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8th August 1999

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Suntel changes captains

Jan Campbell relinquished his captaincy at Suntel to Hugo Cederschiold after a three year stint.

ImageMr. Cederschiold was previously the President of Telia Foretag, a company of the Telia Group focusing on business customers.

During Campbell's term as captain and coach, Suntel crossed the 50,000 subscriber mark and started earning bottom line profit, in a short space of three years.

Campbell said, Suntel hopes to secure 65,000 customers by year-end, and were confident of achieving 100,000 subscribers by end next year.

We have invested US$ 100 mn so far, and we need another US$ 30 mn for our expansion programme, Campbell said.

He said, Suntel would tap the local banks as well as internal resources to fund the investment.

Meanwhile, the planned merger between Telia AB and Telenor AS, the Swedish and Norwegian state-owned phone companies, is facing a European Union antitrust probe.

The merger would form the Nordic region's biggest phone company with annual sales of US$ 10 bn. Joining forces would allow them to boost investment outside the Nordic region and go ahead with plans to sell a 33.2% stake in the combined company to investors next year.

Suntel Chairman, Lennart Michaelsson, said the merger if it goes through augurs well for Suntel's future.

Overweight fund may split

By Mel Gunasekera

The Employees Provident Fund (EPF) may have to split up in the future as it is growing too big to manage, a top EPF official said last week.

"EPF is getting too big. With a terrific 16% growth rate, we will break down one day," EPF Superintendent, W A Wijewardene said in an interview.

The fund which stood at Rs. 175 bn as at end June will grow to Rs. 190 bn by year end.

"But the question is, how do we do it, on what basis?" he asked.

EPF could be broken down according to the provincial council basis but then again, the money would not be safe, he said.

The other possibility, he says, is for the government to allow EPF to invest overseas due to limited investment opportunities available here.

"However, we have not yet sat down and discussed the split up as it is still premature to say anything," he said.

EPF's annual employee contributions will top Rs. 13.5 bn this year up from Rs. 12 bn last year. Annual refunds of Rs. 6 bn to 7 bn is paid out to around 70,000 members. With an interest income on investments amounting to Rs. 25 mn and administration costs being Rs. 150 mn, enables the fund to invest Rs. 40 bn in government securities (major slice), corporate debt (except banking sector) and various equity investments.

The fund has invested Rs. 462 mn in the stock market as at end June, mostly in blue chips (except banking sector), diversified holdings, and the manufacturing sector. Investments in guaranteed corporate debt touched Rs. 3.5 bn as at end June.

EPF hopes to invest Rs. 44 bn next year.

The Sunday Times Business spoke to a cross section of investment bankers and asked them how best they would give an optimum return on Sri Lanka's largest pension fund.

Members should be given the choice of investing their monies, says Rajiv Casie Chitty, Director CT Smith Stockbrokers.

Wijewardene dismisses it saying the average annual balance of a member is around Rs. 35,000, while the average refunds are Rs. 85,000. "We give a best return of around 12.5% to our members."

However, Casie Chitty says if the refunds are so low perhaps EPF should split the fund according to high income individuals or perhaps promote private pension funds to allow members to get a better return.

"Investing overseas is costly, there should be more infrastructure projects like Sri Lanka Telecom for EPF to invest," Casie Chitty said.

EPF should hand over at least a small slice of its portfolio to external fund managers, Manjula de Silva, General Manager Eagle NDB said.

Perhaps the fund could be split up into a few parts and allow each other to compete with itself, he suggested. By doing this, the external fund managers get a chance of competing with EPF's internal fund managers, he said.

However, Wijewardene says the request for an external fund manager is still in the preliminary stage. The World Bank has prepared the guidelines for EPF to select fund managers and draw up the contractual documents.

We are studying the performance of the fund managers now and we may probably invite them next year, he added.

Meanwhile, the World Bank has selected 12 local graduates to be trained as internal fund managers under a two year period. They will also be required to take the Chartered Financial Analyst exam.

Debt specialist here early next year

Sri Lanka's first investment bank dedicated to dealing in debt market activities is expected to commence next year, International Finance Corporation officials said.

DFCC Bank are the main promoters of the project, which will also include the International Finance Corporation (IFC), the National Savings Bank, the Employers Trust Fund and a technical partner, IFCs Country Co-ordinator for Sri Lanka, Sanjiva Senanayake said.

The capital structure has not yet been decided and IFC's feasibility report on the proposed bank is expected in the coming weeks.

The promoters are also scouting for an overseas technical partner who has had similar experience.

The Sunday Times Business learns, the new bank hopes to deal in both government and corporate debt.

The debt focussed investment bank, yet to be named, would work closely with companies to issue debt (with a credit rating from the rating agency), list the debt on the stock exchange, and find investors to buy and sell debt. The same would apply to government debt as well.

Sri Lankan government debt secondary market activities are now in the process of being re-structured with the setting up of subsidiaries for primary dealership. However, the Central Bank's guideline may pose a problem for the new bank's activities, analysts said.

Drop in joblesness as more go for casual

Casual employment is becoming the popular choice in the labour force in Sri Lanka resulting in a drop in the rate of unemployment. Of the total population, 39.7 per cent actively participated in or was looking for employment in the last decade.

According to a Central Bank report on Consumer Finances and Socio Economic Survey for 1996/97, regular employment or full time employment showed a considerable decline when compared with the previous survey conducted in 1986/87. Regular employment as a percentage of the labour force dropped six per cent from 29 per cent in 1986/87 to 23 per cent in 1996/97.

The report said that a six per cent increase in casual employment has resulted in lower unemployment. Casual employment increased from 29 per cent in 1986/87 to 35 per cent of the total working force in 1996/97.

A relative drop in employment in the reformed public sector has also added to lower regular employment, it adds.

Unemployment rates as a whole dropped over five per cent in a decade from the 14.5 per cent in 1986/87 to a little over 10 per cent in 1996/97, the report said.

Sector wise only the plantations sector, owing to the organised corporate nature of its economic activity recorded the highest proportions of regular employment.

In the urban sector, on the other hand, where the organised modern sector is concentrated, the share of 'regular employees' declined to 27.1 per cent in 1996/97 from 33.3 per cent in 1986/87. An expansion of informal activities in generating employment in the urban sector resulted in an increase in the proportion of casual employment in 1996/97.

Rupee continues slide against the US dollar

Slowly but steadily the rupee is sliding against the greenback. Within a year the Sri Lankan rupee lost 5.4 per cent against the dollar. The dollar which was Rs. 67.78 at the end of June 1998, was Rs. 71.45 at the end of June 1999.

The slip tagged along closely with the 5.9 per cent rate of inflation recorded in June '99.

Imports at lower prices and another year of a rich paddy harvest are expected to keep inflation in check, a John Keells weekly review said.

However, the brokers are worried over the dive cumulative exports for January-May '99 took. Lower demand for tea and garments saw cumulative exports for the period dip by 11.4 per cent yoy in contrast to the growth of 2 per cent in '98.

The pressure of falling exports has stagnated the import bill in 1998 and has pushed imports up to May 1999 down by 16 per cent, the report added. Industry officials have their fingers crossed, hoping for prices to pick up towards the end of the year, paving the way for at least a moderate recovery.

Inevitably the effort of maintaining a stable currency amidst regional turmoil has seen the country's external reserves slip from 6.4 months of imports in 1997 to 5.2 months as at May '99.

John Keells feels that given a high defence import bill and rising petroleum prices, the government's attention is likely to be focused more on the adverse implications of a devaluing rupee, despite the flagging exports.

The need to control domestic price levels on the eve of the 2000 elections will also act as a further deterrent towards a faster fall of the Rupee in 1999. John Keells expects the current controlled slide of the rupee to continue through 1999 and maintain their estimates of a 10 per cent depreciation of the rupee for 1999.

Political fingers smudge state banks

The Bank of Ceylon celebrated its 60th anniversary on Au gust 1st in Kandy by opening an imposing building to house its supra branch. August 15 marks the 58th anniversary of the Kandy Branch, the first to be opened by the Bank. President Kumaratunga and Central Bank Governor Jayawardena, who spoke on the occasion, made significant statements.

The President reiterated that the government has no intention of privatising the two state banks, but warned that if the efficiency of the two banks do not improve, their competitiveness would be eroded and their market share would decline, as is happening.

What she did not say, however, is that the two issues of state ownership and operational efficiency were directly related. This is especially so in our political culture and context.

The state banks cannot be run efficiently under state ownership for several reasons. First, it has to contend with political interventions in its credit operations. Whatever incumbent governments say of past governments' interferences, these are also true of themselves to a lesser or greater extent.

Second, state banks have to cope with lending for governmental purposes - directed credit - as it is termed. These reduce profitability and sometimes their liquidity and increase loan delinquency.

Third, staff discipline cannot be maintained as trade unionism together with political pressures undermine efficiency, unlike in the private sector.

Fourth, state banks are unable to pay market rates for its executive staff. State bank salaries are a pittance in comparison with private banks. Consequently these banks cannot recruit and retain quality staff.

Fifth, the incentives which state banks could give efficient staff are minimal. The good and the bad tend to go up the ladder together. There is no fast track for the competent and the efficient. This in turn makes it difficult to recruit quality staff.

All these factors lead to poor management practices and to minimal efficiency. Productivity, efficiency and profitability of state banks are seriously affected by these factors. In a sense the Bank of Ceylon should be congratulated for maintaining itself at even its current levels of efficiency, despite all these disadvantages. But as the President and Governor clearly stated these standards are inadequate to face the competition of private banks.

All these deficiencies and many others stem from state ownership and control. There is no prospect whatsoever of these conditions changing under continued state ownership. Various "efforts" have been made under IMF and World Bank insistence, to improve the efficiency of the Bank of Ceylon but nothing has worked. Commercialisation' of state banks sounds good, but is unrealizable in our political context.

Governor Jayawardena, who said he had a personal knowledge of the Bank as he had been its General Manager and Chairman, added he admired the loyalty Bank of Ceylon officers had for their institution. However, he said this loyalty and unity among the staff would not suffice to meet the stiff competition from private banks. Efficiency, technical skills and keeping pace with new styles and fashions in banking, he said, was most important.

What the President and the Governor could not say at this August occasion was clearly stated in the 1996 Annual Report of the Central Bank. We quote:

"The first best scenario to afÄieve this target would be the privatisation of the state banks which would enable them to improve their operational efficiency. Privatization of state banks is a delicate issue and may not be immediately feasible as a great deal of preparatory work would have to be undertaken.

Meanwhile, it is essential that the public and the employees be made aware of potential benefits of privatisation. The next opinion would be the re-structuring of the state banks, within state ownership, to improve their commercial viability.

This is essential, particularly in the context of increasing competition in the financial system where the two state banks have to compete not only with their counterparts, but also with other non-commercial banks."

The country is missing the "first best scenario". Why ? Politics?

Decision making: Is it science, art or trait?

By Ananda S. Wijesuriya

One of my clients, a foreign investor, was describing the profile of the person he needs to fill in a senior position. After detailing the academic qualifications, experience, and so on, he emphasised: 'I need a person who is a decision-maker, good at thinking on his feet, decide and act'.

Reflecting on this statement, I have to admit that the qualities he looks for is what a result oriented manager should possess. These are not necessarily rare birds. One can easily spot them at any organisation: the management usually entrusts them with increasing responsibilities. Colleagues, both peers and subordinates, hold them in high esteem and accept their leadership without a murmur.

The most difficult thing about decision making is that it happens to be an attribute, one either has it or it is not there. One may improve this trait by exposure, but I feel it is not possible to teach or train a person to be a good decision-maker and a result-oriented person.

Education and training would certainly go a long way to sharpen and improve this ability, but can one acquire it? I tend to believe that such a trait is acquired mostly during the formative stages of human beings and to a large extent will depend on the exposure and the responsibilities entrusted to him during his school days.

Here are two situations that illustrate the usefulness of this trait.

My friend, a senior executive in a leading establishment is not fond of driving and believes it best be left in the hands of somebody who is more competent in driving than she. The executive also has discovered that there is a marked difference between the ideologies of her chauffeurs and herself. Result is a very high turnover of chauffeurs. Since she was in dire necessity, the latest was sourced through an organisation that specialises in this field.

It was a rush morning and already the start was delayed, genuine excuse, the new appointee could not find the address. Thanking her lucky stars for being so merciful in dispensing life's essentials, she got into the car and instructed the driver to proceed. The driver started the engine and drove the car out of the premises and was on his way.

She had to say, 'Hold on and close the gate, please', a most natural thing to do. 'Close the gate? It is not part of my duty !', came the prompt retort. My friend says, she thought that she heard wrongly, but realised that the driver was in earnest. She could see that the driver had thrown the gauntled and was challenging her authority. Time for quick thinking and action.

'Yes, you are correct, it is probably not part of your duty, but here the gate is always kept closed, and who ever opens the gate closes it. And I did not open it.' The driver realised that he had met his match.

Long years ago, as a junior, I had a situation one day at the office.

We had a personal officer who normally oversees canteen operations too, and that day she was absent. The teamaker came up to my desk and showed me the tea strainer, the type with cloth pocket sewn around a wire frame.

'Sir, the top seam has come apart and it does not strain the tea properly and I cannot make tea'. I looked at the clock and realised that in 15 minutes the workers would be crowding into the canteen and if the tea is not served it will be the start of an industrial dispute. Time for quick thinking and action ! I looked around spotted the stapler, took the strainer adjusted the cloth around the wire ring stapled it right around and gave it back, 'here this will serve the purpose' (Is it ) 'a stitch (staple) in time saves..........?"

One of the things any decision-maker learns is, after the event there would be many who criticise it.

It is also possible that occasionally the decision made could prove to be wrong. Nevertheless, the important thing is to take a decision and act. Although it was said that this is a trait and is difficult to acquire it, perhaps learning of what others have done and the results, success as well as failures may give some impetus to those with lesser exposure to attempt to be a decision-makers. Good or bad, the first need is to be a one who makes decisions.

"The Sunday Times Business" believes that management practices have to be learnt and experienced. It is not everybody who gets opportunities to face challenging situations that would enrich his experience. Therefore, we are offering an opportunity to all those who are interested to learn from others' experience. We invite all those who want to share their experience in such situations, where quick thinking and decisive action have brought in the desired results. They could range from situations that saved millions of rupees to simple embarrassment. Editor's Note: Please keep your entries to not more than 1500 words. We will not publish entries that are in excess of 1500 words. The Editor also reserves the right not to publish entries that may not meet with editorial requirements.

Sharpen focus on regions not nations, IMF told

By Robert Chote, Economics Editor

The International Monetary Fund needs to sharpen and reorganise its surveillance of global economic developments, according to a hard-hitting independent report prepared for the organisation's executive board.

The report recommends that IMF surveillance should focus more on regions of the world economy and less on nations. It proposes the creation of regional sub-committees of IMF executive directors.

This is expected to prove controversial when the report is discussed by the IMF board this week. European directors have traditionally been hostile to regional surveillance by the IMF, arguing their part of the world should be left to the EU.

Drafts of the findings have already prompted a number of comments and objections from IMF staff and management. The report was prepared by a team of outside experts, led by former Canadian Central Bank Governor John Crow. Among other proposals, the report suggests many industrial countries should no longer face annual "Article Four" consultations - economic health checks prepared by IMF staff and discussed by the board.

Annual consultations could be confined to the largest economies, it says, with others going through the process only every other year. Less detailed economic snapshots could then be taken more regularly.

But officials with long memories are wary; when it was decided to drop annual consultations with Sweden some years ago, the country promptly suffered a banking crisis.

There is also concern that the IMF sometimes dodges politically contentious issues in its consultations with individual country authorities. For example, the latest Article Four consultation for the UK did not discuss the merits of joining the euro. The desire for greater use of multilateral surveillance in part reflects the belief that it might help avoid crises like those which have swept emerging market economies in recent years. The speed and severity of contagion surprised the Fund.

Stopping theft of ideas is critical for all countries

By Stuart E. Eizenstat

The 21st century will belong to creators of new ideas. Innovation has been the foundation stone for today's technological revolution. Human genius has brought us digital music, medical marvels, micromotors - and dynamic economic growth. Tomorrow's Age of Technology will build on this explosion of ingenuity and bring prosperity to nations that encourage creativity.

Protecting innovation is critical to the future growth of developed and developing countries alike. There is a direct correlation between a country's protection of intellectual property - patents, copyrights and trademarks - and its economic growth and development. For many developing countries, intellectual property initially seems an ephemeral concept, but they are increasingly learning that if taken seriously, protecting intellectual property can produce concrete, positive results. Without protection of trade secrets, without patent or trademark safeguards, countries in every stage of development will fall short of their potential. In case after case, effective protection of intellectual property has been a launching pad for domestic and foreign investment, technology transfer, economic growth and high-paying jobs.

Intellectual property obligations such as those contained in the WTO (World Trade Organization) Agreement on Trade Related Intellectual Property Rights (TRIPS) are sometimes seen as serving the interests of the United States or other developed countries at the expense of the developing world. The reality, as amply demonstrated by real world cases, is that effective intellectual property protection is the essential cornerstone for creating an attractive investment climate in any nation. The tide of technology is strong and capable of lifting all economies. But nations that fail to protect intellectual property will be left behind.

Technology is generating the best jobs in the world economy. The packaged software sector generated nearly three-quarters of a million jobs in 1996/97 alone. Sixty-two different economies shared this growth, ranging geographically and alphabetically from Argentina to Vietnam, and including developing countries in the Western Hemisphere, Central and Eastern Europe, Africa and Asia. Through direct foreign investment, many of these countries are now developing indigenous software industries. Local employment opportunities and tax revenues from this new international software industry were estimated at 21 billion dollars ($21,000 million) in 1996/97.

The factor directly contributing to all these success stories? Improved copyright protection. Among the Gulf States, for example, it is no coincidence that the United Arab Emirates, the leader in copyright protection, also has the largest information technology sector - employing over 3,500 people.

We have seen similarly striking results in other economic sectors. In the audio/visual area, Cyprus stands out. In 1990, prior to implementation of stronger copyright and anti-piracy measures, Cyprus had two cinemas. Now there are 34 theatres, with development of multiplexes in the works. In Asia, in the area of sound recordings (cassettes, CDs, and DVDs), the impact of copyright protection on economic growth is equally noteworthy. Less than 10 years ago, the music industry estimated annual losses in Asia at more than $400 million. Since the introduction of legislative and enforcement measures, markets in Asia have grown remarkably - over 500 percent in Singapore alone.

More amazing (and gratifying) to many has been the dramatic growth of indigenous music. From a base near zero, national music now holds 50 percent of the market share in Malaysia, 72 percent in Indonesia, 41 percent in Singapore, 65 percent in Taiwan, 57 percent in Korea and 71 percent of the market share in Thailand according to 1997 data. This translates not only into jobs in production and distribution but also into a renaissance of national culture that some predicted would be doomed by economic globalization.

Patent protection has produced equally positive results in the pharmaceutical sector. In 1996, Brazil adopted very good patent legislation. Since then, Brazil has attracted some $2 billion ($2,000 million) in new investment in high-tech industries, particularly pharmaceuticals. Employment outside the United States by international pharmaceutical firms totalled 164,000 in mid-1996, with the most significant increases over previous years in the Asia/Pacific and Latin American regions where governments adopted patent protection. India provides an interesting example of what can happen when intellectual property protection is uneven. Since it adopted copyright protection that largely conforms to international standards, India has emerged as a world-class competitor in computer software development. Recent joint ventures in India have included United Air Lines and Software Solutions. These large firms can go anywhere to find the best partners, and they have chosen Indian firms.

The skill and industry of India's engineers and research scientists are admired internationally. So why have bio-tech and pharmaceuticals stagnated while the information technology sector booms? The answer is simple. India does yet not provide patent protection for pharmaceutical products. Protecting the process of manufacture only, as India and some other countries do, is not the same thing. Until this changes, no India-based scientist or firm is likely to develop and market innovative pharmaceutical products.

The trademark aspects of copyright and patent protection add even more importance to intellectual property protection. Around the world, corporations are investing billions of dollars (and creating hundreds of thousands of jobs) to manufacture everything from basketball shoes to auto parts. They will not invest without assurance that their trademarks will be protected. With the January 1, 2000, deadline looming large for the implementation of the WTO Agreement on Trade Related Intellectual Property Rights (TRIPS), the United States, other WTO member states and institutions like the World Intellectual Property Organization (WIPO) are providing technical assistance to states preparing to bring their intellectual property protection up to international standards. The question every WTO member should now be asking is how to speed up the reforms required to create a climate for economic growth in the 21st century.

(The author is US Deputy Secretary of the Treasury. Ambassador Eizenstat wrote this article while he was Under Secretary of State for Economic, Business and Agricultural Affairs.)

More rural jobs keep more people at home

Increasing economic activity in the rural sector is reducing the need to move to urban areas.

A Central Bank (CBSL) survey showed a declining trend in migration within Sri Lanka compared to a decade ago.

As a proportion of the total sampled population of 8,880 households, the number of people who migrated was 3.3 per thousand compared to 7.6 per thousand recorded ten years ago.

The CB survey on Consumer Finances and the Socio Economic Survey reported that migration rates for both urban to urban and rural to urban dropped as a result of the expansion of employment generation in the rural sector.

Rural electrification and the new rural housing may have also contributed to the decline the report added along with reasons like high cost of living and congestion in urban areas.

The report also says that employment was the most significant reason for people migrating abroad, accounting for 97.2 per cent of the total external migration.

The frequency of migration was higher among the married when compared to the unmarried and this is common to both males and females.

Industry officials say that this was mainly due to the high cost of living among the married.

Meanwhile, unskilled labour ranked high on the list of migrant workers accounting for more than 70 per cent of the total.

Housemaids/boys and labourers made up the bulk of this category, while middle level skilled occupations like construction workers, transport equipment operationns, and plumbers accounted for 9.8 per cent.

Skilled workers accounted for only 9 per cent of the total migrant workers.

Ceylon Glass deal boosts bourse

Turnover on the Colombo bourse reached a high of Rs 422 million on Friday, when DFCC Bank sold its stake in Ceylon Glass to Gujarat Glass company of India. 12.7 million shares of Ceylon glass were traded at prices ranging between Rs19.50 and Rs 20.50.

Foreign buying and selling contributed to strong trading volumes during the week.

The All Share Price Index rose by 2.42 per cent to close at 584.03 at the end of the week while the Milanka Price Index registered a 1.64 increase to close at 978.4

The week saw plantation stocks rise backed by speculative buying by retailers. Namunukula Plantations rose by 93 per cent while Maskeliya, Udapussellawa, Balangoda and Kelani Valley also appreciated.

Analysts said the retail push was fuelled by foreign buying in the market the previous week. However demand at the tea auction was strong and the bottom end of the market for tea picked up.

"Trading in the next week will be mixed, with certain stocks rising and profit taking on others," Director Research John Keells Stock Brokers Nandakumar Nair predicted.

"Retailers have pushed up stocks in the last couple of days and retail sentiment in the next week will depend on the tea auctions," Head of Research, NDBS Stock Brokers, Chanaka Wickramasuriya said.

"The market will be restricted by profit taking in the short term," Head of Research, Asia Securities Dushyanth Wijayasingha said. "There may be profit taking in the plantation sector. We see a phase of consolidation but expect a rally in September and October," he added.

"The market will stabilize next week," Head of Research, Forbes ABN Amro Prasanna Ludwick said. "There are indications of a strong tea auction next week and plantation stocks will do well," he predicted. "The Indian market is doing well and a spillover to Sri Lanka may result. Meanwhile buying in the US has deteriorated in the past couple of days. This may cause investors to switch from equity to debt in the short term but will lead to an inflow of funds to East Asia and the sub continent in the long term," he added.

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