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Plantations regain lost ground
Hayleys catching up earlier downturn, upbeat on final results

Hayleys Limited, the diversified conglomerate that has grown substantially on value added exports in the last three decades, has seen a dip in its 9 months results up to December 31, 1999 but is confident of catching up by the close of the current financial year.

A company spokesman said that the plantation sector particularly that had impacted on profitability earlier during the period under review had improved during the last quarter. Also, there was a positive contribution from the leisure sector although their investment in this area is small.

"I think we can match last year’s results or slightly improve on them by the end of the current financial year,’’ the spokesman said.

In a statement to shareholders, Hayleys Chairman/Chief Executive Sunil Mendis said that their coir, environment, inland marketing and transportation businesses contributed most substantially to the consolidated 9 months after tax profit of Rs.371.1 million, down 31% from a year earlier.

However, after discounting minority interest, the profits attributed to shareholders of Hayleys at Rs.238 million was down only 13% from Rs.272.1 million earned during the comparative period the previous year.

Mendis said that the profit attributable to shareholders for the second and third quarters was in line with the corresponding periods the previous year. The 13% decline in the 9 months result was entirely due to the downturn in the first quarter.

He explained that the 9 months downturn was mainly due to the drop in the group’s plantation profits. The sector had shown improved results as the year progressed and they expected the trend to continue for the remainder of the year.

"The group’s view of the year as a whole is therefore a positive one. The board anticipates that dividends to be received from subsidiary and associate companies in the last quarter of the year will enable Hayleys Limited to pay its shareholders a dividend in keeping with their expectations,’’ he said.

Hayleys has been making headway in the textile sector where it took some blows in previous years. According to a turnover analysis published with the 9 months results, turnover in this sector had grown to Rs.1.3 billion from Rs.0.87 billion a year earlier.

The company is supplying high quality knitted fabrics to the upper segment of the exports garment industry. These fabrics are not sold locally.

Although there has been a turnover downturn in the agricultural sector, the spokesman said that they were retaining their gherkin outgrower network and shipping a finished product against previous exports of a semi-processed product in barrels. Their customers included MacDonalds in Japan who have 2,500 outlets there.

The rubber sector had a setback with the pressure on prices in rubber gloves manufacture handled by Dipped Products, the group company which has grown into one of the world’s biggest non-medical glove manufacturers.

Additionally, a 11% appreciation of the rupee against European currencies hit the company’s value added exports both of rubber gloves and finished coir fibre products like brushes and floor coverings to Europe.

While Haycarb, the company’s activated carbon manufacturing company had performed in line with the previous year, as had the transportation sector, Hayleys’ inland marketing had done very much better, the spokesman said.

Billion rupee SLT debenture issue to open on March 13

The billion rupee landmark Sri Lanka Telecom (SLT) debenture issue will open for public subscription on March 13, the promoters announced on Friday. The issuer said that it may close on the first day in the event of an over-subscription.

A news release from the promoters said that the prospectus and application forms will be available from all stockbrokers and branches of the Commercial Bank of Ceylon and the DFCC Bank from March 2.

These debentures will be listed on the Colombo Stock Exchange facilitating trading and enabling investors to convert them to cash if they need to do so, the promoters said.

SLT said that they were floating these debentures to fund expansion hitherto covered by multilateral credit lines, bank borrowings and internal fund generation.

The issue is being promoted as the first opportunity given to investors here to participate in the development of the country’s infrastructure, an area hitherto largely undertaken by the government.

The 5-year debentures offer 14% p.a. interest payable quarterly, 14.5% payable annually or a floating rate option of the 6-month Treasury Bill rate plus 1.25% per annum payable semi-annually.

Duff & Phelps Credit Rating Company has ranked the debentures AA+ rating which is the best given for anything less than a sovereign debt.

The promoters said that the capital will be redeemed in four equal annual instalments commencing two years from the date of allotment. This reduces the maturity risk to investors against a 5-year debenture redeemable entirely on maturity, they said.

The issue is structured and managed by the DFCC Bank and underwritten up to Rs.1 billion by a consortium comprising the Bank of Ceylon, ABN AMRO and DFCC Bank. The Commercial Bank of Ceylon is the trustee to the issue.

Sri Lanka restores Tiger hit oil storage tanks

COLOMBO, (AFP) - Sri Lanka’s main petroleum distributing monopoly Friday announced the full restoration of oil storage tanks devastated in a major Tamil Tiger guerrilla attack.

The Ceylon Petroleum Corporation (CPC) said its storage capacity of 180,000 tonnes of crude oil has already been restored with the reconstruction of three storage tanks in the Orugodawatte area of the capital.

Six more storage tanks added to the CPC capacity at the suburb of Sapugaskanda and the rehabilitation of six tanks at the main Kolonnawa storage deport will be formally completed by the end of this month.

"The tanks are all ready and some have already been commissioned, but the official handing over will be on the 28th," a CPC spokesman said.

The total cost was revised to 47 million dollars, down from an earlier estimate of 50.3 million dollars after Liberation Tigers of Tamil Eelam (LTTE) rebels blasted oil tanks at Kolonnawa and nearby Orugodawatte depots.

The Asian Development Bank had lent the money to finance the restoration work carried out by the China Huanqiu Chemical Engineering Corporation, while other improvements were financed locally.

The Chinese firm’s contract was 21.8 million dollars.

Two weeks ago, the CPC sharply raised the price of diesel and kerosene oil and officials said the raise was to off set losses suffered due to the rapidly rising price of crude on international markets.

President Chandrika Kumaratunga last week told the Sri Lankan parliament that the government will open up the petroleum industry toforeign and local private sector competition.

Sri Lanka, China agree on joint promotion of tea

COLOMBO, Feb 23 (AFP) - Sri Lanka and China Wednesday agreed to jointly promote the worldwide use of tea produced by both countries as part of efforts to enhance their international trade, it was announced here.

The decision was taken at a meeting held here of the Joint Committee on Trade and Economic Cooperation between the two countries attended by China’s vice minister of foreign trade Chen Xinhua, a government statement said.

China also agreed to offer Sri Lanka an interest free loan of 20 million renmimbi (2.4 million dollars) to finance projects to be decided later.

Both countries also agreed to increase mutual business visits.

"The Chinese side also expressed willingness to assemble and process small agricultural tools or machines and household electrical appliances in Sri Lanka," the statement said.

Agreements in March for Hayleys’ entry into power & insurance

Hayleys Limited will break into the power production field with the finalisation next month of an agreement with AES the giant US firm, a senior company spokesman said.

AES is the world’s biggest private power producer and has been expanding rapidly in the Indian Sub Continent and, in the words of the Hayleys’ spokesman, "looking at this country very seriously.’’

Hayleys’ entry into the financial services industry, another ground breaking event for the group, will be finalised with an agreement with AIG, a global insurance player, also in March. This joint venture has already obtained its insurance licence.

Sri Lanka has long been looking at the option of cheaper coal power production in preference to diesel fuelled thermal power. However, all the CEB’s efforts at investing in a coal fired power project has been shot down by environmental considerations.

The Hayleys-AES tie up is significant in this context as the latter company has a 180 MW coal power project in Hawaii that has become a tourist attraction.

The Hayleys group under the leadership of the late Mr. D.S. Jayasundera, widely considered to have been a business genius in Sri Lanka’s contemporary history, diversified strongly into value added export of local raw material in recent decades.

The company is now moving into infrastructure and the financial services sector with its tie ups with AES for power product and AIG in insurance. Hayleys has also reached an arrangement with a big European player in water supply.

The group’s diversified portfolio of investments has helped it to weather downturns caused by adverse currency fluctuations and massive freight rate increases into the USA and continental Europe.

All properties in Sri Lanka and Maldives perform
46% leap in 9-month results at Aitken Spence Hotels

Aitken Spence Hotel Holdings Limited has just announced a strong 9-months performance with after-tax profits attributable to shareholders of the company growing to Rs. 55.4 million, up 46% from the comparative period the previous year.

A company spokesman said that 1999 was a record year for tourist arrivals in Sri Lanka with 436,000 visitors, up 15% from the previous year. They had made full use of this opportunity to boost their hotels and tourism related business.

Said Suresh Rajendra, Director/General Manager of the company: "This performance was due to the strong partnership we have established with our tour operators and destination management companies."

Operating profits during the period under review grew 93% to reach Rs. 71.1 million, the pre-tax profit was up 96% to Rs. 75.4 million and the after-tax profit was up 82% to Rs. 69.2 million. Minority interest absorbed Rs. 14.5 million of these earnings leaving a profit attributable to the company of Rs. 55.4 million.

With unappropriated profits of Rs. 192.2 million brought forward, the company had Rs. 247.6 million available for appropriation as at December 31, 1999.

Aitken Spence Hotel Holdings now has an issued share capital of Rs. 549.3 million including Rs. 165 million in preference shares. The company made a scrip (bonus) issue of 3.4 million shares late last year followed by a rights issue of 14.4 million ordinary shares at Rs. 40 per ten-rupee share. This boosted its issued ordinary share capital to Rs. 384.3 million and helped reduce financial charges with funds in the share premium account. With 16.5 million cumulative redeemable preference shares, the total issued share capital of the company is Rs. 549.3 million.

The company said that there had been a good allround performance in its hotel properties helping the higher profit levels. Kandalama has done particularly well earning Rs. 30 million.

"The other hotels too did exceptionally well, particularly the Tea Factory, which has become very popular with foreign tourists," the spokesman said.

The company is also continuing to reap the rewards of its strategic move to the Maldives with both operational properties at Bathala Island Resort and Club Rannahli continuing to be profitable. The third hotel will be commissioned this year when Aitken Spence Hotels will hold a substantial share of the Maldivian tourism market.

Both Kandalama and Neptune in the south coast, Aitken Spence’s first hotel property which celebrated its 25th anniversary last September, were acclaimed by international industry bodies last year. Kandalama was named a Green Globe Hotel by the World Travel and Tourism Council while Thomsons, the leading British tour operator, made the Neptune a Gold Award for all round excellence for the second year running. Kandalama has also been recognised for its good food.

Disclosures on unauthorised transfers made to shareholders
Horana loses Rs. 5.2 mn. in fiscal 1998-99

Horana Plantations Limited, now controlled by the Ceylon Theatres group through its investments in the ceramics sector, has reported a loss of Rs. 5.2 million for the year ended March 31, 1999, a sharp reversal from the after-tax profit of Rs. 111.2 million recorded in the previous 15-month period.

The company’s Chairman, Mr. Anthony Page, has told shareholders that the year had been a difficult one with tea prices that had been buoyant a year earlier falling sharply and rubber prices continuing to be depressed for the second consecutive year. This has pushed down both turnover and profitability of the company.

Horana has 2,471 ha of tea and 2,195 ha of rubber under cultivation. It employees a workforce of over 10,000 and had produced 4.3 million kg of tea, down 5% from the previous year, and 1.9 million kg of rubber, marginally up from the previous year, during the year under review.

Page said that their tea estates at Upcot, specially Stockholm, Gouravilla and Alton, continued to lead the market and had contributed most favourably to their results. Their rubber factories at Frocester and Mirishena which produced sole crepe had been able to process the latex of four other plantations as well to benefit from the premium price of sole crepe.

"These factors, i.e. the premium prices obtained by the Upcot estates, and the manufacture of sole crepe, which benefits four of our rubber properties, have insulated us from the worst effects of falling prices,’’ Page said.

He also advised shareholders on the unauthorised transfers totalling Rs. 72 million made by Horana in 1998 to Uni Walkers Limited. There were no agreements or documents available giving the terms and conditions under which these transfers had been made. Subsequently, at a meeting of the reconstituted board of directors on July 7, 1999, a resolution dated May 14, 1999 which had been approved by the majority of the previous board regularising the transfer of funds had been tabled. But the reconstituted board did not adopt this resolution, Page said.

He said that in mid-June 1999, Uni Walkers had advised the Horana board that a consortia of banks was considering restructuring the debts of Uni Walkers and repayment schedule will be presented for the repayment of the Rs. 72 million transferred from Horana.

The reconstituted board of Horana Plantations is now seeking legal opinion on the modalities of recovering the funds due from Uni Walkers, Page said. He said that the board would not accept the repayment schedule unless in the interest of the company and only if it is without prejudice to any other course of action that may be required for the recovery of funds.

Page also disclosed that unauthorised advances of management fees for the period April 1, 1998 to March 31, 1999 aggregating to Rs. 48.7 million had been made to the management company, Ceyexxe Plantations Limited. A sum of Rs. 2.2 million was owing as at March 31, 1999, but this amount had been set off against management fees due to Ceyexxe in subsequent months.

Page said that the Registrar of Companies and SEC were also investigating the activities of the company.

Ceylinco Insurance buys heavily into Blue Diamonds

The Ceylinco Insurance Company has increased its sharedholding of Blue Diamonds Jewellery Worldwide to approximately 5.5 million shares by the purchase last week of 4.8 million shares, the Colombo Stock Exchange (CSE) has been informed.

Blue Diamonds has informed the CSE that the company's losses have been reduced by changes in the sales policy, controlling factory expenses and a sales agreement with a company called Rosy Blue Finance.

Blue Diamonds has said that provided trial runs and designs are finalised, commercial operations will begin in April and 50% of the production would be sold to Rosy Blue Finance.

Prior to this week's purchases by Ceylinco Insurance, that company owned only 667,017 Blue Diamond shares.

Blue Diamonds was a heavily traded stock last week with 5.5 million shares transacted on Monday, 5.7 million on Tuesday, 0.7 million on Wednesday, 1.1 million on Thursday and 0.7 million on Friday. This adds up to approximately 13.7 million shares.

As Ceylinco's declared acquisition was 4.8 million shares, analysts said that other interests too were buying into Blue Diamonds.

Trading in Blue Diamonds was suspended for nearly two and a half months earlier this year and resumed on February 16. The price of the share had risen from levels of Re.1 to Rs.1.25 to Rs.3 and Rs.3.50.

Pakistan’s economic problems

By Kanes
The covp d’etat in Pakistan took ptace in the backdrop of mounting economic problems centred round poor economic growth, falling living standards, growing inequality of income and slow human development. The real GDP per capita in Pakistan is $492, higher than $436 in India but lower than $827 in Sri Lanka, but real GDP per capita (PPP) of Pakistan $ 1570 is lower than both India’s $1760 and Sri Lanka’s $2625. What is more, per capita GDP (PPP) dropped in Pakistan from $1605 in 1998 to $1570 in 1999 when it rose both in India and Sri Lanka.

Income inequality is greater in Pakistan than in the other two countries: the ratio of the income of the richest 20 per cent of the population to that of the poorest 20 per cent is about 4.7 which is higher than India’s 4.3 and Sri Lanka’s 4.4. The Human Development Index of Pakistan is 138 of a total of 174 countries, lower than India 125 and Sri Lanka 90. Adult literacy is 41 per cent as compared to India 54 per cent and Sri Lanka’s 91 per cent. Infant mortality rate per 1000 live births of 88 exceeds India’s 71, and Sri Lanka’s 14. Pakistan’s rank in the Human Poverty Index is 71, lower than India’s 59 and Sri Lanka’s 38. Human poverty affects 42 per cent of the population in Pakistan, 36 per cent in India and 20 per cent in Sri Lanka.

Slow Growth

Pakistan’s economy grew at an average annual rate of 5.9 per cent in the 31 years 1965 to 1996, and its per capita income grew at 2.7 per cent. These growth rates were higher than India’s where economic growth was 4.5 per cent and per capita growth 2.3 per cent. Pakistan’s economic growth was also higher than Sri Lanka - 4.7 per cent. Thus, Pakistan had the highest economic growth in South Asia in this period.

It was, however, lower than that of East and South East Asia: South Korea 8.9 per cent, Malaysia 6.8 per cent and Thailand 7.3 per cent. Economic growth in Pakistan appears to have declined in recent years; its high growth rate of 6.3 per cent in the decade 1980-90 dropped to 4.6 in the period 1990-1996 and plummeted to 3.1 per cent in both 1997 and 1998. Although there was a recovery in 1999 to 5.3 per cent of growth, the current growth forecast is only 2.7 per cent.

Pakistan’s exports of goods and services grew at an average rate of 6.4 per cent a year in the 31 years 1965-1996; this was higher than that of India - 6.1 per cent. In recent years, however, Pakistan’s export growth has slackened and fallen below India. In 1996, it was 2.0 per cent compared to India’s 7.5 per cent and in 1997 it was minus 6.2 per cent as compared to India’s 9.1 per cent. Pakistan’s merchandise exports have remained virtually stagnant in the last four years: $8.3 billion in 1996, $8.1 billion in 1997, $8.3 billion in 1998 and $8.3 billion in 1999. Its foreign exchange reserves have declined from $1.8 billion in 1997 to $0.7 billion in 1998. The slowing down of export growth has resulted mainly from the decline in prices of its principal exports: the world market price of cotton has fallen by about 35 per cent and of rice by about 38 per cent in the last three years.

External Finance

Total external debt of Pakistan at the end of 1997 amounted to $29.7 billion or 47.5 per cent of its GDP and debt service accounted for 35.2 per cent of its exports of goods and services. India’s external debt was $94.4 billion which was eqwl to 24.9 per cent of its GDP and its debt service amounted to 19.6 per cent of its exports of goods and services. Pakistan, however, received more official development assistance per capita -$5.4 in 1997 - than India - $1.9. ODA accounted for 1 per cent of Pakistan’s GNP and 0.4 per cent of India’s. After a de focto default in 1998, Pakistan built up its external reserves from $0.7 billion to $1.5 billion in 1999.

Foreign investors have become wary with the Western sanctions imposed after the 1998 nuclear tests followed by a government decision to freeze foreign currency accounts of $11 billion. The previous government also harassed independent power producers accusing them of overcharging state utilities; it also failed to raise fuel prices by about 6 per cent to settle the dispute about tariffs. Foreign direct investment has dropped from a peak of $3.2 billion in 1994 to an estimated $300 million in 1999 and portfolio investment has fallen from $2 billion to $250 million in the same period. Remittances from Pakistanis working abroad have also declined from about $150 million a month in the first half of 1998 to about $65 million a month in 1999.

The unsatisfactory state of affairs such as the dispute between the government and private power suppliers resulted in the delay by the IMF in releasing $280 million in September 1999 which was part of the $1.6 billion IMF loan programme. The settlement of the dispute with private power suppliers may pave the way for releasing this money by the IMF and Pakistan wants this money badly to pay back international debts.

The Economist rates Pakistan as the third riskiest country in the world after Russia and Indonesia. Country risk-ratings are produced by the Economist Intelligence Unit for 93 countries. A country’s overall score takes account of 77 different indicators that reflect such factors as political stability, quality of governance, monetary and fiscal policy, regulatory policy, current account balances, debt, financial structure and liquidity risk. Political risk has a weight of 22 per cent in the overall core. The riskiest country - Russia - has a score of 78 out of a maximum of 100. The safest developing countries are Singapore with a score of 16 and Taiwan with a score of 24. Pakistan has a score of about 70.

Planned Reforms

The new military government promised to carry out extensive reforms in the polity and the economy to root out corruption, cronyism and bureaucratic inefficiency and to revive the moribund economy. Among the major reforms are restructuring of banks, deregulating commodity prices and raising government revenue by introducing sales tax and improving income tax collection. One of the biggest obstacles to economic growth is the low level of investment and domestic savings in the country.

In 1997, for instance gross investment was 15 per cent of GDP compared to 24 per cent in India and Sri Lanka and domestic savings amounted to 10 per cent of GDP as compared to 20 per cent in India and 17 per cent in Sri Lanka. The new government therefore needs to raise the investment rate to much higher levels if it wants to achieve high economic growth.

A major problem is the need to broaden the tax revenue collection base in the country to mobilize resources for development. Tax revenue in 1997 was 13 per cent of GDP which was higher than 11 per cent in India but lower than 16 per cent in Sri Lanka. In a population of 137 million only about 1.6 million people or less than 1 per cent pay income taxes. The black economy in Pakistan is about 51 per cent of GDP and it undermines attempts to raise revenue. The size of the black economy is much less in other countries - about one-fifth to one-third.

Agricultural incomes are lightly taxed. Direct taxation of agriculture contributed only 4 per cent to the direct tax revenues of federal and provincial governments in 1990, though the value added in the sector amounted to 26 per cent of GDP. Agriculture is lightly taxed because landlords are not only economically powerful but are also well represented in the Parliament. Informal sectors of the economy pose a similar dilemma. Cottage industries, owner-operated enterprises and small farms outside the formal system generate much income and are growing rapidly but remain largely untaxed. The government plans to improve the income tax collection even if it meets much opposition. It has also introduced an across-the-board sales tax.

The total amount of bad loans of Pakistan banks is estimated at 211 to 350 billion rupees or $4 to $6.6 billion which is about 24 to 40 per cent of all bank loans. These moneys are owed to a significant extent by political leaders and their cronies who had helped themselves to loans they never meant to repay. Central Bank officials estimate that just 322 families owe 70 per cent of the money. The new government ordered defaulters on bank loans to pay part of what they owed by November 16, 1999 and submit to a timetable for paying the rest.

This may create a few problerms. For one thing, the defaulters may use the legal system to stop banks from foreclosing and low loan recoveries will hurt the banks some of which have inadequate provisions against losses. For another, apart from willful defaulters, there are honest victims of economic circumstances who dehulted for reasons beyond their control. Distinguishing between innocent and guilty defaulters may prove to be difficult. The harassment of defaulters who include leading businessmen can also discourage new investment needed for economic revival. Besides, banks need billions to recapitalize.

Deregulation of commodity prices was launched with the increase in wheat flour prices by 10 per cent in early November 1999. Proposals to raise the prices of oil, gas and electricity are also being studied. However, justifiable economically they are, price increases and the sales tax are expected to push up the cost of living. Pakistan had very low inflation in recent years - 7.0 per cent in 1998 and 3.4 per cent in 1999. Economic reforms, however, may accelerate the pace of inflation.

Slow Progress

Although the new government set out its agenda to revive a shattered economy, hold the corrupt accountable and devolve power to the grassroots level, it seems to be losing steam after an initial thrust. The government has failed to come up with a single case of corruption against any important figure from the government of ousted premier Nawaz Sharif. Only a few cases of corruption have been decided by about a dozen accountability courts set up in the country. The National Accounhbility Bureau has recovered only 10 billion rupees ($200 billion) for bank loan defaulters who owe a total of more than 200 billion rupees. Many Pakistanis who were supportive of the new government, wonder whether the government despite its intentions to improve things, is up to the mark to meet challenges in external, internal, economic and administrative sphere.

On the external front, China is reported to have allowed Pakistan to defer payments on a string of loans, consequent to General Pervez Musharaf’s recent visit to Beijing. However, there is no indication that the IMF and the World Bank will resume lending to Pakistan and give it more time to pay interest on its $29.7 billion foreign debt. The international community is getting impatient with the lack of economic reforms and delay in announcing the restoration of democracy and is not favourably disposed to invest in the country.

Tea Market

Pakistan was a major buyer of Sri Lankan tea in the past. In 1988 for instance, it purchased nearly 20 million kg of tea from Sri Lanka - about 9 per cent of the country’s total tea exports. Pakistan ranked as the third largest buyer after UAR (16 per cent of Sri Lanka’s tea exports) and Iraq (15 per cent). In recent years, however, Pakistan has been reducing its tea purchases from Sri Lanka and in 1998, its purchases amounted to only about 3 million kg or about 1 per cent of Sri Lanka’s total tea exports. It was the 19th largest tea buyer in 1998. Kenya has now become the principal supplier of tea to Pakistan. It is a matter of great importance to recapture this major tea market and the appropriate authorities should study why we have lost it - if they have not done so already - and take appropriate remedial action.

The economic cost of a cockeyed transport policy

By Analyst
Minister Fowzie has a remarkable propensity to set off strikes in whatever area he is in charge of. Each time he participated in decision-making in the Ministry of health there was an uproar from the GMOA which ended in a strike. Now it is the turn of the bus operators.

Pitching the bus passengers against the bus operators is no way to solve the problems of the passengers. Both the government and the bus passenger organizations must accept that bus operators are engaged in a business. A business requires cost recovery plus profit.

The classical economists pointed out that the state should stay clear of interventions in micro markets because such interventions cause more problems than solve them. The minister should confine himself to regulate the quality of the service provided not interfere with the business decisions of the private sector. The minister should concentrate on improving the bus services operated by the state. If he can offer a competitive service the people will patronize the state bus services instead of the private bus operators.

If he thinks a particular route is not well served by the private bus operator he should introduce the state operated buses also on the same route or increase their number, Under the Transport Act of 1985 in Britain, if the vehicles and drivers meet public service standards, anyone can run any unsubsidized bus service he likes provided he registers with the authorities. This applied particularly outside the London area. If services had to be subsidized the local authorities called for tenders. They also had to hive off their buses to distinct operating companies.

Traffic Congestion

The problems of bus transport cannot be tackled without tackling the problem of congestion on our roads. More road construction or widening roads is not the answer for transport economists have pointed out that the supply of vehicles will soon increase to fill the new road space available. There are also the social costs involved in displacing people for road expansion. The allied answer, more parking spaces has also demonstrated the same effect.

Traffic jams have increased and the pace of traffic in the rush hours in the morning and evening has been reduced to a crawl2 causing much wastage of fuel. Often there are the police to direct the traffic at junctions. At other times the queue of cars, buses, vans three wheelers and motor cycles are left to sort themselves out, miraculously avoiding the pedestrians who, for either a want of a pavement as in the road to the national hospital or because the pavements have been taken over by hawkers, have to walk on the middle of the road. Even the present slowing down of the economy has not brought about any relief for the pedestrian. The government stands the main accused in promoting this enormous traffic congestion. Firstly, it has granted an enormous economic subsidy on diesel. Everywhere in the world except in India and Sri Lanka, diesel and petrol prices are closely allied with very little difference in their selling prices. Our government by taxing petrol excessively while having a very low tax rate for diesel, created an enormous economic subsidy for diesel.

It is true that there is no financial subsidy. But the economic subsidy has created an artificial demand for vans. In no city in the world do we find the number of vans exceeding so heavily the number of cars on the roads as in Colombo. Since these vans carry much less than their capacity the amount of fuel consumed Per passenger is wastefully high. A government which is running enormous budget deficits should have raised the price of diesel and brought some parity perhaps by reducing the tax on petrol. But this opportunity has been missed since the world oil prices are now on the rise.

Instead of taxing to reduce the budget deficit the president has preferred to use asset sales, an unsound economic principal and if practised by a private company would be considered financial mismanagement. Asset sale proceeds should be used to pay off debts and maintain the net worth.

Transport subsidies distort

The low price of fuel used by the majority of vans has also increased the demand for transport to the city. This is particularly noticeable in the case of school children that are now rushing for admissions to the city schools where the education provided is better and where the country’s elite children study. The catchment area of the school is supposed to be only 2.5 miles but vans carry school children from as far as Bentota.

What deception is practiced using forged documents. What an example parents are setting for their brood! The main contributor to traffic congestion is this school going traffic. And at least 30-40% of van journeys during the morning peak involve taking kids to school.

Free education is supposed to have brought about equality of opportunity. Can the children of the poor enter these schools? Why then subsidize the affluent so that their children can enter the elitist professions like law, medicine, accountancy etc. where they will use their free education to exploit the poor? Even if children of not so affluent parents enter these schools they too end up in the elitist professions where they make money far in excess of the average per capita income. Why subsidize bus fares for school children?

The widespread ownership of vehicles has also led to people going to the city shopping centers for their shopping needs instead of patronizing the neighborhood shops or stores. Separate households generally make separate shopping and marketing trips, driving separately to social events, increasing enormously the total number of journeys.

Then there are those who travel to work in the city daily. They also seem to do their marketing and shopping in the city as well, particularly buying from the pavement hawkers. Freight too has shifted to the roads from the railways, which has been sadly neglected. The number of vehicles registered each year have jumped enormously since this government took office. All these cars, lorries, vans, three wheelers have brought a host of other unpleasant problems with them: air pollution, noise pollution excessive dependence on oil, hazards to life and property. Every other child in Colombo and the suburbs is suffering from respiratory diseases and asthma. Commuters have to spend a good part of their waking hours in a vehicle as the traffic congestion raises the time of journeys to and from the city. Why doesn’t the government care? Why do they ignore the enormous social costs? Is it because the politicians themselves are still able to travel in comfort in their Pajeros with the police clearing a way for them? Does everybody else, never mind if he is the High Court judge of Kandy, have to grin and bear. Are we a democracy or some kind of aristocracy of Parliamentarians, even if the members are commoners? Why doesn’t the Government take actions to limit the number of vehicles by doing away with duty free concessions for the import of vehicles? Why doesn’t it impose higher road taxes, heavy imposts on lorries do away with the economic subsidy on diesel, raise parking fees and-make all parking in the city streets subject to parking fees. The people who will have to bear the burdens are not the poor but the affluent classes. In fact the government should give priority to public transport, which is patronized by the less well off. The revenue from such increased taxes should be set apart in an earmarked fund for the development of public transport and for road maintenance. The government should win back the pavements from the hawkers. Surely the pedestrians must be able to walk on the pavements without risking lives by walking on the roads. The former U.N.P Mayor tried a camouflage when he introduced carts for hawkers. But these are stationary and only make the problem worse for the pedestrian. This is the type of gimmick our politicians are so good at.

Traffic congestion is related to the problem of urbanization in poorer countries. An increase of one million in a city’s population means an additional 350,000-400,000 public transport trips per day, according to an Asian Development Bank estimate in 1989. Sao Paulo has grown from 4 million to 20 million since 1960’s and Cairo mushroomed from 2 million to 12 million. Colombo has grown too. But someone should project the growth in the near term and calculate the consequential growth in traffic. It would no doubt be alarming.

If the Government does nothing to mitigate the growth in traffic we might become like Bangkok where commuters ended up in their vehicles for long hours of the day. We don’t have the vast space of Bangkok. There are signs that already other traffic on our roads has reached saturation.

People come to the city and urban centers because they offer better economic prospects. Economists have pointed out that there is an urban bias in the allocation of funds in the governments of developing countries. They may be democracies but their politicians don’t want to base themselves in the rural areas they represent. They send their children to the prestigious city schools; they live in the city and therefore have a stake in the development of the city as much as a stake in the rural areas, they represent.

So the prestigious city schools get the best teachers, the best facilities and the most funds per pupil. The initial advantages of such schools are strengthened and they become more attractive for the parents living far from the city. The devolution of power to the provinces should help to correct this situation. But there is marked reluctance to devolve power and all manner of subterfuges are resorted to, to negate or water down such delegation or devolution of power. In fact special safeguards are necessary to ensure that the powers granted to the provinces are not subtly eroded. If this were to happen with regard to the north and east, any solution to the ethnic problem would come apart.

Putting economics to action...

The Singapore government has been conscious of the problems caused by traffic jams and has always acted to minimize such congestion. Singapore doesn’t have the chaos of Colombo. Three wheelers dare not dart in and out of the stream of traffic. Singapore has put economic thinking to good use in order to control congestion. An array of measures has made it costly to buy a car, own a car, drive a car, park a car, or take a car to the city center.

At the same time the government has invested heavily in public transport and in road building. Many other cities have sought to emulate Singapore, like Stockholm, Edinburgh and San Diego. Singapore has sought to use only economic measures rather than direct controls. As the Singapore government says, it is not against cars or driving but since driving creates social costs, those who cause such costs to society must bear the costs in full themselves. At first the government introduced a vehicle import duty of 30 to 45%. Car registration was raised to equal 25% of the cars market value. But this didn’t help much since car owners kept their vehicles for a longer period even while they caused more trouble. Other measures were also introduced, all market based. The government introduced a scheme of vehicle licenses which alone entitled one to import a car. These licenses were marketable. Some of these measures did not work and the government introduced a toll scheme. Tolls have reduced congestion and made traveling easier and faster. "Congestion can be viewed primarily as a case of incomplete markets and mispriced resources". In 1990, Japan’s International Co-operation Agency calculated that Bangkok loses as much as one-third of its potential output because of overcrowded roads. In 1994 two U.S economists estimated the annual cost of driving delays in U.S.A at $48 billion dollars or about 0.7% of the GDP (London Economist). The European Commission estimated that crowded roads in Europe impose costs equivalent to 2% of GDP.

Congestion and traffic jams also make pollution much worse. If the Government is keen on promoting economic growth, it must pay more attention to curbing traffic congestion and reducing delays in driving caused by traffic jams. If it is interested in the safety of the common man who is pedestrian it must clear the pavements of hawkers. If it is interested in the health of its people it must control air pollution caused mostly by diesel powered belching buses and lorries.

Congestion affects the private sector business as well. If unpredictable traffic jams cause delays in deliveries of goods to the markets, consumers will have to pay higher prices and also will not obtain supplies regularly. Factories and stores may have to keep more stocks increasing the costs of stockholding. If on the other hand travel time is Improved by reducing traffic congestion people will move further away from the city where they work, reducing urban overcrowding.

Give Preference to Public Transport

Our ruling politicians do not travel by public transport unlike in some developed cities where they are compelled to do so because it is faster. There should be preference for public transport instead of private car and van owners. The developed countries have decided that what is required is to use less cars (and vans) and more public transport. The government should place more curbs on private vehicles and develop public transport.

So many developed countries subsidize public transport while clamping high fuel taxes, high parking fees and strict regulation of on street parking. Illegally parked vehicles should be towed away and not merely because they are a security risk. The demand for traffic is normally a function of the expected economic growth. But the present government has caused a huge increase in the import of new vehicles by granting unnecessary duty concessions to politicians and public servants to import vehicles and has increased the volume of traffic on the roads by giving the diesel subsidy.

Studies in Britain have shown that a 10% rise in fuel prices leads only to 3% fall in consumption Vehicles involved in traffic jams cause three times more pollution than when they are flowing freer; according to Daimler-Benz. So if the government is interested in curbing pollution it must take some action to reduce traffic congestion.

Our people are still not concerned about the environment, about public health and air pollution. If they were they would make a bigger uproar on air pollution in Colombo than about the proposed coal plant in Norochchalai. Road pricing using electronic technology is the most effective way to reduce traffic congestion on the roads. But this may be too sophisticated or costly for our economy. It may be cheaper to remove the diesel subsidy and raise parking fees by a hefty amount to reflect the cost of land in the city.

The taxes that motorists pay at present are not enough to reduce congestion on the roads. They pay taxes on the purchase price of cars and for registration and annual revenue licence. But these increase the cost of owning a vehicle not of using it. Only road pricing can increase the costs of using a vehicle. Some of the costs of driving fall on the owner, who pays for the fuel and for lost time on the roads. But the government pays for the repairing the roads; other road users pay for delays caused by congestion and society at large pays for air pollution, noise and road accidents. The costs of accidents may be quite high. These are all social costs, which vehicle owners must bear at least in part. Without road pricing road building provides no relief.

The government also caused a decline in the second hand vehicle market by its unnecessary duty free concessions and reductions in duty. Vehicle owners who borrowed to purchase vehicles would find it in their interest to default on the finance and let the lender take over the mortgaged vehicles. Such are the adverse effects of the favoritism of the government to its politicians, the new despots in our society.

Colombo stock market dips in January

The All Share Price Index of the Colombo Stock Exchange (CSE) was down 17 points to 555.5 (2.9%) in January while the Milanka Price Index which opened at 937.5 declined 28.2 (3%) to close at 909.3, the Colombo Stock Exchange said in its January report.

Turnover during the month at Rs.801.7 million was down sharply from Rs.1.5 billion the previous month and Rs.976.4 million a year earlier. The average daily turnover for January at Rs.44.5 million was down from Rs.77.2 million the previous month and Rs.51.4 million a year earlier.

The CSE said that the plantations gained 4% during the month and beverages, food and tobacco 1%. These were the only sectors to record gains during the month under review when 13 sectors posted losses. Noteworthy among these were motors (down 11%), investment trusts (down 10%), trading (down 7%), banking, finance and insurance (down 6%) and hotels and travels (down 4%).

Foreign investsors were net sellers with an outflow of Rs.191.3 million. Banking, finance and insurance sector amounted to 58% of foreign purchases and 44% of sales while the diversified holding sector accounted for 30% of foreign purchases and 44% of sales.

CSE said that markets in developed stock markets reported record gains in the first week of January but tumbled during the latter part of the month. In New York, the Dow Jones index was down 5% during the month amid worries that breakneck economic growth would lead to higher inflation and rising interest rates. In Tokyo, the NIKKEI index was up 3%. The Japanese economy is expected to grow around 1% this year, CSE said.

In the region, the Bombay Sensitive Index moved up 4% in January while the Karachchi Stock Exchange appreciated a significant 25%.

Hayleys Exports hit by shooting freight and currency movements

There has been a sharp downturn in profitability at Hayleys Exports, the Hayleys subsidiary handling its traditional coir products business, during the first 9 months of the current financial year when the group pre-tax profit declined 64% to Rs.11.3 million from Rs.31.3 million a year earlier.

According to company sources massive increases in freight charges to both Continental Europe and the USA had impacted heavily on profitability of the fibre sector. Freight on a 40-foot container to the US has shot up from $ 1,700 to over $ 4,000 in a year while charges to the Continent were up by $ 600 a container, a spokesman said.

A second blow has been the appreciation of the Sri Lanka rupee against European currencies. This appreciation in terms of the DM, French franc and the Dutch guilder was as much as 11% last year affected profitability of finished fibre products like brushes and floor coverings.

Another factor that had affected the fibre business during the current financial year has been the wet weather. Sunlight is necessary to dry the product and the lack of sufficient bright days to dry the fibre affected the filling of orders in hand, a company spokesman explained.

Fortunately, Hayleys Exports have substantial investments in associate companies like Rileys producing floor coverings whose earnings cushioned the downturn at the parent company enabling the declaration of a 15% interim dividend on the current year’s results.

Hayleys Exports made an after-tax profit of Rs.44.9 million for the full year ended March 31, 199.

According to an interim report, group turnover was down 9.7% to Rs.161.1 million while the gross profit was down 26.2% to Rs.32.8 million. After taking credit for other operating income of Rs.1.2 million and discounting distribution and administrative expenses, the group had a marginal profit of Rs.0.2 million in its profit and loss account.

Financing cost at Rs.4.9 million was almost double the Rs.2.6 million expended on that account the previous year. Income from associates, down 20.6% to Rs.18.8 million, brought the company’s profit and loss account into the black. The pre-tax profit of Rs.14.1 million, down 61.7% from a year earlier and an after-tax profit of Rs.11.3 million, down 64% from the comparable period the previous year saw shrinkage of earnings.

The net profit for the 9 months under review at Rs.11.8 million compared with Rs.31.3 million earned a year earlier and Rs.45 million earned during the full year ending March 31, 1999.

With balance profits of Rs.95.5 million carried forward in the books, Hayleys Exports had Rs.107.4 million available for appropriation as at December 31, 1999. Of this, Rs.5 million had been capitalised for a 1 for 7 bonus share issue.

Kingsley at UNCTAD Ten in Bangkok

Internal and International Commerce and Food Minister Kingsley T. Wickramaratne led the Sri Lanka delegation to UNCTAD X in Bangkok earlier this month.

During this visit, the minister had discussions with the commerce ministers of Thailand, India, Bangladesh, Bhutan, Nepal and Iraq on a wide range of bilateral issues including promotion of trade and investment and tourism as well as regional trading arrangements.

UNCTAD X was attended by 17 heads of state, 108 commerce ministers and over 3,000 delegates from 159 member countries, the United Nations system, specialised agencies, inter-governmental organisations and NGOs.

Addressing the conference on February 14, Minister Wickramaratne said that globalisation was a irreversible process rapidly impacting on every-day life. It had helped Sri Lanka to find new markets in areas like banking, insurance and transport as well as new financial markets and global consumer markets.

However, he said that it was equally true "that there are many pitfalls which must be avoided if the positive elements of globalisation are to be translated into effective benefits for the common good of all.’’

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