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26th April 1998

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US regulator may hit Telecom revenue

By Mel Gunasekera

Sri Lanka may lose billions in foreign exchange if new telecom regulations are enforced in the United States.

US telecom regulators are looking at reducing overseas payments, telecom sources said.

This would eventually correct the imbalance in Sri Lanka Telecom's tariff structure where domestic calls are subsidised at the expense of exorbitant overseas charges, analysts say.

Telecommunication carriers world-wide, including SLT have been warned that they may face US sanctions if they fail to negotiate reductions in international call settlement rates, industry officials say.

The US move is prompted by the fact that there are far more calls going out from developed countries than are coming from developing countries such as Sri Lanka.

Calls originating from US to Sri Lanka are estimated to be three times more than calls going out. Similarly traffic outflow from Canada to Sri Lanka is 20 times more, and traffic outflow from UK five times more than the inflow.

At present US carriers pay US$ 1 per minute to Sri Lanka. Sri Lanka also pays the same amount to US operators when calls originate from here.

But the US regulator, Federal Communications Commission (FCC), wants to bring the cost down to 23 cents at least under the new benchmark rates.

However, the huge imbalance between outgoing and incoming calls is causing huge outflows of foreign exchange from developed countries like the US, putting pressure on their external accounts.

The FCC believes the existing rates for receiving (terminating cost) calls are far above cost. The US order takes effect from January 1 this year, reducing settlement rates to levels closer to cost.

It would bring down settlement rates by around 25 per cent, a senior Sri Lanka Telecom official said.

However, developing countries like Sri Lanka have been given up to year 2002 to re-structure their tariff rates, he added. But SLT officials say the ruling on Sri Lanka would come sooner, perhaps by the year 2000.

The FCC's position has brought out a massive outcry from other developing countries. Nearly 100 foreign carriers including India, Pakistan, Singapore and China are challenging FCC's benchmark scheme in the US appeal court, industry officials say.

The main arguments are that FCC has no jurisdiction as to what US carriers should pay to foreign carriers, the benchmark scheme becomes a unilateral agreement not a bilateral agreement and the values that they (FCC) have proposed are too low.

Sri Lanka has not filed a petition in the US court of appeal, due to astronomical legal costs.

At present, 60 per cent of SLT total revenue comes from international calls. Of the 60 per cent, 20per cent accounts for outgoing international calls from Sri Lanka. The balance 40 per cent is a surplus SLT gets from the US and other countries due to the favourable settlement scheme.

The 40 per cent surplus may come down to 10 per cent if the ruling comes into effect.

"In fact, the Sri Lankan expatriates living in the US and other countries have been subsidising the domestic Sri Lankan users," SLT says.

"The revenue lost from Telecom may be recouped by other means," says one industry analyst.

Timely boost for beer maker

By Ruvini Jayasinghe

The GST has turned out to be a timely intervention for beer guzzlers who may have had to cough up more for their pint.

Ceylon Brewery Ltd. (CBL) said it would hold retail prices of Lion Larger and Carlsberg for the present.

The market leader for soft liquor, (nearly 75 percent of the market share) CBL has not adjusted prices for almost three years since excise duty on soft liquor was reduced from Rs. 33.60 to Rs. 10 per litre.

A price revision was imminent but the replacement of turnover tax with GST has given CBL a slight advantage, which the company is passing onto the customer, officials said.

The company is however unable to take full advantage of the tax reduction due to GST restrictions on its dealer network. Both distributors and certain retailers are liable to GST and these costs have to be inbuilt to the final selling price of beer. The company therefore has to pass on part of the tax reduction to its distributors.

"During the past three years, raw materials such as malts and hop have gone up. The dollar appreciates by about 8 percent annually. Labour, energy and other infrastructure costs have also gone up. But we have not passed on these price increase to the customers," CBL Chief Executive Suresh Shah told The Sunday Times Business.

Meanwhile, the brewing process has now begun in the company's second plant in Biyagama. Bottling should begin in the next two weeks and Lion Larger from the new plant should be out in the market by mid next month, Mr. Shah said.

The second brewery with an annual 30 million-litre capacity will add the much-needed volume to the CBL's annual 50 million-litre current capacity.

The new plant should eliminate the short supply of beer, which was precipitated as a quick market reaction to the slashing of beer prices following excise duty reductions.

Top executives of CBL's strategic partner, Carlsberg, who were in Colombo last week en route to Singapore told The Sunday Times Business that Sri Lanka received high priority in the region, much higher up the scale than neighboring India.

Sri Lanka is an interesting and promising market. A good investment climate and a potential huge tourist market make the country a bright prospect for the premium brand here, President and CEO, Flemming Lindelov and Managing Director, Michael Juul said.

The Danish multi national Carlsberg has a 8 per cent stake of CBL and its Malaysian arm 26.4% stake of Lion Brewery.

Soft liquor is a mere 6 per cent of total liquor consumption in Sri Lanka. Over regulation and restrictions on licensing have made illicit brews the top seller, CBL officials say. Sri Lanka's 1500 liquor outlets are among the world's lowest. In comparison to some western countries our per capita consumption of soft liquor is minimal. (See graph.)

CBL has been lobbying for more open retailing for soft liquors. Liberalizing the soft liquor market could eventually change social drinking habits of the next generation at least, the officials said.

This will no doubt improve soft liquor manufacturers' performances tremendously and hit the illicit liquor trade and those who make a living of it.

Liquor licences are issued by the Excise Department for an annual license fee of Rs. 250,000. CBL officials are pushing for a more liberalized retailing of beer with a separate soft liquor license. Unless retailing soft liquor is opened up the true potential of the market cannot be tapped, they said.

Economic implications of BJP for Sri Lanka

The political repercussions of the Bharathiya Janata Party's (BJP) assumption of office in India have been our main concern. The statements made by the BJP at election time sent waves of anxiety about the possibility of India once again interfering in Sri Lanka's internal conflict.

However, soon after the election, Mr Vajpayee has given an assurance that there would be no such interference and our initial anxieties have been allayed to some extent.

Equally important and perhaps more important in the long run are the economic repercussions of BJP's economic policy. There are indications that the BJP might retard economic reforms, in particular the process of trade liberalisation.

The BJP takes the view that while trade liberalisation may be good for India, it has to be done in a phased manner after institutional and economic changes within the country could cope with international competition. Such a stance could retard the process of trade liberalisation and regional economic integration.

There are several reasons why such a change in economic policy in India could be disadvantageous to Sri Lanka. First of all, it has to be recognised that India plays a leadership role in South Asia, not only in political terms but also in influencing economic policies.

The economic policies pursued by India are likely to influence Sri Lanka's economic policy as well. One remembers only too well that in the first three decades after independence Sri Lanka followed closely the economic policies pursued by its giant neighbour.

The inward looking import substitution strategy for industrialisation and a lead role for the State with the nationalisation of economic enterprises are policies which Sri Lanka adopted partly due to the influence of Indian economic thinking. Fortunately Sri Lanka diverged from the statist policies somewhat earlier than India and no doubt India's change in policies about a decade later strengthened and reinforced Sri Lanka's economic reforms.

Will the new economic policies of the BJP government, which may look inward somewhat more than the past governments, deter foreign investment into India? Will such changes influence Sri Lanka's economic policies as well?

There is another reason why Sri Lanka could be anxious about lndia's economic policies. When one looks at the global picture one cannot fail to observe that economic growth has tended to have a regional pattern. East Asian economic growth was followed by South East Asia's economic growth and there is a sense of expectation that the next wave of economic growth would be in South Asia.

If however the BJP government' s policies fail to carry through the economic reforms and usher in an era of autarchic economic policies, this could lead to a lower rate of economic growth in India. Slower growth in our giant neighbour will no doubt have its direct and indirect bearing on Sri Lanka's economic growth as well.

Some of the regional similarities in economic performances are likely to be due to the foreign perception of a region for investment. The perception foreign investors have of India could largely determine their perception of South Asia as a whole.

Trade liberalisation within the region could lead to greater regional efficiencies in industrial production and the enlargement of the market for each other's industrial products. There are possibilities of vertical industrial integration promoting new globally competitive economic enterprises.

There are ways by which some of the complementarities that exist between SAARC countries being exploited such as the export of excess power generation in Pakistan to India. Besides, what could be achieved within the region, if SAARC becomes a dynamic regional group, it could lobby at international fora and obtain advantageous conditions and concessions.

As it is South Asia remains a powerless group unable to exert influence in international trading and economic deliberations and consequently the region is being marginalised.

The third way in which the new government could affect the region's economic performance is by a slower implementation of SAARC economic co-operation and integration. Differences in foreign policy as well as differences in the attitude towards intra-regional trade liberalisation could adversely affect SAARC as a regional economic and trade bloc.

The conflict between India and Pakistan which is undoubtedly the biggest stumbling block to the region's economic co-operation implies that Sri Lanka and the other smaller countries could exert some influence to bring sanity to the two larger countries.

The region's economic performance is also no doubt largely dependent on the settlement of the Indo-Pakistan conflict which absorbs a huge proportion of government expenditure of each of these countries and saps the governments capacities to play a more useful role in economic and social development.

In this conflict-ridden context Sri Lanka should influence these two countries to adopt policies which would lead to economic co-operation, increase trade and encourage industrial integration. Such co-operation could greatly assist in enhancing growth in the region.

Looking for power alternatives

By Feizal Samath

Nations Development Programme (UNDP), has launched a new programme to expand the country's use of sustainable and renewable energy resources. "This would reduce the need for fossil power fuel in power generation Therefore green-house gas production, which is associated with this type of energy, could be reduced," explained Tilak Gunawardene, the UNDP officer in charge of the project.

Through the project, researchers will investigate the potential for better utilisation of water, wind and wood energies. These findings would then be passed onto potential investors.

The UNDP project costing $US 1.8 million was kick-started last month and is expected to be completed in three years.

According to the Central Bank of Sri Lanka's last annual report for 1996, the total energy supply in Sri Lanka was in the region of 6.4 million tonnes of oil equivalent. Approximately 57 percent of the total energy supply is derived from bio-mass (including fuel wood) and utilised for household cooking and industries.

Another 26 percent comes from imported fossil fuel (crude oil and gas) and mainly consumed in transport, industrial activities, cooking and lighting thermal generation. The report said that hydro power accounted for the balance 17 percent.

It said that the available indigenous commercial source of energy is hydro power which provided 76 percent of Sri Lanka's electricity supply in 1996. The balance came from thermal power sources. Gunawardene, the UNDP's Assistant Resident Representative in Colombo, said that under the project, it was hoped to promote mini and village hydro power units and draw the private sector into grid-connected and stand-alone schemes.

Many of the plantation schemes which were sufficient for their own energy requirements but with cheaper electricity being available through the national grid, these schemes were abandoned. Sri Lanka has now reached the limit in large scale hydro-power generation and a severe drought in 1996 caused a serious power shortage.

The government then bought power from private thermal power plants and also offered incentives to the private sector to buy large diesel or kerosene generators. Gunawardene said there were six components in the UNDP scheme.

Later this year, a team of foreign experts and the Ceylon Electricity Board will study the potential for small hydro power schemes in a selected river basin. "The area had not been identified. We are looking for a 30-40 miles (45-60 km) area on a river," he added.

Another aspect is to build two wind monitoring stations on the west coast and the central hills so that scientists can assess the wind capacities of these areas.

Currently wind energy is being tapped from the country's southeast coast where a wind farm has been established through World Bank assistance and windmills generate power.

"We want to look at the wind velocity in the west coast and central hills and ascertain whether it is sustainable and constant," Gunawardene said. "Knowing the potential of these sites will encourage the private sector to invest in small hydro and wind energy."

Though small hydro systems are a viable power generating option for Sri Lanka, many investors have stayed away from investing in such projects due to the lack of proper information. At the same time the local capacity and manufacture of small hydro equipment is limited.

To develop local skills for the manufacture of small hydro power equipment, the UNDP has invited a local non-governmental agency, Intermediate Technology Development Group (ITDG) to train local personnel.

"We hope to train up to 75 local craftsmen, in this field, in the next three years," said Sunith Fernando, ITDG's energy programme manager. ITDG, which began operations in Sri Lanka in 1989, has developed new technology in energy, agro processing, rural transport, research and policy and communications.

Fernando said that in the past six years, the group has run a village hydro project scheme in which units ranging from one kilowatt (KW) to 35 kilowatt (KW) are set up and owned, run and maintained by village communities. At least 42 such mini hydro units, using small streams, have been created with ITDG help.

"We create the environment and provide technical support like training of local craftsmen in the design, manufacture and assembly of a small hydro power plant," Fernando said.

Most of the homes under this project receive 100 watts of electricity - enough to light five 20 watt fluorescent lamps, two of which are switched off when a black and white television is switched on.

ITDG says that some village societies give subsidised connections to poorer households, and people often lend neighbouring homes their share of power on special occasions like weddings and funerals. Fernando says that there are 300 potential sites for 100 KW and over units across Sri Lanka which likewise could be tapped for hydro-power.

Most of these are in tea plantations where water resources are available.

In developing wood energy, UNDP is relying on Sri Lanka's National Engineering Research and Development Centre which specialises in energy efficient, small wood combustion systems for commercial and industrial use.

"We will assist the Centre in finding commercial and industrial applications in which the private sector would like to invest particularly in ovens, stoves and brick kilns," UNDP's Gunawardene explained.

The rest of the project includes workshops for energy managers and a new course, designed to spread the advantages of renewable energy resources, at the University of Moratuwa.

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