not to the export market and they can't be hiding behind tariff barriers for ever."

Meanwhile, the SLAEA, in a media release said, "the facility to import textiles duty free would also entice many foreign suppliers of basic fabrics to set-up warehouses and sales outlets in Sri Lanka, thereby making Sri Lanka a hub of entrepot trade in this region of the world."

"The large multi-national textile manufacturers have been reluctant to invest in Sri Lanka up to now, as the domestic market has been virtually closed to them due to the prohibitive taxes imposed for local sales of fabrics. The liberalisation of the textile mills to be set up in Sri Lanka would strengthen and gear the textile industry to be a partner of the apparel industry to face together the challenges of the 21 century." (MG)

Vanik bags Forbes Ceylon

Vanik Incorporation's offer to buy shares of Forbes Ceylon closes tomorrow, after having secured more than 70 per cent of the company.

After Vanik acquires 75 per cent of Forbes analysts beleive thae company would be de-listed from the stock exchange. However Vanik Senior Vice President Priyanthi Pieris said no such move had been planned at the moment.

Last week Vanik made the offer unconditional after securing more than fifty per cent of the target company and gaining shareholder approval to issue new shares.

By Thursday Vanik said more than 70 per cent of the shareholders including the major foreign owners and Asia Capital had accepted the offer. The figure is expected to go up after documents already submitted have been processed.

Vanik said in the offer document that it intended to restructure Forbes Ceylon after an evaluation of it.

"Depending on the outcome of these evaluations there could be a divestiture of FCL's subsidiaries," Vanik said.

However at present no board decision had been made to divest any of the subsidiaries, Ms. Pieris said, though some analysts believe that companies such as Soy Foods may be sold off.

The Global Equity Corporation has also agreed to sell the shares it owns in Forbes & Walker Ltd. to Forbes Ceylon after Vanik acquires Forbes Ceylon.

Vanik can also compel remaining shareholders of Forbes to sell if more than 90 per cent of the shareholders accept the offer.

Continue to Business page 2  * Eagle, NDB touch new heights  *  MIND YOUR BUSINESS  *  To devalue or not?

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