4th July 1999
Lasses with lotus blossoms prepare for the ceremonial opening of the Nations Trust Bank (NTB) last week. The Overseas Trust Bank's (OTB) decision to curb operations to Hong Kong and China had the Central Bank contemplating on how to scale down the Colombo operations. The leading lights of the financial sector, as the Central Bank Governor A. S. Jayawardena put it, then came forward to take over the operations of the OTB and formed the NTB. The Bank's IPO was subcribed three times over in a sluggish market. NTB has the backing of John Keels Holdings, Central Finance and the IFC. With people like Ken Bahendra and Chandra Wijenayake holding the reins, many industrialists feel very otimistic about the future of the bank. NTB is seen as the beginning of a dramatic financial institution, but a bank that would have to win the nations trust, the Governor said. Pic by Gemmunu Wellage
ONE of the significant develop ments in recent times was the broad continuity of policies by the present government. This ended the alternating economic regimes which had characterised the country's economic history since independence.
Many observers have attributed the relatively poor economic preformance of the country to the alternating and drastic changes in economic policies. At least we can be agreed that it was one of the significant factors which impeded a better economic performance.
It is now clear that if the country is to forge ahead, there has to be a much greater consensus on a wide range of economic policies. This is needed for several reasons.
The foremost requirement for an agreement on seveal areas of economic policies is that without such an agreement, the opposition tends to make political capital of the government's economic reforms.
The government in turn is not likely to undertake much needed reforms as the oppposition would characterise such changes as detrimental to the public good.
Consequently much needed economic reforms are shelved. Budgetery cuts in expenditure, the privatisation of state banks and closure of redundant state agencies are among the illustrations of this type of economic actions which are not taken.
The inability of the government to take firm action and enforce rules and regulations are also partly due to the divergence of attitudes between government and opposition. Every action a government takes is first considered in terms of how the opposition views it. This leads to inaction.
Even in areas of economic and social policy where political differeces could be expected to be minimal, the interplay of politics prevents proper long term remedies to be adopted. Educational and health reforms are clear cases of such areas where the government is unable to adopt policies in the long run interests of the country.
Educational reforms are meaningless if a change of government leads to drastic changes in education. There are a number of vital areas of economic and social policy which require stability and continuity for their effectiveness.
It is crucial that a mechanism be worked out whereby the desireable policies developed by the technocrats are discussed by a political group representative of the main political parties and adopted as a national policy rather than a government policy.
There are also critical areas in which a bipartisan approach is needed to resolve a problem. The clearest example of this is the need to have a bipartisan approach to the settlement of the ethnic conflict. Without such a bipartisan approach, it is very unlikely that a viable solution could be adopted.
The inability to come to a consensus on this critical issue has resulted in the single most important factor affecting economic development of the country remaining unresolved.
If the country is to achieve rapid economic growth there is a need for a bipartisan economic dialogue and the fashioning of a common economic agenda. A bipartisan approach is indeed imperative for the country to achieve peace.Long term economic and social policies would require politically agreed reforms to be put in place.
Such reforms tend to have unfavourable impacts on a section of the population or be unpalatable in the short term. Therefore a consenseus is needed to undertake such changes and implement them effectively.
Economic growth and social development would take a back seat unless the main political parties are able to come to an agreement on many areas of national importance.
The business community would require to assert their bargaining powers to merge such a consensus.
By Feizal Samath
The Asian Development Bank (ADB) is promoting private sector-run water networks in Asian cities where inefficient and bureaucratic municipalities exist, a senior ADB official says.
"The policy of the ADB is to encourage responsible privatisation of services," Preben Nielsen, ADB's manager of water supply, urban development and housing, told The Sunday Times Business last week on the sidelines of an international conference in Colombo discussing ways of improving basic services to Asian cities. More than 75 mayors, councillors and local administrators representing a total of 100 million residents in Asia took part in the three-day Asian Mayors Forum, which is looking at improving the services offered by municipalities. It opened on June 28.
The forum, the second in a series of meetings between Asian mayors, was sponsored by the ADB, the Asian Development Bank Institute (ADB Institute), and other international funding agencies. The first meeting of the forum, mooted by the ADB Institute, was held in Cebu, Philippines last December.
The mayors were representing 28 cities in Bangladesh, China, India, Indonesia, Malaysia, Nepal, Pakistan, Laos, Philippines, Sri Lanka and Vietnam.
Municipalities across Asia are struggling to cope with a multitude of problems like burgeoning populations, unplanned economic growth, urban migration, inefficient administrations, lack of financial resources and a proliferation of slums.
ADB's Nielson said while water supply in Manila, a city of 11 million people, and Kathmandu in nepal were being handled by private sector firms, the ADB was working on privatising water supply in cities like Colombo and Negombo (in Sri Lanka) and Karachi, Pakistan which has been delayed due to civic unrest.
Colombo's water was scheduled to come under private control by around 2001 when a regulatory water body is set up.
The ADB helps municipalities set up regulatory bodies, prepare - with World Bank assistance - management or lease contracts and formulate a set of guidelines for bidding documents.
With water supply expertise available only amongst five or six major international contractors in the world, Nielson says foreign firms are asked to set up water supply projects, run them for one or two years and then hand over operations to local partners.
Often the municipalities retain control after a period of time under Build, Operate & Transfer terms (BOT), once efficiencies improve. Management or lease contracts range from 5 years to 25 years. Decisions to privatise water supply is taken only after extensive feasibility studies are carried out but in the Katmandu case, water services were so badly maintained by the municipality that private firms were called in without any reservation, Nielson said.
The ADB has also helped foster an efficient public sector water supply scheme in Ho Chi Minh City Saigon.
The Colombo conference heard some success stories of how the private sector and civil society have helped local administrations to provide basic amenities to residents.
At least two studies, from the municipalities of Colombo and Penang in Malaysia, illustrated the effective use of the private sector and community groups in providing a range of services including water supply, sewerage, garbage and solid waste disposal.
Karu Jayasuriya, former Mayor of Colombo, spoke of a number of partnerships that were built between the Colombo Municipality and the business community, professional organisations, non governmental groups (NGOs) and civil society.
"NGOs and private sector joined us in the maintenance of dispensaries, of roundabouts, traffic lighting systems, provision of common amenities to the poor, street name boards and so on," said Jayasuriya, who relinquished duties as mayor last month and moved to an elected post in a higher authority - the Western Provincial Council.
He said that with public services not being effective and efficient, some of the basic services in Colombo were offered to the private sector on contract.
"Although there was initial criticism and objections, it proved a successful venture. Today, many services such as janitorial, security, garbage collection are carried out on contracts by the private sector," he told the meeting.
A press note released at the meeting said that the ADB Institute believes that cities would be one of the key government agencies that will bear the brunt of improving living standards and economic well being for urban residents in the next millenium.
"The second Mayor's Forum is an important initiative in building practical skills among leaders in the Asian region to cope with their large and growing challenges in improving municipal services to the general population at large," it said.
Sri Lanka's Jayasuriya, whose 20-month tenure as mayor saw a significant transformation of Colombo city in the supply of basic amenities and in enhancing the Sri Lankan capital as a garden city, said that since the inauguration of the Colombo Municipal Council, 134 years ago, the city population had grown from 80,000 to 800,000.
"The density and increase in commercial and industrial activity also brought greater pressures on the council. Unplanned patterns of urban growth have caused economic inefficiency, environmental degradation and human misery," he said.
Mass migration, like many other Asian cities, had increased by leaps and bounds to Colombo and the delivery of services was at breaking point, said Jayasuriya, who used his managerial skills as a former private sector executive to devise a plan to lift the council into a viable and effective local administration.
In much the same vein, Rhina Bhar, a senior councillor at the Municipal Council of Penang, referred to the "Sustainable Penang Initiative", which championed initiatives and explored partnerships between civil society, state and business.Bhar said that the local government in Penang, a state of 1,031 sq km with a population of 1.28 million, set up a think tank called the Socio-Economic & Environment Research Institute (SERI) which provided a forum for all stakeholders in the city.
She said under this partnerships were built between the Malaysian Nature Society, the Penang government water authority, business and industry for a public campaign on water conservation while another was set up between pedestrians, users and cycle groups to promote cycling and infrastructure in two pilot areas. Other partnerships were built to help disadvantaged groups as well as for environment protection, Bhar noted.
Mohammed bin Saib, president of the Kuantan Municipal Council in Malaysia said partnerships between the private and public sectors were always a win-win situation.
"There was success in many of the projects we jointly undertook," he said.
Benjamin Abalos, mayor of the small Filipino city of Mandaluyong, said that when local authorities had no money to rebuild the city market that was destroyed in a fire, it turned to the private sector. In a pioneering move, Abalos offered state land for development under BOT terms to the private sector for various development purposes and quickly raised millions of dollars for the local authority.
"We were not only able to generate large revenues but also construct a new mall free of charge," he said. By turning an experiment into a successful venture, Mandaluyong became the first municipality in the Philippines to implement a BOT arrangement.
Some of the issues discussed at the meeting were the need for some central government tax functions to be passed to municipalities to enable local authorities to increase tax revenues, fears of job losses by employees when the private sector takes over services, conflicts between elected and appointed administrators, bureaucratic delays and safeguards to the private sector against political risk after agreements are finalised.
The Mayors' Forum is part of an ADB project to help municipalities in Asia to enhance their capacity to deliver services. The project began in September 1998 and will go on for 15 months.
The ADB said in a note that 10 municipalities - Bandung in Indonesia, Bangalore in India, Cebu City in the Philippines, Colombo, Kuantan, Lahore and Peshawar in Pakistan, Semarang and Surabaya in Indonesia and Shanghai in China - were taking part in this project.
There is an urgent need for Sri Lankan private companies to have a voluntary contribution pension plan as a way of providing social security for their employees, a retirement schemes specialist said.
Contributory pension plans is a popular scheme in USA where the government encourages such schemes by providing corporates with tax breaks to set aside money on behalf of their employees.
"Apart from tax benefits, the company gets a chance in locking in key employees, they satisfy their employees as well as the unions," Norman H Green, a TIPS retirement specialist said.
In USA, employee benefit programmes are probably equal to now 1/3 of the employees income.
"Its good for the corporation, it's great for the employees and it's great if the government encourages such benefit schemes," he said.
"We have approached a few corporations with this scheme and received a favourable response, he said.
However, certain laws will have to be changed to encourage such pension plans, he said.
Green was formerly attached to the US based Pepsico Company which pioneered the contributory pension plan in 1971.
He works now as a volunteer expert for the USAID sponsored TIPS programme, and is in Sri Lanka to help Ceylinco Insurance explore ways of designing and implementing a private pension plan. He has experience in designing corporate pension plans for companies in a number of countries including Bulgaria and Mexico. He said the proposed pension plan has been supported by governments worldwide, primarily to improve the living standards of the elderly, and to reduce the burden of social welfare cost to the government. It is particularly relevant to countries like Sri Lanka, which has a high ageing population and a high age dependency ratios. The demographic changes now taking place will have a significant implication for Sri Lanka in the future, with the percentage of people over 60 years (presently 9%) in the population estimated to grow to 12 % by 2001 and 22% by 2031.
The shift in population structure and the age dependency ratio is likely to cause strain in providing welfare to the elderly.
At present, of the country's total 6.2 mn labour force, only 0.7 mn of the public sector employees have a regular pension income after retirement. Of the balance 5.5 mn, only around 1.8 mn contribute to the EPF/ETF schemes.
The state sponsored EPF/ETF schemes provide lump sum benefits at retirement, leaving retired people with the burden of investing and managing funds in their old age.
Considering the social and demographic changes taking place in the country, Green says there is an urgent need for a properly designed pension plan to be implemented.
By Shafraz Farook
For the first time since 1973, there has been a shift in real income distribution towards greater income equality, Central Bank said.
In a recent report on Consumer Finance and Socio Economic Survey for the decade 1986/97, Central Bank says the income share of the bottom 40% of the income receivers increased from 11% in 86/97 to 13% in 96/97 at the expense of a decline in the share of the top 20% of income receivers from 57%-53%. Another reason attributable to the shift is the widespread availability of employment opportunities benefiting both the urban and rural sector.
This helped in narrowing down urban-rural income disparity, better targeting of government welfare schemes among the more deserving households and the trickling down of benefits emerging from outward oriented economic progress to lower income groups. The rural sector, accounting for three fourths of the Sri Lankan population saw a sharp increase in per capita income. This was due to the emerging diversity in economic activities in the rural sector, leading to greater income generating possibilities from off-farm employment, the report said.
The proportion of agriculture, forestry workers and fishermen declined to 36% in 96/97 from 45.4% in 86/87. Strategies like rural infra-structure development, location of industries in the rural sector and expansion of rural banking was attributed to the shift in the report.
Statistics in the report also showed a shift away from agricultural income, which declined from 30%-21% in 96/97. The income share of manufacturing and construction increased 3% for the same period. Distribution of income receivers by industry also showed similar changes, but in larger proportions.
Distribution of income receivers in the agricultural sector dropped to 28% in 96/97 from 41% in 86/87.
Services and manufacturing sectors increased 5% and 3% respectively, while construction sector increased 1% and the mining and quarrying dropped 1%, the report said.
Lanka Ventures Ltd. - C.A. Coorey resigned as Director/Chairman of the company, with effect from June 3.
East West Properties Ltd. - Lakshman Sirimanne was appointed as a Director of the Company, with effect from June 1 and Capt. R.C. N. Mendis resigned as a Director of the Company, with effect from Nov. 20, 1998.
By Dinali Goonewardene
With the stock market in the doldrums, the interest in debentures is fast growing. The debenture market is gathering pace with six listings in 1998 compared to only one in 1997.
Yet, another commercial bank is to issue debentures at a rate at just a minute premium to risk free treasury bond yields.
Sampath Bank will open its listed debenture issue to the public on July 8. The issue of Rs. 500,000 unsecured, subordinated, redeemable 5-year debentures of Rs. 1000 each carry an annual 14.2% interest rate. Alternatively an annual 13.5% rate is payable quarterly or a floating rate between 12% and 16%, depending on the 3 month treasury bill (TBill) yield plus 1 per cent, can be opted for.
However, treasury bonds (TBond) with the same 5-year period to maturity, yield a return of 13.96%. A 3-year TBond was issued last week carrying a 13.99% interest rate.
Keeping this in mind, analysts say it is important for investors to compare the return on this risk free gilt edged security with the return on the debenture.
The debenture contains an inherent credit risk, it is subordinate and therefore ranks just above the ordinary share in the event of closure.
However, the fact that a premium, however small, is available on long date (debt) issues is a big step from the convoluted risk return structure on one year issues, analyst said.
For example, the interest rate on 12 month treasury bills is 12.65% in comparison to commercial bank's one year fixed deposits which carry an interest rate between 9% and 12.5%.
It is here that we can possibly understand the attraction of debentures as an alternative to fixed deposits.
However, the anomalies in the risk return structure of TBonds in comparison to fixed deposits have diminished over time.
At the same time, market participants point out that yields available in the secondary market on listed debentures are so high that rates offered on new issues pale in comparison.
Ceylinco Securities and Financial Services' unsecured redeemable debentures with 3 years to maturity yields 18.39% when purchased in the secondary market for Rs. 98.00. Commercial Bank's unsecured subordinated debentures with 4 years to maturity yields 13.66% and costs Rs 99.50, while Hatton National Bank's unsecured subordinate redeemable debentures with 4 years to maturity yield 14.34% and cost Rs 99.50. Seylan Bank's unsecured subordinated redeemable debentures with 4 years to maturity yield 14.34% and cost Rs 99.50. These comparatively high yields culminate with Vanik's unsecured redeemable debentures which take 8 years to maturity. It costs a mere Rs 58 and yields 32.74%. However, this yield is dependent on the markets perception of the instruments credit risk and the period to maturity.
This issue was used to facilitate a share exchange when Vanik acquired the Forbes Group. Vanik officials explained the large discount at which the debenture is trading. "It was issued free and was a ten year instrument in a market which was unaccustomed to long term instruments. A large percentage of it was held by foreigners who wanted to opt out of a devaluing rupee and chose to sell the debentures," Head of Treasury Vanik, Niroshan Wijeratna said. The company is now seeking to introduce a put option on these debentures.
Although debenture yields on the secondary market are high, liquidity in this market is dismal with, captive sources such as the Employees' Provident Fund, Employees Trust fund and National Insurance Corporation etc. having a large stake in it.
Large scale buying in the secondary market is not facilitated. Large scale investors may therefore have to purchase debentures in the primary market notwithstanding the higher cost.
Debentures were first introduced to the Sri Lankan market in 1996 by Vanik. The pioneering issue which raised Rs 150 mn was listed on the Colombo Stock Exchange (CSE) and carried a quarterly interest rate of 20%. TBill rates at the time was between 17% to 18%.
"This issue was traded heavily at par or a premium," Vanik officials said. "The high interest rate offered was a result of the high interest rate scenario which prevailed at the time. The fact that it was a pioneering debenture issue and a three year instrument in a market which was used to instruments of shorter duration also affected the interest rate offered," they said.
There has recently been a surge in the market for debentures outside Colombo. Although the success of certain issues has depended on this market, critics warn that the outstation investor is less educated on the status of debentures, which are unsecured or not listed on the CSE.
The assessment of the risk attributable to instruments and entities will soon be undertaken by Duff and Phelps, a credit rating agency which has set up shop in Sri Lanka.
The development of the debt market will also be helped along by the CSE which changed its listing rules for debt to permit companies to list their debt independent of equity.
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