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12th April 1998

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BOI infrastructure firms may enter stock market

Major BOI infrastructure companies may seek listing on the Colombo Stock Exchange (CSE) to finance expansion projects, fund backward linkages, expand into new capital intensive areas and reduce their debt burden.

The Colombo Port project, certain power projects and the local wireless loop operators, are some of the likely candidates.

"It is not binding in the BOI agreement, but nevertheless there is an understanding that these companies would seek a listing in the future," BOI chief Thilan Wijesinghe said addressing investors in BOI companies, who took part in a CSE seminar aimed at encouraging them to list.

Mr. Wijesinghe said there was scope for companies involved in large and small scale manufacturing, and hotel projects to also seek a listing.

The BOI has ensured that certain proposed major investments like the Eppawela Phosphate project have built in agreements to divest 10 per cent stake to the public.

"We have also received assurances that large manufacturers like Puttalam Cement too would seek a listing," he said.

The BOI sector plays a vital role in the national economy, he said. Some 58 per cent of total exports originate from around 900 approved BOI companies. Moreover, 80 per cent of industrial exports (excluding petroleum) originate from BOI companies.

BOI companies with foreign equity participation accounted for 68 per cent of the total exports.

In the BOI sector, 85 per cent of non-apparel exports originated from companies with foreign equity. In sectors depended on technology like electronics, rubber, and mineral products, 100 per cent foreign owned companies accounted for nearly 50 per cent of exports, Mr. Wijesinghe said.

However, exports from wholly owned Sri Lankan companies have risen considerably over the last five years. Earlier, nearly 60 per cent of exports originated from foreign owned companies. Increased local participation in the export sector has brought it down to less than 24 per cent.

In 1997 the Sri Lanka attracted US $ 130 mn worth of foreign direct investment (FDI) with large BOI projects such as wireless loop operators heading the list.

Locally owned companies play a dominant role in sectors like textile and wearing apparel, where 43 per cent of total exports originate from 100 per cent locally owned companies. For the food, beverage and tobacco sector, 44 per cent of exports originate from 100 per cent locally owned companies.

Despite the heavy involvement in the national economy, BOI ventures have been shy to list in the market.

Mr. Wijesinghe said since most BOI companies began small, and were less capital intensive, they were funded by their own equity. Many BOI companies were also 100 per cent foreign owned, where the parent company was already listed abroad.

The last budget announced a series of concessions to attract new comers to the market. Concessions included, a 5 per cent reduction in stamp duty pertaining to initial public offering, allocation of new share values to be exempted from capital gains tax, which can be deducted as an expense when computing the assessable income.

The government is also encouraging the NSB and Insurance Corporation to play an active role to help companies that are seeking a listing.

Mr. Wijesinghe said having external shareholders could also improve management prompting greater accountability and transparency. Employee share ownership schemes could also be another way of intensifying and retaining employees.


James Finlay to spell out PIMC deal

By Mel Gunasekera

James Finlay & Company (Ceylon) Ltd, which bought the Plantations Investment Management Company (PIMC) is expected to make an announcement this week on the corporate management contract PIMC has with Merchant Bank of Sri Lanka.

PIMC has to pay fees — equivalent to 1.25 per cent of the turnover of the companies owned by it — to Merchant Bank of Sri Lanka, in addition to several other payments.

PMIC paid a total of Rs. 711.4 mn (Hapugastenne Rs. 245.3 mn, Udapussellawa Rs. 316.1 mn and Udapussellawa debentures Rs. 150 mn) for its purchase of the two plantation companies in 1996.

The two Regional Plantation Companies (RPCs) collectively hold lease rights to about 22,900 hectares of land, including 9,963 hectares of tea and 1,866 hectares of rubber.

James Finlay paid Rs 1.5 bn for PIMC last week.

James Finlay & Company (Ceylon) Ltd is going for a rights issue to fund part of the purchase.

The rest is expected to come from internal funds and bank borrowings.

Analysts expect the bulk of the rights issue to be taken up by its parent company.

James Finlay already has a sub management contract with Hapugastenne Plantations.

When James Finlay offered to buy the company in 1996 it was outbid by the PIMC. It was then contracted to sub manage the company by PIMC. Maturata Plantations which was originally bought by the ETF amidst much controversy was also sold off last week for Rs 885 mn to Free Lanka Trading group.

ETF also says it is prepared to purchase secured debentures (bank gueranteed) from Free Lanka and James Finlay to help finance the deals.

PIMC was set up by Employees Trust Fund (47.2 per cent), Sri Lanka Insurance Corp. (28.3 per cent), National Insurance Corp. (14.1 per cent) and Merchant Bank of Sri Lanka (10.3 per cent). Merchant Bank also holds Rs. 6.3mn convertible debentures of Hapugastenne.

All three investors have made capital gains of around 50 per cent for their Rs 1 bn equity investment in PIMC.


Alliance confined to tyre business

Responding to our story last week, headlined "Local tyre giants to merge', Kelani Tyres Limited says it does not plan to merge with Associated CEAT (Pvt) LTD as a company.

"Kelani's involvement in the strategic alliance and what has been agreed is confined only to the 'tyre business of Kelani and not the entirety of the business of the company as a corporate entity," Kelani Tyres said in a statement.

The statement says it decided to form the alliance with Associated CEAT as part of the overall restructuring it underwent in October 1997 after labour problems were resolved and not because it was facing closure.


IMF team here ahead of Paris aid meeting

A mission from the International Monetary Fund (IMF) arrives in Sri Lanka next month for annual consultations on Sri Lanka's economy and as a precursor to the Aid Sri Lanka consortium meeting due to be held from May 26 and 27 in Paris, government economists said.

The team will meet officials from the Finance Ministry, the Central Bank and other institutions during two weeks of consultations, which the IMF normally has with member countries. Under article four of the IMF constitution, member countries are obliged to co-operate with the IMF in surveying their economies.

Another important conference is being scheduled for next month, when the World Bank organises a meeting with donor countries and agencies in Colombo including the Asian Development Bank and the IMF to discuss the Paris meeting and aid prospects.

The annual Paris meeting is sponsored by the World Bank. The World Bank's joint Colombo consultation with other donors is also held on an annual basis as a run-up to the Paris meeting.

"The Colombo meeting generally takes stock of the aid situation, tries to ensure there is no duplication of aid and looks at combining donor resources for more effective use," an official at a donor agency said.

Government economists said the IMF team's visit in May was more coincidental than being connected to the Paris meeting. "It is connected as far as the timing is concerned. As the Paris meeting is scheduled for the end of May and the IMF also has to present its views on the Sri Lankan economy at the meeting, it was felt that the consultations should be held before that meeting," one economist noted.

After the annual consultations, the IMF prepares two documents. The first one — the staff report — summarises the discussions with Colombo officials and ends with a staff appraisal in which the fund may suggest where policies need to be changed. The second report is a background paper called recent developments, which is made public with the consent of the country concerned, the economist said.

Sri Lanka is unlikely to get more than the US$ 850 mn pledged at last year's aid group meeting, a diplomat from a donor country said.

"In view of the East Asian crisis and the appreciation of the US dollar, the figure is more likely to be less," he said.


Postal disruption: time for review

The postal strike could lead to an unhealthy development of alternate delivery systems to serve the business community. Unhealthy because such alternate systems are more expensive and could in the course of time result in a further deterioration of postal services which would affect especially ordinary citizens. In fact the postal strike came at a time when the postal services had deteriorated. The strike should focus attention on the need to revive the efficiency of the postal system.

For many decades Sri Lanka enjoyed a relatively efficient postal service. One has to give credit to the British who developed efficient postal services in their colonies. For most part of the post- independent era the postal service had been efficient. Far flung places in the country were served quite effectively by the system. In recent years however there has been a noticeable deterioration in the services. This may partly be a reflection of the general deterioration in efficiency of the public service. It may also be related to some specific conditions of the postal service itself. There is a need to review and take appropriate steps to reform and revive the system. The postal strike underscores this need more emphatically.

An efficient postal system is vital for the business community. Private business has regular need for an efficient postal system. Without an efficient and quick delivery of business mail there could be considerable inconvenience and ineffectiveness of business activities. For instance the documentation of sales in the Central Depository System requires to be delivered promptly as the transactions have to be settled in a brief period of a few days. If the postal system delays the bought and sold notes reaching the clients the payments that are due would be delayed and Stock Exchange transactions could be adversely affected. This is just one instance when business transactions require a dependable, regular and quick delivery of mail. Another current instance is that many shareholders whose companies declared dividends are awaiting their cheques.

It is true that the business community now uses alternate systems of delivery for its urgent delivery needs. This is however largely restricted to Colombo and the widespread use of such alternate systems could be very expensive and raise business costs appreciably. Besides this, while such systems could serve the main cities, it is difficult to see how such systems could penetrate less populated areas. If the postal system is inefficient, business activity would tend to be limited in its outreach into non-urban parts of the country.

It is also conceivable that when the business community relies on alternate means of delivery of documents and communication by electronic media, the general postal system would become less viable and financially a burden on the government. Over time this would result in a further deterioration of postal services. The main sufferer of such a deterioration would be the ordinary citizen and particularly those who are at a distance from the main cities. Other categories that have been seriously affected are those who depend on foreign remittances from their relatives for their livelihood, pensioners and widows receiving pensions. Besides this the government itself requires the postal services to render an efficient service in a number of sectors to the people.

The need for an efficient postal service is self-evident. A small country like Sri Lanka cannot afford to let the postal services deteriorate to an extent where heavy reliance is placed on alternate systems. This is especially so as a large section of the population will not have access to such systems owing to their higher costs as well as their restricted services to particular areas. Therefore the government must take the postal strike as an opportunity to review the entire structure and functioning of the postal services and take remedial measures to improve its efficiency. Without an efficient postal service the country's business activities could be adversely affected. The common people of the country would suffer most by the lack of a good postal service.

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