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Resolution to remove Dep. Chairman/MD from board
Kotelawela - Senanayake row at Blue Diamonds

Shareholders of Blue Diamonds Jewellery Worldwide Limited will meet tomorrow (Monday) to consider a resolution to remove Mr. Daya Senanayake from the board of directors of the company.

This climaxes a long simmering row between Ceylinco-Seylan chief Lalith Kotelawela and his long time deputy, Daya Senanayake, whom Kotelawela describes as a ``life long friend.’’ Signs of the breach became apparent last year with Senanayake retired from most group companies though a joint statement was made by both Kotelawela and Senanayake suggesting that there was no serious problem.

Kotelawela has said that it was with considerable personal anguish to himself that the company decided to file action against Senanayake and seek his removal from the board. ``The board and I have done our duty. The shareholders are the owners of the company. I will abide by your decision,’’ he told shareholders.

Kotelawela’s letter to shareholders included the plaint filed in a law suit where Blue Diamonds are suing Senanayake to recover a billion rupees. This plaint also makes some allegations regarding some diamond trading transactions of the company.

In turn, Senanayake has told Blue Diamonds shareholders that he has been advised that he is entitled in law to take legal action against Kotelawela and the board ``and all those, including any shareholders who have participated or participate in any illegal acts, and I am advised that the damages could be very substantial.’’

He has urged shareholders to vote against the resolution removing him from the position of managing director of the company. At an earlier stage, Mr. W.G.B.M. Ranaweera was appointed joint managing director of Blue Diamonds.

Differences relate to huge USD 5 million investments made by Blue Diamonds in a company called Energen Holdings Company Limited of Mauritius which Mr. Kotelawala regards as irregular and detrimental to the company. Senanayake says that the resolution to remove him is based on the allegation that he has either misappropriated or siphoned monies of the deeply troubled company now carrying massive accumulated losses in its books.

In his letter to shareholders, Kotelawala says that Senanayake had sought to explain his position by shifting the blame and responsibility for the Energen deal to the company’s directors and himself.

"Since I have nothing to hide I have without amendments circulated this letter to you,’’ Kotelawala said.

He said that it is unfair of Senanayake to suggest that the board shares responsibility with him for the project. The initial resolution for this project had not been signed by him or his wife and the other resolution was signed about a month and a half after the decision was implemented and was signed after Senanayake’s recommendation.

Senanayake has specifically requested that the copy of his explanation be forwarded to those shareholders of the company who received notice of the resolution to remove him. There had been some effort to collect proxies for this meeting from shareholders who may not attend it.

Senanayake says that the Energen investment was bona fide and made with the full approval and support of the board and Kotelawala. He claims that the Energen holding company in Mauritius ``now holds valuable technology rights with enormous potential.’’

Kotelawala has made the point that Ceylinco Consolidated has over 100 companies and several resolutions come up for signature. Such resolutions are considered only after the recommendation of the chief executives.

"No company nor chief executive can function otherwise. This was even more so in the case of Mr. Daya Senanayake who was the deputy chairman of the group for several years. These resolutions were presented and signed only after his representation that he had studied the project and he had recommended the passing of the project,’’ he said.

Kotelawala stressed that the board trusted Senanayake and acted upon his recommendation. Moreover, Senanayake was a life long friend of his and a trusted colleague on the board which saw no reason to query his recommendation or his bona fides in making the recommendation.

He said that in this context, it is unfair for Senanayake to suggest that the board shares responsibility with him for this project.

Kotelawala has also accused Senanayake of not revealing to the shareholders that "the most important resolution of July 1996’’ was not signed by him or his wife as he was in the UK being treated for injuries suffered after the Central Bank bomb attack.

Kotelawala’s main contention was that Senanayake conceived this project investing large sums of money in it and was the executive in charge of the development and the management of the company.

"The only fault of the board is that they acted upon the recommendation of Mr. Daya Senanayake,’’ Kotelawala said. But he said that this was not a fault because the company, like most of the companies of large groups, acts in this manner of necessity.

Senanayake has annexed copies of the Energen investment resolutions signed by Kotelawala and other members of the board to his letter to shareholders.

He says that it makes clear that Kotelawala has orchestrated the move to remove him from the company by suppressing the fact that the board including himself "had approved this bona fide investment by signing agreements and board resolutions.’’

He has explained the background to the Energen investment saying that in the early 1990s the Ceylinco group set up a company called Energen International here as its power generation arm. Both Kotelawala and himself, Ceylinco Insurance and Ceylinco Securities and Financial Services Limited were shareholders of this company of which Kotelawala was chairman until 1977 or 1998.

In 1995, Energen founded a consortium with some foreign investors to bid for power generation projects in India. In November 1995, the Rajastan State awarded the Energen Consortium a tender to build a 200 MW solar chimney power plant on a build, own and operate basis in India.

This project had an estimated cost of USD 750 million with provision for expansion with four additional units to 1000 MW with an estimated project cost of over USD 2.5 billion. Subsequent to this tender, Energen International Limited of Sri Lanka assigned its rights under the tender to a holding company named Energen Holding Company Limited, Mauritius.

Senanayake says that Blue Diamonds made substantial progress until 1997 with Kotelawala as chairman and himself as deputy chairman/managing director. Despite this progress, the chairman and he were aware that the company’s business was high risk and volatile and therefore decided to diversify into other industdrial projects and products using the company’s core technological advantages. That was how they went into the power generation field and obtained BOI approval for this purpose in 1995.

1999 GDP growth down to 3.6% - JK Stockbrokers

A leading firm of stock brokers have projected 1999 GDP growth at 3.6%, down from 4.7% a year earlier but expects improved prospects for tea and garment exports together with improved performance in the telecommunication and construction sectors would help the economy to recover to a 4.7% GDP growth level this year.

These projections have been made by John Keells Stock Brokers who also expect corporate earnings to post improved growth performance of 13% year-on-year in fiscal 2001 (covering the year ended December 2000 and March 2001) from a moderate 4.3% in the previous financial year.

John Keells stressed that their projections are based on the assumption that the security situation in the country does not deteriorate further and weather patterns are favourable.

Unilever to sell green tea in China

Unilever, the Anglo Dutch group which is represented here, plans to sell green tea to China - a move that would mark the first time a large foreign company has launched its own brand of China’s traditional and most popular hot drink in that country, the Tea and Coffee Trade Journal reported.

The initiative is part of a strategy to develop product lines catering for Chinese tastes, the journal said. Preparations have begun for the launch of a brand of green tea, including the introduction of a green tea bag, which is being considered alongside plans to introduce two other Chinese teas - jasmine and oolong. The development of the products is still at an early stage and people familiar with the plans suggest it may take until next year before the Chinese teas are brought to the market, the report said.

Unilever owns Lipton, the most successful foreign brand of black tea or "English tea," in the country. Lipton is a big player in the Colombo tea trade. However, market researchers calculate that more than 80% of the tea drunk in China is traditional Chinese tea. Green tea is as much a cultural reference point in China as it is the standard drink for hundreds of millions of people several times a day.

Since green tea leaves are still widely bought from dedicated tea shops in China - which stock urns of leaves priced and categorised by region, season, colour and aroma, Unilever’s plans to introduce green teabags and packets of loose tea could represent a serious change to green tea drinking habits in China. The plans would also test the readiness of the Chinese to accept foreign brands, even if the tea leaves are still grown in China.

The company is looking at bringing a pyramid-shaped bag, which can hold larger than normal tea leaves to allow for a gradual and longer-tasting infusion. Unilever has had success with the pyramid teabags selling Chinese teas to customers in Taiwan and Hong Kong. It is not yet clear whether the tea in China will be launched under the Lipton label or using another name brand.

Colombo swam against the Asian tide
Strategic acquisitions boosted stock market in dismal year

Analysing the performance of the Colombo stock market in 1999, John Keells Stock Brokers have said that Colombo was "the only market to swim against the Asian tide" recording a downward drift against upturns elsewhere in the region.

The analysis noted that the All Share Price Index (ASPI) had fallen by 14% in mid-June 1999 due to concerns of a slowing economy, falling corporate earnings and the overhang of the provincial council elections earlier in the year.

The depressed market conditions had thrown up opportunities for a host of strategic acquisitions for the rest of the year and, but for these strategic deals, last year’s average daily turnover of Rs.62 million would not have been achieved the report said.

Acquisitions of companies last year included Hotel Services (Ceylon) Limited, the owners of the Hotel Ceylon Intercontinental, Ceylon Glass, United Motors and Aitken Spence. Also, CTC Eagle Insurance was divested to Zurich NDB Finance Lanka Limited.

The market analysis said that tea prices that had plunged to dismal depths early in the year were up by about 15% from mid June to end of August last year largely due to a global shortage. This 90 million kg shortage mid-year was the primary reason for the recovery of Sri Lankan tea prices, the analysis said.

The report said that there was a second market rally towards the end of the year with investors speculating on the outcome of the presidential election. This saw the All Share Price Index top the 600 level in December for the first time during the year.

"But this optimism was short-lived by the twin bomb blasts immediately prior to the presidential election and the retail selling which followed thereafter," John Keells said.

The report noted that while all other Asian markets in the region ended the year on a positive growth note, Colombo continued to ignore the regional trend to fall 4% over the year ending December 30.

John Keells said that the motors, hotels and travels and diversified holding sectors which were subject to takeovers and rumours of acquisition were the only gainers during the year.

The acquisition of the controlling interest of United Motors by Readywear Industries propped up the motor sector while the acquisition of the Hotel Services and rumours of a similar bid on Trans Asia boosted the hotels and travels sector.

The purchase of a substantial stake in Aitken Spence by the Distilleries Company moved the diversified holding sector over the 52-week cycle last year.

Although the plantation sector under-performed the market over the 52-week cycle, this sector turned out to be the best performer over the 26-week cycle during the second half thanks to buoyancy in tea prices.

Asian economic recovery

by Kanes
The economies of East and South East Asia appear to have recovered in 1999 from the currency crisis of 1997-1998 but they are still fragile. There were seven economies with negative growth in 1998 and all but two of them have achieved positive growth in 1999, but even these two experienced much lower negative growth than in the previous year — Malaysia, the Philippines, Thailand, South Korea and Japan changed from negative to positive growth in 1999 while Hong Kong and Indonesia showed much less negative growth. However, the positive growth of the five countries referred to above except for South Korea was at a low level of 1 to 3 per cent.

According to forecasts for 2000, both Hong Kong and Indonesia will have positive growth and there will be no country with negative growth. However, economic growth in 2000 is expected to be moderate or low, nowhere near the high growth achieved before the crisis. Indonesia, Philippines and Thailand will have 2.5 to 3.0 per cent growth while Malaysia, Taiwan, Singapore and South Korea will have 5 per cent growth; Hong Kong will have a very low growth of 1.5 per cent while Japan may not have any growth at all with no end to the recession. China, which was not affected much by the currency crisis, will have the highest growth in the region - 8.4 per cent. Thus, economic recovery in 1999 may not continue in 2000. Besides, there are several imponderables such as whether China will devalue, whether Japan’s recession will continue and whether the US dollar and the stock market will crash.

Most of the recovery in 1999 was fuelled by government pump priming or deficit financing. Thus, each of the five nations hit hardest by the crisis is expected to run a budget deficit equivalent to more than 5 per cent of GDP by the year 2000. Budget deficit in Thailand for instance was 7.2 per cent of GDP in 1999 and is expected to lower it to 5 per cent in 2000. Deficit financing to simulate the economy was necessary in the absence of an increase in consumer spending and private investment but it has limits, for it raises the country’s public debt, and debt service and tends to raise interest rates. Thailand’s public debt has risen from 15 per cent of GDP before the crisis to 45 per cent in 1999. In South Korea, public debt more than doubled between 1996 and 1999; it rose from 12 per cent of GDP in 1996 to 23 per cent in 1999. Monetary policy was also eased considerably once financial market confidence was restored, to reinforce expansionary fiscal policies. Some structural reforms too played a role. Countries took measures to downsize troubled companies, recapitalize banks, improve their supervisory systems and strengthen the institutional framework for corporate sector restructuring, including developing procedures for bankruptcy and liquidation. The substantial support from the International Monetary Fund and others too may have helped in restoring stability and confidence.

Weak Consumer and Business Confidence

In spite of the modest recovery in 1999 consumer and business confidence is still fragile. There was deflation in five countries in 1999: Japan, Hong Kong, Taiwan, Thailand and China; consumer spending and prices dropped. Consumers have no confidence in the context of rising unemployment and downsizing of firms and weak consumer spending reduces business profits and discourages investment in new facilities. In fact, more than half the mega firms in Indonesia are unable to meet their interest payments from their current earnings.

Company finances are expected to improve in 2000 and the proportion of firms that cannot cover interest payments from earnings is likely to fall, but it will still exceed half in Indonesia, account for about a quarter in Thailand, a fifth in South Korea and a sixth in Malaysia.

Falling exports was a major factor causing concern to business in Japan, Singapore, Hong Kong and Indonesia while stagnant exports clouded the business outlook in Thailand. It is true that China, Taiwan, Philippines, Malaysia and South Korea increased their exports in 1999 over 1998 but the increase was small varying from 1.5 per cent in South Korea to 7.4 per cent in Malaysia.

Debt

One of the biggest problems constraining Asia’s recovery is that of accumulated heavy debts, of firms, of banks and of governments. Two years after the crisis, Indonesia continues still to carry a $70 billion in unpaid foreign debt and efforts to relieve that crushing burden are making little progress. Restructuring talks have foundered for the most part. A weak legal system protects debtors from bankruptcy, removing the fear of legal action that is an essential prod to debt restructuring. Overhauling the laws and further rescheduling of its sovereign debt are urgent. In Thailand, non- performing loans were 47 per cent of outstanding loans in August 1999 or over 2.5 trillion baht. It is estimated further that the Thai banking system needs 150 billion baht or $3.8 billion for recapitalization before the end of 2000. For sustained recovery, banks must lend for investment to pick up but there is little bank lending as banks are struggling to accumulate capital both to reduce their non-performing loans and to meet provisioning requirements imposed by the central bank. The amount that banks must put aside as provisions grows by 20 per cent of total non-performing loans every six months until bad loans are fully covered by the end of 2000. The current recovery could stall or even reverse without a resolution of the debts of the banks. Generally, bank reforms are very slow: the bankruptcy laws passed recently in Thailand are largely ineffective as both debtors and creditors do not like to attend bankruptcy courts for reasons of "social stigma"; and both South Korea and Indonesia are not keen on opening the banking sector to foreign ownership.

Foreign Investment

Foreign investment has been a major factor in the rapid development of East Asia. Private capital inflows into Asia, however, shrank much during the currency crisis; the total private capital inflow dropped from $174 billion in 1996 to $71 billion in 1997 and to $8.6 billion in 1998. Significantly, foreign direct investment was not affected by the crisis; actually in 1997 and 1998 it even exceeded the figure in 1996. The biggest drop was in commercial bank loans; the inflow of $75.6 billion in 1996 turned into outflows of $8.3 billion with bank loan repayments and reduction of short-term borrowing. Non bank credits too fell parallel to commercial bank loans; so did portfolio investment; the former fell from $34.2 billion in 1996 to $2.4 billion in 1998 while the latter declined from $19.1 billion to $5.0 billion. These adverse trends were offset to some extent by increase in official capital flows in 1997-1998 - mainly IMF assistance supplemented by bilateral aid.

Preliminary estimates indicate that total private capital flows to Asia in 1999 have risen to $39.3 billion from $8.6 billion in 1998; this has been caused mainly by an increase in portfolio investment and a reduction in commercial bank credit outflows (repayments). On the other hand, there was an actual drop in foreign direct investment, official aid and non-bank credit (which turned negative). The forecast for 2000 is not rosy as total private capital inflows are expected to fall from $39.3 billion in 1999 to $26.8 billion in 2000 on account of mainly a drop in foreign direct investment and portfolio investment and an increase in bank loan repayments. If foreigners begin to worry about the unsustainability of the US current account deficit which is estimated at $300 billion for 1999, US interest rates could rise to attract capital inflows and to offset inflationary pressure; this will tend to reduce the capital flows into developing Asian countries. Some Asian countries also fear whether the expected increase in foreign direct investment in China with its membership the WTO, would result in a diminution of capital inflows into them.

How politicians undermined economic efficiency

by Analyst
The classical economists called economics political economy because the political and economic realms were not sufficiently separated at the time. Both under feudalism as well as under communism, political and economic power were combined with those having political power also exercising economic power and wealth. It was as bourgeois capitalism developed that the two realms separated.

The two realms were combined even under crony capitalism since the capitalists enjoyed favour from the ruling politicians to make money. Crony capitalism flourished in the Philippines under Marcos, in Mexico under the PRI one party government and in several Latin American and African countries as well in our own country particularly under the Premadasa regime. Businessmen come to depend on the politicians in power for various concessions and favors and in turn they support the ruling politicians in various other ways like providing them foreign exchange during their trips abroad.

Classical economists studied the causes and consequences of the wealth of nations, about the material well being of nations and came to the conclusion that there was an invisible hand in the form of free markets, which contributed to the maximum social gain. They argued that free markets promoted the best allocation of resources and opposed in interference by the state in the markets for goods, services or factors of production like labor, land, and capital.

Later, another economist, Pareto, proved this proposition of optimality on the basis of certain assumptions, which include perfect competition in free markets. He showed that on those assumptions a free market, economy will allocate resources so that it is impossible to make somebody better off without making some one else worse off. So Adam Smith’s free markets combine resources in a way to achieve Pareto optimality .Should the state intervene in markets through rules and regulations? If there is monopoly, yes but not otherwise for any such government intervention however modest removes the guarantee that the economy will reach Pareto efficiency.

Of course Pareto outcome has no moral force and economic theory offers no rules for moving to some socially "better" outcome. Economists point out that Pareto efficiency requires perfect competition in markets. The individual firm should not be able to move the price by his actions alone, there should be free entry to and free exit from the industry. Where such conditions do not exist is state intervention justified? And if so what form should such intervention take.

Take the industry into the public sector, tax it, force the monopolist to charge a price which would prevail under perfect competition etc. There is one other area where free market efficiency can break down, that is where the cost to the individual producer diverges from the cost to society or social cost.. Pareto assumed that there was no difference between individual costs and benefits and social costs and benefits. Apart from these exceptions there is no case for government interference in markets.

Both Taiwan and South Korea, although they resorted to varying degrees of state intervention did not distort market prices. They kept prices at the level that a free market would find .Our own governments since Independence have repeatedly violated this principle. They began with the subsidy on rice. The colonists had controlled the price of rice and rationed it during war-time. Our politicians under a mistaken sense of equity continued to subsidize rice and later introduced free rice as well.

Development a Process

Economic development is more than mere economic growth. There must be continuous growth which also means the growth must be sustainable. Theorists of development economics have established that this requires action on several fronts, political, economic and cultural.

The development process follows a well ordered sequence and shows some common characteristics across countries which have passed through the process. For thousands of years countries had been poor. Development is a phenomenon of the last three hundred years commencing with the Industrial Revolution which began first in Britain, then spread to the continent in France and Germany, thereafter to U.S.A and Japan and now to the East Asian NICs. Societies which were primarily agricultural and rural became mainly industrial and urban.

How did this transformation take place and why has it not taken place in our country? Economists have formulated models of the growth process. A commonly used model was the Harrod-Domar model. It expressed economic growth (O/O=I/OxtO/I) where I/O is the investment output ratio and O/I is the productivity of Investment. Slow growth is by definition due to either a low investment ratio or a low productivity of capital or both. From this model it is possible to calculate the investment requirements for a particular growth rate.

Planners began to calculate how much investment would be required to achieve a faster growth rate specified by them. It was next a question of mobilizing the savings required to carry out such increased investment. Economists talked of several development gaps such as the savings-investment gap and the foreign exchange gap. As the people were poor savings were low and they could be increased only out of higher incomes. But incomes could be raised only by higher investment.

How to raise savings? The Soviet Union achieved remarkable growth by diverting resources from consumption to investment, by so called forced savings. Could planning as in the Soviet Union mobilize resources for investment more effectively and thus provide the prerequisites for development? Many developing countries adopted planning and so did we. A ten year plan was prepared in the early fifties with the help of several well known economists from abroad. The country was enjoying a boom in commodity prices after the outbreak of the Korean war. Unfortunately our politicians misunderstood the development process. They assumed that the commodity boom will last and proceeded to embark on a series of welfare measures like free rice, free education and free health for all.

The question of whether the state could afford it in the long run was not considered. Resources which could have been used for investment to achieve a higher rate of economic growth were frittered away on consumption. Some argued that free education and free health were investments in human capital.

Sources of Economic Growth

The economic model of growth refers to the process of growth but does not identify the causes of growth. The sources of growth arise from technological progress and from international trade. The last three hundred years have seen phenomenal changes in technology as applied to the art of production. It is due to inventions, innovation and research New knowledge is created and then applied to the process of production.

These are all economic activities. The spread of new ideas and their acceptability throughout society is a complex matter involving more than economics. All societies have some potential inventor and innovator. During the Industrial Revolution in Britain there were many inventor and innovator, who made a great contribution to economic progre. Developing countries don’t have to have a supply of inventors since machinery and equipment incorporating the latest technology is available to be imported from abroad. The degree to which modern technology is absorbed depends on how receptive the people are to accept new ideas.

Countries like Japan and China made a conscious effort to absorb foreign technology. We have preferred to merely use the modern technology without any deliberate learning of such technology. A society can progress in technology only by learning through doing. It is this learning that is important for economic growth and not the spread of general education as such. Improvements in health and education which makes the labor force more productive are those like literacy and numeracy and elimination of common diseases which make for poor health among workers.

Economists make a case for universal primary education. But education beyond that to secondary and university education do not make any serious impact on development. In fact social not individual returns, decline the higher the level of education and the returns to tertiary education are quite low. Of course since education in our country is free the returns to the individual is higher than the social return.

Our politicians did not appreciate this point and clamoured for the introduction of free education .The enormous funds invested in higher education could have produced higher returns and contributed to a higher rate of economic growth if invested in economic and physical infra-structure like roads, ports, telecommunications, power etc.

Rostow in his book "The Stages of Economic Growth "pointed out that priorities in investment vary according to the stage of growth. In the early stages of growth the direction of investment should be in transport and social infrastructure; rather than in secondary and tertiary education. We should have decided on the type of educated manpower required to avoid a bottleneck in skills.

We have only succeeded in producing an unemployed intelligentsia, an avoidable waste which has also undermined the development process. It has even undermined social stability as seen by the J.V.P insurrections in 1971 and 1988/89.

Economists only argued for raising the primary education level to 50% because it will help to dissolve traditional customs and attitudes of mind. Education should be not for its own sake but to enhance the capacity of the workforce to absorb physical capital and technological progress. By spreading the British secondary school system designed to produce the limited number of clerks and professionals which alone could be absorbed by the economy, to universal mass education a lot of resources were wasted and an unnecessary social problem was created.

We see this problem of educated unemployment a continual problem which no government has been able to solve. It is time we realized that the educated unemployed cannot be absorbed into jobs meeting their aspiration. Industrialization can create jobs for skilled and unskilled people, for technicians and for some number of managers and executives. Industrialization does not need an army of clerks.

Nor can there be much expansion in service sector except perhaps in the software industry for which the education would have to be in English .But education in the English language cannot create jobs as proclaimed by some people. The truth is that no amount of economic growth can absorb these educated unemployed to jobs of clerks and executives as desired by the unemployed youth. A large number of such jobs are not created by economic development. If these youth wait for such jobs they will be permanently unemployed.

In this context to continue with free education to produce more and more educated is to ask for more social unrest. The East Asian NIC’s like South Korea provided much less education than we have done. Their labor force still have less than 7 years of education. Our educated youth cannot or do not wish to enter this labor force. Perhaps they could be absorbed into the army which is in dire need of soldiers to hold the ground they capture.

When will the government take steps to divert students to vocational and trade schools after the fifth standard as in colonial times. Perhaps only vocational and technical education should be free. Unless we retrace our steps regarding the provision of education itself rather than about educational reform we are misleading the youth and will have to face their wrath once again as in 1971 and 1988/89.

The resources for free education came from the plantation sector which enjoyed boom prices in the first half of the 1950’s. But good times were not to last. The boom in commodity prices petered out and a foreign exchange emerged. One of the constraints to growth is the balance of payments that emerges when there is an attempt to accelerate growth. Maintaining an adequate growth rate while preserving a balance in the international payments is a problem which requires deliberate attention.

The Role of Planning

With the change of government in ,1956 the six year plan prepared in l954 was dumped and a fresh plan came to be prepared for 10 years. In 1962 this was also given up and a Short term Implementation Programme adopted. No plan has ever been followed through because of the changes of government every five years or so.

But planning is important. Planning has acquired a bad name because of the failure of central planning in the Soviet Union and the East European Communist countries. Planning can take place at the enterprise level, the sectoral level and at the level of the whole economy.

The Communist countries after the second world war tried to do without the price system using input-output analysis and advanced mathematics to centrally plan the allocation of resources. The economy was too complex for this attempt to succeed. But the Soviet Union did achieve one of the fastest growth rates during the period from 1920 to about 1960.

Planning became too rigid thereafter and tried to supersede the price system and then ran into trouble. Planning can mobilize resources and prerequisites for economic growth in a systematic way. There are also planning models and techniques for project appraisal and allocation of resources between industries which are important.

The Social Revolution of 1956.

The change of government brought about by the general election of 1956 was accompanied by a social revolution. The westernized elite lost ground to a new social elite who were educated in swabasha and rather traditional in outlook and culture. The ruling elite came to be sharply divided. The people had come to realize their power and in this sense it was a movement towards mass democracy.

The age of the common man dawned. He could no longer be taken for granted by the ruling elite. Like all revolutions it saw a breakdown of social discipline. The old social discipline was based too much on class and it required deference to the westernized elite by the ordinary folk. A new social discipline based on equal status of every citizen had to be evolved. The need for discipline and obedience to established authority had to be a new social value. The immediate outcome was a breakdown of discipline in the workplace with a rash of strikes.

Workers struck work demanding the Prime Minister’s intervention. There was also social antagonism between the Sinhalese and the Tamils which led to communal riots. A new kind of Member of Parliament had been elected. The Member of Parliament was no longer from the landed gentry. Very ordinary people came to be elected. As De Tocqueville pointed out in his book on democracy in America, the masses like to elect some one who is like themselves.

Democracy produces mediocre representatives. These MP’s understood well the expectations and aspirations of the people they represented. They therefore made demands on the elected leaders who formed the government. They were not satisfied at being legislators only, which is their role in a mature democracy in the West.

The people wanted land particularly in the Dry Zone areas. The bureaucrats could not however deliver on demand although there was crown land available in the 1950’s. The process of land alienation involved blocking out after a survey and only a certain amount of land could be alienated after holding land kachcheris. But the people were impatient and began encroaching crown land. The Government decided to regularize such illegal encroachments Similar encroachments took place on unoccupied urban land. The law was being brought into disrepute.

The MP’s also had to provide jobs for their supporters. Unemployment was high. It was useless telling the people that jobs have to be created by investment and that people just could not be taken on to government payrolls. The MPs ‘wanted a say in deciding who should be appointed to vacant government jobs. Political patronage in recruitment or the so-called MP’s chit came to be a passport for a government job. It was no longer possible to select on the basis of merit the most suitable candidate.

But filling vacancies in the cadre was not enough. Jobs came to be created for non-existent work. The C.W.E provided a fertile source for creating new jobs of clerks, storekeepers and assistants. Thousands of party supporters were employed in the C.W.E. Since work had to be created for them following Parkinson’s Law, a large number of retail shops were opened in each MP’s electorate to enable each government MP to give jobs to his supporters.

The principle of political job creation for non-existent or uneconomic work has come to stay. Every government owned enterprise has adopted this practice including the state-owned banks. A false and economically inefficient solution to the problem of the unemployed thus came to be put into practice.

The Marxists had always argued that the commanding heights of the economy must be in the hands of the State so that the profits or economic surplus of such enterprises could accrue to the State which could then invest such surplus in much needed investment to accelerate economic growth. So the SLFP Government nationalized the ports, the bus transport service, the import and distribution of petroleum by taking over the oil installations belonging to foreign oil companies, the insurance industry and the locally owned banks.

These state enterprises provided a fertile field for the exercise of political patronage. Soon these enterprises far from generating profits or surpluses needed subsidies from the Treasury to keep them going. They became white elephants consuming capital rather than generating surpluses.

The politicians were still not satisfied. They had by their over investment in education created the massive problem of the educated unemployed. So they had to increase government expenditure. A Lain American economist, Raoul Prebisch, had argued that forced savings could be generated on the Soviet model by running budget deficits. The Soviet Union had cut back on consumption and diverted resources to investment leading to high growth rates.

While there is a grain of truth in Prebisch’s theory it was a dangerous doctrine to entrust to politicians. Soon large budget deficits were incurred year in and year out, causing inflation. The excess government expenditure also led to excessive imports of consumption goods. Most of our food was imported and also subsidized. Soon the volume of imported goods increased, causing a balance of payments crisis.

Economists studying development had always warned about the emergence of a foreign exchange gap but that was in relation to planning investments to promote faster growth. Using scarce foreign exchange for excessive consumption is unproductive and socially wasteful. Soon the twin deficits, budget deficit in rupees and foreign exchange deficit emerged. Subsidized food cost about 4% in terms of the GDP. Investment in the economy was around 14% of GD. Dr. Saman Kelegama has speculated that if the 4% used up in subsidies went for investment, economic growth would have accelerated to levels prevailing in the East Asian NIC’s.

The government’s answer to the foreign exchange problem was to embark on a policy of import substitution. The SLFP gave priority to import substitution industry. Approvals were granted and foreign exchange provided to import machinery and equipment for setting up industries which could save on the import of finished goods. Several industries were set up to assemble a variety of goods like textiles, radios, electrical goods etc.

But the Government maintained an, unrealistic exchange rate and foreign exchange was severely controlled. The industrialists soon found out that it was more profitable to deal in the black market in foreign exchange rather than produce the goods . Since the government also provided protection to these industries, the industrialists faced no competition and had no incentive to improve the quality of their products. They made shoddy goods and sold them at high prices.

Owing to the flourishing black market in foreign exchange the businessmen resorted to false invoicing. Even other countries had begun their industrialization by producing for the domestic market. But they outgrew and launched into export markets. But because of the distortion in relative prices it was more profitable to sell in the domestic market than to enter export markets. So our industrialists made no attempt to export their products. So the import substitution industries made no contribution to solve the foreign exchange problem.

The UNP Government which came to power in 1965 sought to solve the foreign exchange problem by concentrating on agriculture since much money was expended on the import of rice, flour, sugar and subsidiary foodstuffs like dhall and onions. Considerable progress was made in agricultural production. But the foreign exchange market was not liberalized. Nor were markets freed and the economy exposed to international trade.

Trade for Growth

International trade is one of the ways to achieve faster economic growth which was much neglected because of our foreign exchange problems. The classical economists had argued that both parties to trade benefit from trade based on the law of comparative costs. They argued for free trade. The recent agitation against the WTO sessions at Settle was demanding fair trade. The law of comparative costs is based on static concepts. Japan is a country with few natural resources to provide absolute cost advantage in very many products. But the Japanese absorbed Western technology and made its labor force so productive as to turn out products which could compete with those of the West.

The efficiency of management and the productivity of labor are more important than being endowed with scarce natural resources to produce goods at a competitive advantage. Of course Japan allowed markets to function and allowed the price system to allocate resources. The export markets widen the total market for a country’s products which is particularly relevant for small countries like ours.

For a small country with no trade there is very limited scope for large scale investment in modern costly equipment. As Adam Smith pointed out specialization is limited by the extent of the market. Industry is subject to increasing returns as pointed out by economists. The converse is that large scale production reduces costs per unit. Countries like India with a large domestic market can therefore industrialize better than a small country like ours. Hence there is an argument for forming Free Trade Areas.

Of course we have to make many adjustments and maintain stable macro-economic policies if we are to benefit from membership in such an area. In economic matters there is no gain without pain. Although trade benefits both countries, the gains from trade are not equally shared.

Leftist Economists talk about unequal exchange, dependency and exploitation. So the question of fair trade has assumed importance as in the recent protests in Seattle during the WTO sessions. Although the gains from trade are unequally shared, yet there are gains for both trading parties. So the policy of import substitution with protection for these industries restricted our international trade. But this policy did not solve the foreign exchange problem . The import content of such industries was high exceeding 50%. Some industries merely fabricated or assembled imported parts and components.

The government continued to hold the exchange rate of the rupee at an unrealistic level which created flourishing black market in foreign exchange. The United Left Front Government which included Marxists took some drastic steps to curb foreign exchange violations by businessmen. Several leading businessmen were arrested and charged with foreign exchange offences. Some were jailed. The Business Acquisition Act was passed and held as a sword of Damocles over the private sector This undoubtedly shook the confidence of the business sector.

The Government vested more and more of the import export trade with government institutions like the CWE. Of course corruption and foreign exchange racketeering now took place in the public sector institutions like the CWE. Attempts were made to correct the over-valued rupee by introducing something like a dual exchange., a wrong step in the right direction as described by the IMF and quoted by Dr. Saman Kelegama (Economic Development in Sri Lanka During the 50 Years of Independence: What went Wrong).

Previously, the Dudley Senanayake Government had tried to resolve the foreign exchange problem by import substitution of food. He concentrated on developing agriculture to make the country self-sufficient in food, particularly rice. Whether it is for agricultural self sufficiency or for industrialization, restricting trade dampens growth. In the 1950’s and 60’s there were several restrictions on trade like licences, quotas, in addition to high tariffs. This policy of a closed economy had severe adverse effects on growth. The growth rate averaged 3% although growth between 1965-70 was higher than in l960-64.

We still have not accepted that trade has an important role to play in increasing growth rates. One problem with free trade is that it allows a plethora of imported consumption goods to be imported worsening the balance of payments. Development requires increased investment not increased consumption. Anybody seeing the plush motor vehicles on our roads would think we are a developed country. But our per capita income is below $800 and 25% of the people are very poor. So it is not a question of trade or not but of trade versus free trade or not.

The excessive restrictions placed on trade during the 1950’s and 1960’s undermined growth. Strict exchange controls and import controls, high tariffs with a government determined exchange rate heavily overvalued, slowed down the economy. The results of the closed economic experiment were indeed tragic. At Independence our economy was second only to Japan in Asia. Other countries in Asia like South Korea, Malaysia, Thailand, Indonesia were much worse off. Fifty years later they have all leapt far ahead.

The JR Jayawardene Government realized that it had to try something new. He opened up the economy and welcomed foreign capitalists, the robber barons as he dared to refer to them. For the first time a leader had understood the requirements for economic growth. He undertook a wholesale liberalization of markets including the foreign exchange market. The rupee was devalued substantially and brought closer to what would prevail under a free market Exchange and import controls were relaxed considerably.

Soon foreign investors came in particularly to the garment industry where country quotas operated in several industrialized countries. President Jayawardene also launched the Mahaweli scheme which was a massive investment which despite its returns contributed to excessive inflation reducing the benefits which would otherwise have accrued by way of liberalization.

Foreign investment like foreign trade contributes to economic growth by increasing the volume of investment, enhancing domestic base of knowledge and technology, promoting efficiency and productivity of management and labor. We have seen these benefits and most people are now convinced of the need for foreign investment.

Dr. Saman Kelegama points out that if not for the 1983 riots much more foreign investments would have taken place in the latter half of the 1980’s. Harris Corporation which had commenced an investment here pulled out leaving a half built factory. Motorola changed its mind and went to Malaysia. Other projects in the pipeline from Sony, Marubeni Sanyo, the Bank of Tokyo never materialized. We have paid a heavy price for our folly of 1983.

President Premadasa carried the liberalization process further. It was he who got down to privatization seriously. He liberalized shipping and relaxed exchange control further. In fact he made the most meaningful relaxation of exchange control by allowing exporters to retain their export proceeds abroad if they so desired. He encouraged foreign investment by making the whole country a free trade zone for foreign investors.

Export led growth began with garment exports playing a leading role. President Jayawardene had also removed the restrictions on Sri Lankan women leaving for employment in the Middle East. Their remittances in foreign exchange have become an important source of earnings for the country. In fact it is these remittances that will keep the economy afloat if the oil prices remain at the present high levels. Of course most of this foreign exchange is being wasted on the import of consumption goods and on the procurements for the war effort.

(To be continued next week)

Hutchison Telecom celebrates innovative first year in Sri Lanka

The newest entrant to Sri Lanka’s telecommunication industry, Hutchison Telecom International celebrated the first anniversary of its commercial operations in the country on a high note in December.

Hutchison Telecom International ventured into Sri Lanka in August 1997 after taking over the existing operations of Lanka Cellular Services Ltd. (Call Link) from Singapore Telecom International but launched Hutchison Telecom only in December last year after extensively building the largest network in the Greater Colombo area.

In making its decisions to invest in Sri Lanka, Hutchison Telecom has always had the view to address a much larger market than its competitors through offering a reliable and affordable service.

In one year, Hutchison Telecom had quickly acquired a customer base of over 25,000 subscribers. "As the fourth operator, we have had to work harder and smarter to capture 15% of market share within a year of operation," Hutchison Telecom Managing Director Philippe Loridon said.

"However this achievement is only secondary to our primary objective on investing time and resources to first understand the communications needs of the Sri Lankan market. It was very important to understand the real concerns and fears experienced by prospective cellular customers in order to address them accordingly. In a crowded market we have had to determine the reasons why Sri Lanka since 1989, still has one of the lowest cellular penetration rates in Southeast Asia".

"The traditional cellular market was obviously limited and we had to find a way to enter into this industry and still be successful. Instead of establishing and offering a standard cellular service to the market, we first tried to understand what a broader market would be willing to spend for basic cellular services. From the findings of our research, we determined that our targeted cellular subscriber might only be willing to budget about Rs. 800 to Rs. 1,000 per month for our service. We have therefore spent the last year restructuring and building a business which could be supported by such revenue stream," he added.

This learning resulted in a host of pioneering initiatives, which were widely labelled as trend-setters in the industry. They include a transparent tariff structure as well as a more localized and personal marketing strategy. Hutchison Telecom was the first operator in the industry to introduce per second (not per minute) billing, a one-off flat fee for incoming calls irrespective of their duration, low monthly subscription and detailed billing statements showing separately the applicable interconnect charges.

The company has developed an innovative and very localised marketing strategy which includes going directly to the prospective customer. Hutchison Telecom representatives visit the customer at his home, in order to be able to explain to him and his family the wider benefits of owning a cellular phone and dispel a preconceived notion of it being a luxury item affordable only to a certain segment of the society. As a result of this "Home Zone" strategy, the company has been able to broaden the traditional cellular market beyond the business needs to cater to the wider communication requirements of a typical Sri Lankan family.

Backed by the international experience from Hong Kong, Hutchison Telecom in Sri Lanka has pioneered a concept of "door-to-door" selling, which after one year, has revolutionized the industry. Its resounding success has even prompted the other players to follow the same approach.

Mr. Loridon was keen to acknowledge that Hutchison Telecom’s innovative measures had been well supported in the spirit of the cellular market development by the Telecommunications Regulatory Commission. He also thanked the Board of Investment for their continued support.

The success to date of Hutchison Telecom in Sri Lanka mirror’s its parent, Hutchison Whampoa’s impressive position in the global telecommunications business. It is now one of the world’s biggest Telecom groups after being set up only in 1985. Recently Hutchison Whampoa agreed to sell its 44.8% stake in the Britain’s fastest growing mobile phone company Orange for US $ 33 billion under a deal with German engineering and telecom conglomerate Mannesmann. As per the deal, Hutchison will become the German conglomerates largest shareholder with a 10.2% stake in Europe’s largest mobile operator. Hutchison Whampoa also specializes in four other core businesses - ports and related services; property development and holdings; retail, manufacturing and other services; and energy, infrastructure, finance and investment. The Group turnover in 1998 was over US $ 6.6 billion and after-tax earnings were around US $ 1.1 billion.

(Company news release)

b
What’s wrong with the Bank of Ceylon?
A senior officer takes a look

A senior Bank of Ceylon (BOC) official has published an article in Ceybank News, urging that the bank must tackle the problem of non performing advances on a priority basis and also candidly examining various aspects of the bank’s performance.

The article has been written in an official publication of the bank by Mr. Douglas Weerasinghe, Assistant General Manager (Credit Control Corporate). Although Ceybank News has said that the views expressed by the publication are those of the contributors and not necessarily those of the editor’s or the management, the fact that some plain speaking is evident in what a senior officer has said suggests internal concerns about many problems within the bank itself.

Weerasinghe has said that non-performing advances would stand around 18% at year end with unearned interest (interest in suspense) amounting to Rs.12 billion.

He has also commented on "the thinning margins on lending activity" making lending unprofitable with interest yields slipping below the cost of funds.

"The net profit before tax to income continued to decline from 13.11% after December 1998 to 11.24% in August 1999," he has said.

He had also said that advantages BOC enjoyed of being the largest bank in the country and being bankers to the government continues to diminish with shrinking market share and government business, specially government deposits.

"With the continuing divestiture of business undertakings, both the deposits and borrowings of the government and corporate sector would continue to decline," he has said.

Weerasinghe has pointed out that the growth in advances was unfortunately in the low interest segment such as advances to the government’s staff loans, scheme loans and increased non-performing advances. These all accounted for the bulk of the total advances in 1998.

He further said that the interest yield in performing advances too was dropping as earlier loans which were priced high are replaced by low priced current advances.

"It is clear that this trend would thin out the interest yield further despite the decline in the cost of rupee funds which could be linked to the easing of the reserve ratio and the deliberate policy of exiting from high interest time deposits," he said.

Weerasinghe has analysed the profitability of BOC and the People’s Bank against two larger private commercial banks, HNB and the Commercial Bank. BOC has the highest turnover by far of Rs.9.7 billion, the highest provisioning of Rs.478 million, the highest personnel cost of Rs.2.1 billion and the highest net profit after tax of Rs.779 million. But the BOC AGM has pointed out that the net profit after tax earned by the two private banks together exceeds that of BOC despite the Bank of Ceylon having a higher turnover than HNB and the Commercial Bank total.

The AGM has also made the point that despite the higher salaries paid by the private banks, the personnel cost aggregates are comparatively high (BOC has a higher number of employees) and this contributes to lower profits.

He makes the point that the BOC position could be "fairly acceptable" if not for the higher provisioning reflecting high non-performing advances. This hits the bank on two fronts - as high unearned income (i.e. interest in suspense) and provision against losses that are charged against earned profits.

Weerasinghe has also said that some of the arguments adduced for defending the BOC performance do not carry much credibility and urged self criticism for better directional judgement.

He has illustrated this point by showing that the mixed banking model held out by the state banks as a face saving argument for high operating cost or low profitability cannot be sustained. This was because of the low ratio of loan commitment (as low as 4%) for development loans out of the total loan portfolio.

"In non-performance terms, the sector accounts for less than 20% of total non-performing advances," he has said.

All Share Index peaked at 602.6 in December

The All Share Price Index (ASPI) of the Colombo Stock Exchange (CSE) peaked to 602.6 on December 14, the highest point for the year and closed the month at 572.5, CSE said in its December monthly market report.

Reviewing the market, the report said that both the All Share Price Index and the Milanka Price Index (MPI) appreciated by 3% with the ASPI moving up 18 points during the month while the MPI appreciated by 29.3 points.

The MPI which was introduced on January 4, 1999 also reached its peak of 1010.7 points on December 14. It closed the month at 937.5 points.

The average daily turnover during December at Rs.77.2 million compared favourably with the Rs.73.3 million averaged daily in the previous month.

During the 3-month period October to December, the ASPI moved up a marginal 0.6% while the MPI recorded growth of 1.3%, the CSE monthly market report said.

Foreign sales far outpaced purchases during the month with buying transactions valued at Rs.374.1 million while sales amounted to Rs.642.9 million. The net outflow was Rs.268.8 million.

CSE said that foreign purchases in December accounted for 24% of the total turnover while foreign sales accounted for 42%.

Most of the foreign purchases (56%) were in the diversified holding sector while purchases too (52%) focused on this sector. The other shares that foreigners were interested in were banks, finance and insurance with the sector contributing 28% to total foreign purchases and 31% to total foreign sales.

Net outflow of foreign funds from CSE in 1999

There was a net outflow of foreign funds from the Colombo Stock Exchange (CSE) in 1999 according to statistics compiled by the Exchange.

The December monthly market report of the CSE said that foreign companies and institutions made purchases amounting to Rs.4.5 billion during the year while sales were worth Rs.5.8 billion. The net outflow was Rs.1.4 billion.

Although foreign individuals’ purchases at Rs.580 million was higher than sales of Rs.153 million by Rs.427 million, this inflow did not bridge the outflow of Rs.1.4 billion by foreign institutions.

Local individuals, in money terms, sold more than they bought during the year while local companies did the reverse. According to the CSE figures, local individual purchases at Rs.2.7 billion was below the Rs.3 billion worth of local sales by Rs.277.9 million but local company purchases of Rs.7.1 billion exceeded sales of Rs.5.8 billion by Rs.1.2 billion.

Foreign activity during the year saw an outflow of Rs.950.9 million while total local purchases against sales was a positive Rs.950.9 million.

TQB states its case on management of textile quotas

I refer to the article published in the ‘Sunday Island’ of 16th January, 2000 under the heading "Selling Textile Quotas Now a Big Business". As the manner in which some matters relating to the management of textile quotas has been presented could create a wrong impression in the minds of readers who may not be familiar with the system of management of textile quotas, the Textile Quota Board (TQB) is of the view that certain matters mentioned in the above article require elucidation.

The above article is purported to have been written from the perspective of small scale manufacturers. The writer who has chosen to remain anonymous, deals mainly with following concerns.

permission given to exporters to temporarily transfer part of their quotas to other exporters,the basis of allocation of main quota, operation of the pool schemes,use of counterfeit documents especially textile visas, incentive in respect of non-quota exports,"ship-through" arrangement.

Before dealing with each of the above matters, it is necessary to state that textile quotas are managed by the TQB appointed by the Minister under the Textile Quota Board Act No. 33 of 1996. The Board consists of ten members five of whom are officials who are ex-officio members. The other five are appointed by the Minister to represent the five Industry Associations. One of the industry associations whose Chairman has been appointed to the TQB is the Sri Lanka Chamber of Garment Exporters which represents small and medium scale manufacturers. Textile quotas are managed according to a scheme formulated by the TQB in consultation with the industry associations and approved by the Minister. This Scheme has been published for information of all concerned.

Now to come to the concerns expressed by the writer of the above article. He states that the practice of allowing exporters to temporarily transfer part of their main quota should be stopped. Till last year, the TQB permitted exporters to transfer, without penalty, upto 40 percent of their main quota entitlement. Last year all the five Industry associations including the association which represents small and medium scale exporters, urged the Ministry to remove this limit to allow free transfers, or to increase the limit to 80 percent. The main reason adduced by them is that the apparel export industry which is becoming increasingly competitive requires a great deal of flexibility to quickly respond to changing market conditions. They stated that as the quotas will be completely removed by 2005, conditions in the post-quota period should be simulated now itself to allow the industry to adjust itself to that situation. The view of the author of the above article seems to be at total variance with the view of the large majority of apparel exporters.

The author of the above article also states that the TQB should ensure that allocations from this year should be on the basis of past export performance and that there should be a critical and comprehensive survey to ascertain whether factories are in a position to utilize their quotas. He suggests that the Ministry officials should check the factories for the number of employees, machines, and payment of EPF and ETF. The main criterion of quota allocation for the last so many years has been the "past export performance"; it has not been changed. Payments of EPF and ETF are regularly checked by the Board of Investment of Sri Lanka (BOI) and the Textile Division of the Ministry of Industrial Development. In fact, the TQB does not allocate a quota, unless the Ministry or the BOI issues a certificate of compliance, in this regard. A survey of machinery, employees etc. was carried-out last year. In December 1999, the TQB initiated action to carry-out a similar survey for this year as well. The declaration which has to be filed by each exporter for this purpose has to reach the TQB by 15th of this month. Obviously the writer of the article who claims to be a manufacturer and an exporter seems to be quite oblivious to these measures.

The author of the article under reference also states that sufficient quotas should be channelled to the common pool right at the beginning of the year. According to the Scheme for Management of Quotas, there are two pool schemes; one is known as the Cold Categories Pool Scheme and the other is known as the Main Pool Scheme. Applications for the Cold Categories Pool Scheme for this year were called by a notice published in the newspapers on 13th December, 1999. The closing date of applications was 10th of this month. Nineteen categories are already available in the 7-day pool scheme which is a variant of the Cold Categories Pool Scheme, from the 3rd of this month. It is not possible to release fast moving categories to the Main Pool Scheme right at the beginning of the year because position regarding them has to be ascertained fairly accurately. The Main Pool Quota Scheme will commence in February or early March. In order to enable exporters to take orders for this year, an interim quota allocation amounting to 70 percent of their utilization upto the end of October last year, was made in December 1999.

Regarding the Pool Quota Scheme, the writer further states that no exporter should be permitted to apply for pool quotas if he already holds a similar quota. This method is unfair because even an exporter with a very small quota holding say, 100 dozens, will be denied access to pool quotas. The author’s intention is probably to prevent hoarding of quotas. The TQB achieves this objective by not permitting exporters to utilize pool quotas until they exhaust all their permanent quotas.

Use of counterfeit export documents, especially textile visas has been a problem in most apparel exporting countries subject to quota restraints. Since there was an increase of such activities in Sri Lanka towards the latter part of 1998, an entry by entry comparison of Sri Lanka exports and U.S imports was undertaken by the TQB. Where discrepancies appeared to be due to use of forged documents, inquiries were initiated and certain difficult cases were handed-over to the Criminal Investigations Department (CID) for appropriate action. Where the inquiries conducted by the TQB proved that an exporter had used counterfeit documents for export, 50 percent of his quota entitlement was cancelled, as a penalty. The author of the article states that the penalty is very light in that the 50 percent quota cut is only for one year; It is not correct. The quota cut is permanent. Some exporters have filed appeals in the Court of Appeal stating, among other things, that the punishment is too harsh. Of course there is a certain amount of delay in taking action against the offenders because the process of collecting evidence is long and tedious and penalties cannot be imposed without following the due process. Several exporters on whom penalties have been imposed by the TQB have filed action in Courts. In this connection what is important is that the TQB took swift action to install the Electronic Visa Information System (ELVIS), (at a cost of Rs. 30 Million) to prevent this type of fraudulent activity in the future. Whilst continuing with the paper visa as it was done in the past, now the TQB electronically transmits to U.S Customs visa information for them to verify the information in the paper visa, before approving customs clearance. With this system, it is virtually impossible to use counterfeit textile visas.

Regarding incentives to non-quota exporters, it is relevant to point out that last year, the TQB decided to set apart 25 percent of the annual growth in quotas exclusively to exporters who have shown a strong achievement in nonquota exports. It will come into effect this year.

Regarding the so called "ship-through" arrangement, it must be stated that the TQB does not approve it. The problem is that as it is a private arrangement between two exporters, and it is extremely difficult to prove it. It was pointed out by the Industry Associations that the incidence of "ship-through" will get drastically reduced with the upward revision of the limit on temporary transfers.

Finally the TQB wishes to underline that textile quota management is not a welfare activity. The country requires strong exporters to face the intense competition that is expected in the post-quota period and nothing should be done to undermine their strength. However, in order to help small and medium scale exporters, 3 percent of the total quota available in a year has been set apart to be allocated exclusively among such exporters, over and above their other entitlements. Regarding the suggestion to bring in fresh blood into the TQB, we feel that it is mainly in the hands of Industry Associations because five of the ten members of the Board are their nominees.

W. JAYAMAHA
Chairman
on behalf of the Textile Quota Board.

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