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14th March 1999

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Economy runs on back of women labour

By Shafraz Farook

Sri Lanka's work force of women dominates the country's three top foreign exchange earners - garments, industry and migrant labour. In fact the country's economy is practically running on the back Imageof unskilled and semi skilled women labour.

Housemaids accounted for over 60 percent or 99,132 of Sri Lanka's migrant work force in 1997. According to a Foreign Employment Bureau (FEB) report, of the total migrant work force of 149,843 women make up 75pc.

Migrant labour is the country's second largest foreign exchange earner.

Domestic help flock to the Middle East for a mere pittance leaving their country, home, husbands and children. But the bitter truth is that if they stay at home both husband and wife could be unemployed. Poverty and deprivation would be inevitable. Men accounted for only around 25 percent of the total migrant work force in 1997. Many of these women's husbands are jobless and live on their wives' earnings. A complete reversal of a man's traditional role as the sole breadwinner has occurred in these families.

While migrant workers of all classes and categories prop up our foreign reserves and economy the female domestic labour segment to the Middle East market may be severely threatened if new legislation is enforced in some Middle Eastern countries, like Kuwait and Lebonon.

Although no confirmation was available from authorities, several Middle Eastern countries are planning to regulate the number of workers into their countries, it is understood.

Ministry officials and Foreign Employment Bureau officials declined to comment on this issue.

DFCC moves in securitisation

By Mel Gunasekera

The expertise of DFCC Bank has been secured by the Housing Development and Finance Corporation (HDFC) to introduce mortgage backed securities (securitisation) to develop the housing industry in Sri Lanka, a senior Housing Ministry official said.

A recent report by the Presidential Task Force on Housing and Urban Development has recommended the government to create and develop the secondary mortgage market in order to improve the financial resources in the primary mortgage market.

The recommendations also include the establishment of an Employees Housing Fund (EHF) to which employees of statutory boards and corporations, banks and private sector organisations would contribute 1 per cent of the earnings.

The EHF will strengthen the housing finance market and enable the secondary mortgage market to develop. The primary mortgage lenders such as housing finance institution and banks can raise additional funds in the secondary mortgage market by securitising their available primary mortgage assets, the official said.

Cabinet consent has been granted and the EHF will be established by an Act of Parliament, he said.

Each EHF member will get a return on his contribution in the form of annual interest and dividend based on the profit earned annually. The interest and the dividend will be credited to the members' individual accounts, and refunded when they retire from their employment.

Housing Ministry officials estimate that if all paid employees (approx. 1.4 mn) become members of EHF, around Rs. 650 mn will be contributed to the EHF at the rate of 1 per cent of their annual earnings. EHF members will own accumulated contributions earning around Rs. 10 bn in a ten-year period while supporting the housing finance market.

Securitisation is the creation of liquid and negotiable debt instruments, which will facilitate the primary mortgage lender to raise funds in the secondary mortgage markets.

Securitisation will be serviced through the cash generated by a pool of financial assets.

The originator will transfer, assign, or mortgage the right of outstanding loan receivables to a Special Purpose Vehicle (SPV) as a true sale. The receivables are the future cash inflows earned by the pool of assets (mortgage bonds). The issuer will receive the investment through the SPV.

DFCC Bank has been proposed to structure the securitisation transaction and will act as SPV/Trust especially for this transaction and placement of the trust certificates, the official said.

DFCC Bank will issue asset backed debt instruments secured by a pool of financial assets to investors. Investments will be made through DFCC and look towards DFCC to service the instruments through the future cash flows of the assets.

The National Housing Development Authority (NHDA) will act as the beneficiary who will compensate the required market differential to the HDFC (originator).

HDFC will assign a portion of its existing housing loan receivables, preferably primary mortgages during the last three years, to DFCC.

In other words, the properties, which are mortgaged to HDFC, will be re-mortgaged to DFCC Bank who will also act as a Trust. The non-performing mortgages in the DFCC will be replaced with performing mortgages valuing similar amounts and risk characters by HDFC. The amount raised through securitisation will be used to grant housing loans to purchase houses from NHDA (beneficiary).

NHDA will accept the housing loans granted by HDFC to the buyers of houses from NHDA after discounting at 3 per cent on present value basis.

The cost of structuring, floating and issuing make good interest and capital. Firms could also apply for listing by securing the debenture issue, which enables the trustee to the issue, to realise the assets secured and use it for distribution in the event of default. If these criterias are not met, the company would have to maintain a debt equity ratio of 50:50. The company should also have profit records for three years and create a debenture redemption reserve to which appropriations must be made annualy. this is to enable the amount due as capital repayment on maturity to be appropriated to the redemption reserve. This prevents the distribution of profits as dividends unless a requisite amount has been appropriated each year. Unlisted companies who wish to list thier debt must offer debentures to the public with at least 50% being taken up by outside parties, making it mandatory to have the issue underwritten.

John Keells to open IT school

John Keells Holdings is tying up with Tata Infotech of India to commence an IT school in Sri Lanka.

Known as the John Keells Institute of Information Technology, the school would aim at providing professional educational programmes as well as IT degrees, JKH Director, Ajith Gunawardena said.

Tata will be signing the agreement for the BOI venture shortly, he said.

The last budget gave incentives for IT training, provided a minimum capital investment of Rs.15mn and facilities to train a minimum 300 persons annually. In return, investors would get a 5-year-tax holiday on profits earned from running software training institutes, duty free import of equipment to be used and a full depreciation on IT purchases made on or before March 31, 2000.

Mr. Gunawardena said, JKH ventured into setting up an IT training institute as the company felt there was a tremendous scope for quality IT persons.

"We feel that Sri Lanka should stand out as IT centre," he said.

At present, there is a demand for IT schools in here. The average requirement is 10,000 graduates, but the local universities pass out around 200 graduates a year. "Sri Lanka has the aptitude to do skilled IT engineering. With the proper training and qualifications we can meet the challenges", he said.

More storage for Grain Elevators

Ceylon Grain Elevators Ltd (CGE) has invested Rs. 150 million in Ceylon Warehouse Complex (Pvt) Ltd, the company announced last week.

The alliance will provide CGE the ability to store raw material for prolonged periods under strict environmental controls. Substantial revenue may be obtained via transshipment operations where grain is shipped from Australia or China, stored in Colombo, and subsequently released in bagged form for Middle Eastern markets.

When CGE was initially privatised in 1984, the company operated for over two years mainly on transshipment operations income.

The silo operation is expected to provide around R. 1.5 mn to the bottom line by May 1999 after interest costs and depreciation, an NDBS Stockbrokers' report said.

The project was financed by a Rs. 300 mn loan from a leading commercial bank at a floating interest rate with a one-year grace period on capital repayment.

The recent fine of Rs. 1.2 bn imposed by Sri Lanka Customs on CGE, for alleged duty evasions on animal feed imports, has placed an overall damper on the share, with the stock declining to Rs.14 but recovering to Rs. 34 last week.

Paper out on listing debt

By Dinali Gunawardena

A consultative paper on listing criteria for debt will be circulated among market players shortly making listing rules more stringent, Deputy General manager, CSE Rohan Fernando told The Sunday Times Business.

While more companies have to list their debt for the market to really take off, we are concerned about the quality of listing too, Mr. Fernando said.

At present the sole criteria for listing debt is to have quoted equity. Additional disclosures for individual companies may be required on a case by case basis, in the offer document.

New regualtions under consideration require additional criteria.The issue should be guaranteed by a bank or lending agency which, in the event of a default, can step into securitisation loans will be borne by HDFC and NHDA. Though the government is keen to commence securitisation and USAID had even commenced a report way back in 1994, most private lending institutions are keen on secondary mortgage markets, but reluctant to borrow through securitisation.A senior corporate finance manager attached to a leading commercial bank said the present borrowing rate in the debt market is around 14.5% - 15% and the lending rate of housing finance is almost the same. It is not feasible for the home mortgage lending institutions to borrow and lend more or less at the same rates. The current borrowing rate in the debt market and competitive lending rate in the housing finance market result a slim margin for the lending institutions.The stamp duty of 1% on the issue of debt instruments and the stamp duty on the transfer of securities (mortgage receivables) from the originator to the SPV is also a hindrance, he said.

New five-year plan for AirLanka

Volatility and turbulence in the airline industry, particularly in Air Lanka has prompted officials to redefine AirLanka's 10 year business plan into a five year plan, country manger Chandana de Silva told The Sunday Times Business.

Plans to develop Sri Lanka as a hub in the style of Dubai or the Maldives is a top priority in the new plan. At present not more than 10% of Colombo's traffic is transit passengers as against 80% of Dubai traffic.

While attracting high spenders into the country is the ideal situation, developing Colombo into a hub or a transit point between Europe and Asia will generate more traffic, Chandana de Silva said.

Depending on the success of these plans, increasing routes to India and Europe and long haul non-stop flights, Emirates management will call upon their option to buy six more Airbuses in addition to the six A330s they have already committed to purchase from Airbus Industrie at the same rates, de Silva added.

The first of the six new aircraft will be purchased around mid October, de Silva said.

AirLanka will borrow in the international money market for their new fleet.

Emirates rating in the international market and their close ties with Airbus Industrie have resulted in very favourable terms for AirLanka's purchase of the six airbuses, it is understood.

Meanwhile the final document outlining an enhanced package for local pilots will most probably , by presented to the ministry tomorrow, de Silva said.

We have addressed all their concerns in our new proposals, he added.

At the airline's next board meeting on March 19 the appointment of the new CEO is most likely to be made, de Silva said.

AirLanka's CEO Andrew Gray resigned last month in the midst of the pilots' one=day strike and ensuing discussions with the management.

Peter Hill, Chief Commercial Officer, is now acting CEO.

Baby AirLanka… what's its future?

Number crunching budget preparations

School children doing home work in arithmetic often learn that their teachers correct their work by looking at the answers. So they look up the answers at the back of the book, fudge the working and produce the correct answers.

Budget making under IMF auspices is much like that. The representatives of the IMF, World Bank even the International Finance Corporation repeat ad nauseam the need to keep the budget deficits within their prescribed limits. Governments on the other hand use various devices by which they keep to the required limits, the tricks of the trade are numerous. Much like our story of the teacher and the smart pupils. The recent Indian Budget is the latest illustration of this.

We are not for a moment denying the need for fiscal discipline. In fact our governments would be spending in a most indisciplined manner and jeopardising the long run economic health of the country if not for the dictates of the multilateral financial agencies.

What we are really getting at is that it is the final numbers that are looked at rather than the manner in which it is achieved. There is in other words a lack of qualitative assessment of the budgets, both the revenue and expenditure aspects.

There is a much greater need to look at the quality of the expenditure and its impact on the economy, rather than the final figures.

It is the kind of expenditure and the particular amounts of these expenditures which really matter even in terms of the budgetary impact on inflation. Similarly, the manner in which revenue is raised is important, not merely the amount of revenue.

Our recent budgetary experience demonstrates this clearly. The required deficit figures have been achieved at the expense of cuts in capital expenditures.

This does not augur well for the long run economic development of the country. Further much of the expenditure has been in what may be described as unproductive expenditures.

These include the vast expenditure on Samurdhi, debt servicing, pensions and the war. With an expenditure pattern in which a large proportion of revenue is spent on these items we cannot expect the government's fiscal policy to yield beneficial impacts on economic development.

It is for these reasons that there is a strong argument for cutting some of these expenditures as well as perhaps incurring a larger deficit to finance development projects, including infrastructure. Some degree of inflation may be a necessary cost at this stage of development and in the context of an expensive war effort.

There is a vital need to look at the public finances from the point of view of its qualitative impact rather than be satisfied with getting the arithmetic right to please the international agencies. As the government is preparing for its last budget it may be worth thinking on these lines. What it must resist most is excessive unproductive expenditure.

Getting the economy moving is the primary objective of a Budget. Getting the correct answers for the IMF may not help us in the long run. If the government accepts this position, it is the responsibility of the officials to argue this case with the IMF and convince them of the fundamental rationale of such an approach .The multilateral agencies are humbler and will be more willing to listen after the Asian debacle. We must not miss the opportunity.

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