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Seven items totalling Rs. 316 mn. not satisfactorily vouched
Auditor-General queries unconfirmed debts at Associated Newspapers

Auditor General S.M. Sabry has drawn attention to outstanding debts of over Rs.100 million in the books of the Associated Newspapers of Ceylon Ltd. (ANCL) in 1998 where confirmations called from several hundred debtors had not been received.

Commenting on the just published annual report of the company for this year now with shareholders, Sabry has said: "The position with regard to confirmations was unsatisfactory. Although confirmations had been called for from 827 debtors totalling Rs.115 million, only 67 debtors aggregating Rs.6.3 million had confirmed their balances,’’ the AG said.

He also reported that confirmations had not been called for by the company in respect of debtor balances totalling Rs.95.5 million and accounts payable balances totalling Rs.227.9 million.

Sabry’s report further reveals that 7 items in the accounts aggregating Rs.316 million "could not be satisfactorily vouched or accepted in audit due top non-availability of evidence such as correspondence and detailed schedules.’’

ANCL which had delayed its accounts to the Auditor General by two months had seen a sharp downturn in the trading profit to Rs.27.6 million in 1998 from Rs.44.3 million a year earlier. Other income at Rs.52.7 million was also down from the previous year’s Rs.63.2 million.

Other income has been earned from fixed deposits and Treasury Bills (Rs.20.4 million), quoted investments (Rs.7 million), profit on sales on fixed assets (Rs.2.4 million), sale of old newspapers (Rs.13.4 million) and sale of materials (Rs.1 million).

Directors’ emoluments during the year under review had been increased to Rs.3.35 million from Rs.2.82 million the previous year.

The company has declared a 18% dividend to shareholders absorbing Rs.6.3 million maintaining the same level of dividend that has prevailed from 1989. This dividend is being paid from approximately Rs. 7 million in dividends received from commercial investments.

ANCL Chairman Aloy N. Ratnayake attributed the profit decline to the company’s decision not to pass on the GST to customers and ``also absorb the inflationary effect with increased prices.’’ (sic)

Ratnayake said that there had been a 0.65% decline in sales revenue in newspapers although some newspapers recorded an increase in revenue.

The Public Trustee holds 87.5% of ANCL shareholding on behalf of the Government of Sri Lanka. Some state corporations are also shareholders of the company as are some of those who owned the company prior to its 1973 takeover.

Lake House owns 1,996 shares of Cargills, 69,128 shares of the DFCC Bank, 52,066 shares of the Commercial Bank (non-voting), 6.2 million units in the National Equity Fund and 3.8 million units in the Ceybank Unit Trust.

The directors of ANCL as at 31.12.98 are: Messrs. Aloy N. Ratnayake, Janadasa Peiris, A.M.K. Attanayake, K.P. Dharmawardena and Ms. M.K. Muttetuwegama.

Two business leaders quit Parquet board

Central Finance Chief, Chandra Wijenaike and James S. Mather, directors of large quoted companies including Ceylon Tobacco and the Commercial Bank of Ceylon, have resigned from the board of Parquet (Ceylon) Limited with effect from March 1, the Colombo Stock Exchange announced.

New appointments on the boards of quoted companies include those of Mr. S.A.B. Rajapakse to Central Finance with effect from March 1, Mr. Bandula Wijeratne to Hotel Developers (Lanka) Limited (owners of the Colombo Hilton) with effect from February 28 and Mr. N.S. Welikala to Mercantile Leasing Limited from March 7.

CSE also said that Mr. Walter Ediriweera has been named Deputy Chairman/Executive Director of Arpico Finance from March 6. He succeeds Mr. H. Wijayatunga who has resigned from the post of Executive Director of that company. Mr. A.L.B. Brito Mutunayagam has also resigned from Arpico Finance with effect from March 31.

Other new appointments to quoted boards include Mr. A.T.H. Wong to Glaxo Wellcome with effect from March 1 and Mr. K.Sivalingam to Talawakelle Plantations from February 18.

Resignations from quoted companies include those of Mr. M.O.F. Salieh from Mercantile Leasing and Mr. Dixon Nilaweera from Talawakelle Plantations.

CSE also said that Mr. B.M. Amarasekera had retired from the board of Glaxo Wellcome with effect from March 1.

Budget and public investment – III

By Kanes

Liberalization and Foreign Capital

In accordance with its announced policies of open economy, making the private sector the engine of growth, withdrawing the state from economic activity and inviting foreign capital, the budget has encouraged the expansion of unit trusts and venture capital companies, planned for more privatization of state assets such as hotels, mines and farms, liberalized the financial sector to permit foreign ownership of 60 per cent in banks, 90 per cent in insurance and 100 per cent in stockbroking, and liberalized the petroleum sector to allow foreign companies to compete with the Ceylon Petroleum Corporation.

In fact, the Budget expects Rs. 30 billion in divestiture proceeds to government revenue in 2000. Private investment in infrastructure will receive further encouragement not only in power, ports, telecommunications, and housing but also in water supply, transport and solid waste management. On the other hand, the budget does not envisage public sector investment in any large industrial project as industrial development is left to the private sector.

While the private sector and foreign capital have important roles to play in the country’s development there is doubt whether they will be equal to the task expected of them. Private investment for instance, has been virtually stagnant around 18 per cent of GDP in the four years 1995-1998 and foreign direct investment has been at a very low level — $16 million in 1995, $86 million in 1996, $129 million in 1997 and $137 million in 1998. Foreign direct investment was equal to only 2.7 per cent of the country’s total investment - gross domestic capital formation - in the four year period or 0.7 per cent of GDP, and this is despite the many concessions and incentives offered and the several Missions sent abroad to canvass foreign investors.

As transnational corporations have a tendency to swallow up smaller domestic firms which compete with them, exercise monopolistic power over price, evade taxes through transfer pricing and generally intimidate governments by their sheer size and backing of their powerful governments, the country needs to be cautious and selective in inviting only of those companies which can help the country with advanced technology, management techniques and global marketing links which it lacks, without allowing them to dominate the economy, undermine the government’s authority and destroy local enterprises.

Need for Public Investment

Rapid economic growth cannot be achieved with the current levels of private investment and foreign capital inflows. As there is little evidence of a massive inflow of foreign direct investment in the near future, it is imperative to increase public investment much above the proposed levels.

The budget estimates public investment to be 8.1 per cent of 6DP in 2000 rising to 8.8 per cent in 2002, but this is clearly inadequate to achieve rapid growth when private investment is generally sluggish. Further, the public investment proposed is in improving the infrastructure such as roads; while improvement in infrastructure is essential that alone is hardly adequate for rapid growth. In the context of the country’s underdeveloped private sector, there is a strong case for the government to go beyond the infrastructure and invest in vital industries which the private sector is shunning.

It may invest in them in partnership with private capital, even foreign capital, for the important thing is to create new productive enterprises, new factories and other undertakings — to create employment, and income and accelerate growth. It does not really matter who initiates or who owns them; if private enterprise has failed let that gap be filled by public enterprise, alone or in collaboration with private enterprise.

There should not be a conflict between public and private sectors if they are seen as complementary and not competing agents of economic development. There are many areas where the private sector is best fitted to invest and develop and there are some areas where the state may be forced to invest and develop mainly because of the failure or backwardness of the private sector. If the government fails in managing them efficiently, they may privatize them as it is doing today with old enterprises. Even if they fail to yield profits they will remain valuable, for their divestiture will help to close the budget deficits!

The transformation of the economy to a rapidly growing economy with 7-8 per cent annual growth would require substantial investment and saving of the range of around 40 per cent of GDP. The country’s investment and savings are nowhere near this range. In 1998, for instance, total investment was 25.4 per cent of GDP. The budget does not provide any clues as to how investment and savings will be raised in the coming years; nor does it supply a national plan as to where or what sectors the investment will take place in. It is not the private sector alone but both the private sector and public sector that form the engine of growth as so well demonstrated in East Asia.

The Budget makes it clear that the government’s strategy is to integrate the Sri Lankan economy with the global market in the belief that greater openness and exposure would bring in foreign capital and accelerate growth. The East Asian crisis in which the integration with the global financial market led to disastrous results should teach us a lesson. It seems to be conveniently forgotten that the countries like Sri Lanka and India were spared the disastrous effects of the crisis for the simple reason they were not well integrated with the global financial market and were therefore less exposed to the destabilizing forces of speculative capital.

The budget also reflects much faith in the Indo-Lanka Trade Agreement to expand our exports ignoring that our largest export markets - the USA and EU - have been developed without any trade agreement. It forgets that if we are concerned about our exports, we must concentrate on the US which buys 40 per cent of our exports and not India which buys only 0.8 per cent of our exports. It is difficult to understand the logic behind our approach to place such hopes in the Indian market which buys so little from us and to have no strategy to retain, develop and expand the US market which buys 50 times what India buys from us and 72 times richer.

Economics of policy-making
The case of admission to schools etc.

by Analyst|
The area rule for admission to schools is specific, that children who are resident within two and a half miles radius of a school alone are entitled to be admitted to that school. This rule is openly flouted by parents as seen by the large number of children traveling to schools in Colombo from distant towns, as far as Bentota or Negombo. The parents go to the extent of submitting false documents to claim residence within two and a half miles. This is downright cheating. Not only do they cheat they also teach their children to cheat by giving bad a example.

Many of these children are destined to enter the elite class in society, going on to enter the professions like law, medicine, accountancy, engineering etc. They are the future leaders in our society. Can such children grow up to be good leaders or good citizens?

Edmund Burke, the British statesman pointed out that no law should be passed by Parliament unless it is acceptable to the majority and is capable of enforcements. Otherwise the law will be brought to contempt and it is not good to bring the law into contempt for it will undermine that society.

So the Government must review this rule, amending or withdrawing it altogether. What rule should take its place? Someone might say the area rule is a fair rule since the children who live close to the school should be admitted. If we ask why he considers it a fair rule what answer can he give? Can he say that the residents built the school which might be some justification? But we know that these popular schools were not built by the residents.

Someone else may say the old boys of the school and their parents contributed to the school and they should have a prior claim. Others might say that these schools should be kept for the most outstanding students. But the children are too young to determine how studious they are or how they will develop.

Some one else may say that since these schools provide a superior education, far above the average school in the country and since there is a distinct advantage in studying in these schools which will enable the children to enter the better paid professions, the children of the poor should be admitted. This will promote a fairer distribution of incomes in society. This argument needs to be examined more closely.

Economic Reasoning

Economic reasoning is a powerful tool for evaluating the merits of policies. Economic reasoning proceeds on the basis of models. Since we are talking of rich and poor, we have to ask the question explicitly—what is a fair distribution of income? Our average per capita income per year is about $750 or say Rs. 60,000 per year. Now which distribution of incomes is fairer? All having the same amount or say 3/4 of the people having, say 100,000 a year while the rest earn Rs. 25,000. How does one decide on this matter?

One of the first rules of policy analysis is that you can never prove that a policy is desirable by only listing its benefits. It goes without saying that almost any policy anybody can dream up has some advantages. We see this by reading the speeches of any politician in the press. If you want to make a case for a policy it’s not enough to list the advantages only or even state the advantages and disadvantages, the pros and cons, the good and the bad. We have to weigh them, the good versus the bad, the advantages against the disadvantages, the pros and cons, the costs against the benefits.

Also, every policy measure has gainers as well as losers. One must set the gains against the losses and see the net gains. Politicians are always citing only the gains when they put forward a new proposal. But how does one weigh the costs to some versus the benefits to others without some moral principle — an understanding of what constitutes justice?

One approach to justice which has come to prevail in this country not only among politicians but even among ardent nationalists is that the majority should decide. But a majority decision need not be just. Suppose the majority decide that those belonging to the ethnic or religious minorities should have their hands amputated, or should be shut out of all state schools, would that constitute justice?

When the Equal Opportunities Bill was being discussed it was argued that leading Buddhist schools (they are now state schools) should be confined to Buddhists, thus gainsaying the area rule. Muslims in Maradana who reside close to the leading Buddhist schools have no claim although they may qualify under the area rule.

Another rule of the authorities is that state schools should limit the admission of children of minority religious groups to the same ratio as prevailed at the time of take over of the schools by the government. If they are state schools should there be discrimination against the minority religionists? It must be noted that nobody is allowed to build new schools since the State has a monopoly of education (barring the so-called international schools which are a viable option only for the affluent). If the area rule is modified, how can these rules be reconciled? How can the State ensure that every child finds a school where he is taught his religion?

Typically those who talk of majority rule in a democracy in the west always temper their views with some concept of individual rights that are either inalienable or alienable only under very specific circumstances. This is the approach in all western democracies. We too have a list of rights set out in our Constitution. But they are not accepted with respect to the minorities in some influential quarters.

Democracy is not an ideal system of government but acceptable for want of something better. As Churchill said democracy is the worst form of government, but other forms are worse. Does democracy lead to good outcomes, particularly in the Third World. The minorities in these countries would say ‘no’, the latest being in Nigeria.

When is it good for a majority to deny something to a minority? When is it allright for a majority community to overrule a minority demand? Most people would prefer a system that can avoid such outcomes. This is the issue in the civil war in the north and east where the Tamil minority feels they should look after their own affairs. What would it take to ensure that the system produces just and fair outcomes if the minority is to form part of the same state?

At the time of Independence the representatives of the two communities arrived at a constitutional settlement which stood dissolved with the enactment of the Republican constitution of 1972. We now need a new constitutional settlement between the communities.

To return to the question of what constitutes justice, it’s not a suitable argument to say it must be decided by the majority. Whoever bears the cost of education in the prestigious schools, the cost is certainly higher than the cost in a village school. There are said to be 250 schools in the island where there is only a single teacher. What is the average cost of education per pupil? The government is spending a certain amount of money each year on education- primary education, secondary education and university education. What should constitute a fair distribution of such public expenditure among the schools? Should it spend the same amount per pupil on every school or spend more on the pupils in the prestigious schools? For that matter should it not spend more per pupil on undeveloped or backward schools?

If the government spends more per pupil on prestigious schools it is being manifestly unfair since the poor cannot afford to enter these schools and a larger subsidy is thereby being given to the better off. The main thrust of the argument against the denominational schools in the fifties was that they were receiving a disproportionate amount of state funds. In spite of the change of ownership of these schools (they are now owned by the state) they still enjoy a disproportionate state subsidy. Should this state of affairs continue?

Economics must be put to action to solve this problem. Equity requires that the subsidy per pupil should be uniform or even higher in the undeveloped schools rather than in the prestigious schools. One way to solve the problem is to allow these schools to charge top up fees. Presently they are charging, illegally, enormous sums of money by way of capitation fees, a once and for all charge. There are allegations that school heads are pocketing the money partly or wholly.

The sensible course would be to legalize top up fees. As it is, parents who fail to obtain admission to these schools seek recourse from the Supreme Court on fundamental rights applications. But there is a problem. Everyone who applies to join a particular school cannot be admitted because the number of vacancies is less. So, a selection has to be made. Such situations where demand exceeds supply always creates a market whether it is for school places or for kidneys required for transplanting.

The solution offered by economics is price. So, a capitation fee being levied is a way to ration out supply. How can one prove that this solution enhances welfare? Economists invoke the law of diminishing marginal utility which implies that a thousand rupee note for a rich man has less utility than for a poor man. So if you take Rs. 1,000 from a rich man and give it to a poor man, then aggregate utility or satisfaction or happiness is increased if we assume that happiness can be equated with income.

Someone might say income can not be equated with happiness but this is a workable assumption which will be acceptable to many. Therefore the policy of charging a capitation fee from the affluent parents who seek admission for their children to the prestigious schools and then distributing such money to the poorer students either directly or indirectly by giving it to the less developed schools is a way of increasing welfare or total happiness.

Even if the State were to keep the budget allocation for education unchanged and reduces taxation instead, the conclusion is still valid, for taxing creates disutility and a reduction in taxes increases the utility or happiness of the taxpaying affluent. Similarly, any policy measure which increases the gains of some more than the losses of the losers is a desirable economic policy.

If the losers lose more than what the winners gain, the difference is a deadweight loss and we can call such a policy economically inefficient and the measure of the unattractiveness of the policy is the deadweight loss.

In any proposed policy measure it is useless talking only of the gains while ignoring the losses. The criterion of economic efficiency dictates that we measure all gains and losses in terms of the willingness to pay and determine the net outcome. Consider the on-going civil war in the north and east. The war costs the people about Rs. 50 billion each year. But the government recovers by way of earmarked taxes only half this amount in the form of National Defense Levy.

There are gainers as well as losers. The gainers are the soldiers, the arms dealers, the nationalists who have a psychological satisfaction in carrying on the war to victory. All their utilities can be summed. The losers are all those who pay for the war effort by way of taxes. We can measure what the loss is by finding out how much the losers are willing to pay to win the war.

It is not infinity. More and more losers will reach the limit of what they will pay to win the war. As the tax increases the losses of utility or happiness increase faster. Sooner or later the point will be reached when the losers losses will reach excessive levels outweighing completely the gains of those who want to continue the war. At that stage it is better to stop the war to increase happiness.

One does not know whether we have reached this stage. But one thing is certain, such a stage is inevitably reached. Even in Nazi Germany such a stage was reached and a group of German patriots conspired to assassinate Hitler. In the case of Japan the stage was reached only after the fall of atom bombs on Hiroshima and Nagasaki. Unconditional surrender was accepted by both countries.

Economic reasoning has much to offer in several other fields. One of the post war developments in Economics is Game theory. The antics of the two political parties with regard to the ethnic issue can be explained in terms of the "prisoners dilemma". There are two prisoners in separate cells who cannot communicate. They are separately interrogated. If they both tell the same story they can both escape. But each one doesn’t trust the other and must guess what the other will tell. Similarly, the two parties don’t know what is the solution of the other. The best solution is when each can trust the other and will agree with any solution agreed to with the LTTE, and will not create antagonism against the other among the masses.

A mutually agreed solution has to be put to the adversary- the LTTE. Whatever concessions are offered by the government should be acceptable to the opposition so that they will not make an issue of such concession. But mutual trust will not be forthcoming if the Opposition has grievances with regard to other issues like unfair electoral practices or if violence is unleashed against them by hoodlums with the covert backing of the government. The government has a duty to ensure safety of life and property of the opposition. If it fails to do so it will forsake the much needed trust and confidence of the opposition and a mutually agreed solution to the ethnic problem may not emerge.

There are many other problems where economic principles and criteria can be applied to determine whether a particular policy is desirable or not. Consider the legalization of hooch. It will bring tax revenue to the government. But this is not in itself a social benefit. From the viewpoint of society, which is what is relevant for cost/benefit analysis, this is only a transfer of money from one man to another and they are neither gains nor losses? What the tax collector gains is a loss to the taxpayer and there is no net gain socially.

Now consider the cost of law enforcement against the illicit distillers. The Police and Excise who have to enforce the law which prohibits hooch incur costs in raids, in prosecuting hooch distillers in courts etc. If home distilling of liquor is legalized these costs will be reduced and hence can be considered a social benefit. There are also costs to the distillers in trying to avoid detection. They may be even bribing the Police and Excise. If hooch is legalized they will save these costs. Of course the cost of hooch might come down if it is legalized which will promote greater consumption.

At this point someone might say that increased consumption of liquor is not conducive to human welfare and should not be promoted. But economics separates the moral dimension as long as there is voluntary consumption. So the increased consumption has to be considered as a social benefit rather than as a social cost. We have to accept this assumption to apply cost/benefit analysis.

Whenever someone buys, a good economists say he is earning consumers surplus since the maximum price he is willing to pay for it invariably exceeds the market price. In cost/benefit analysis consumers surplus is a source of benefit. So when hooch is legalized there is consumers surplus created. When the price comes down, the producer does not suffer a loss because his costs have come down. A precise calculation of the costs and benefits may be possible. Therefore legalization would create a net benefit and hence the policy is desirable.

It must be noted that even economic growth has costs as well as benefits. Growth benefits individuals because it allows them to consume more in the future. The conditions that create growth impose costs on individuals, who must work harder and consume less (save) in the present. The environmentalists have of late spotlighted the environmental damage and sparked off a serious debate about economic growth.

(With acknwledgements to the book "The Armchair Economist" by Steven E. Landsburgh — The Free Press 1995)

CSE enforces new reporting format to ensure better disclosure

The Colombo Stock Exchange (CSE) has introduced a new format for quarterly financial statements by listed companies with effect from the quarter ending December 31, 1999, CSE said.

CSE Director-General Hiran Mendis explained that these measures are being enforced in order to ensure better dissemination of information and compel more disclosure. He said that Sri Lanka is ahead of the Indian sub-continent in its quarterly reporting requirements on listed companies.

Told that companies here do not have to declare the emoluments of senior managers paid above specified floors to their shareholders, Mendis said: ``We are ahead in some areas and behind in others.’’

It is now compulsory that all quoted companies give their shareholders the net asset value per share for the quarterly reporting period with the figures for the previous comparative period as well as the highest and lowest market prices of their shares recorded during the quarter and a year earlier.

Under this format, certain minimum requirements have been imposed. These include a balance sheet and a profit land loss account with the P & L account prepared on a cumulative basis for each subsequent interim period in the financial year with figures for the previous corresponding periods also prepared on a cumulative basis for purposes of comparison.

Where the reporting company is a holding/parent company, it is required to separately disclose the results of such holding/parent company and the group as a whole.

Also, CSE has required an additional compulsory column in the profit and loss account indicating the variance calculated against the result of the previous comparative interim period as against current interim results. While some companies previously provided these figures, others did not.

Explanatory notes are also required on the following matters: *A statement that the same accounting policies and methods of computation are followed in the interim accounts as compared with the most recent annual financial statements or, if those policies or methods have been changed, a description of the nature and effect of the change. *Material events subsequent to the end of the interim period that have not been reflected in the financial statements for the interim period. *The effect of changes in the composition of the assets and liabilities of the enterprise during the interim period, including business combinations, acquisition or disposal of subsidiary and long term investments, restructuring and discontinuing operations. *Changes in the contingent liabilities of a material nature since the last annual balance sheet date. *Liability to management fees or any other similar expenditure not provided for in the interim accounts. *Any material change in the use of funds raised through an IPO/Rights/Debenture issue.

New 4-star hotel in Wadduwa readies for August launch

A new 56-bed luxury four star hotel at Talpitiya, Wadduwa, is gearing for full operation by August/September this year, the company announced.

This new hotel, Swiss Hotel Lotus Flower, has been built by Otto Mueller, Chairman/Member of the Swiss Hotel Association and the Chairman/Managing Director of Lotus Flower International (Pvt) Limited, the owners of the new property. Mueller, a frequent visitor to Sri Lanka from 1980s selected the new hotel’s site some time ago and designed the property to suit the needs and tastes of the upper-end of the Swiss tourist market, the company said.

Mueller has taken a special interest in growing vegetables, fruit and herbs on the grounds of the new hotel which has not only flower plants blooming to attract the visitors but also consumables.

He recently bought three acres of land near the hotel to produce all the fruit and vegetables that will be needed when it is in operation. A medium size farm is also planned on this land, the owners said.

A company news release said that Mueller has begun marketing the hotel for the next season giving it wide coverage in Switzerland and is planning to market it in Britain and elsewhere in continental Europe by participating in various travel trade events.

Mueller believes that with tourist arrivals topping 400,000 last year, a stable political situation will accelerate arrivals in the near future.

11.3% profit growth in peak performance in banking sector
Commercial Bank posts strong Rs. 658.4 mn. after tax profit

The Commercial Bank of Ceylon Limited has reported one of the strongest performances in the local banking sector in the year ending December 31, 1999 although its profit growth after tax of 11.3% did not keep pace with the 19.3% growth in income.

The bank’s just published annual report reveals that deposits and advances had grown healthily at 19.2% and 30.3% respectively, well ahead of the projected 12% industry average for both indicators.

The bank’s Chairman, Mr. M.J.C. Amarasuriya, said that its performance should be viewed in the context of many setbacks in the domestic economy including the 4.1% decline in export earnings in dollar terms. He noted that the bank had achieved a 8.3% growth in rupee terms in its export turnover last year outpacing the national performance of a 4.5% gain.

The DFCC Bank is now the major stakeholder in the Commercial Bank with a 29.8% stake in its equity. The other major shareholder of the bank is the Sri Lanka Insurance Corporation which owns 24.6% while its Life Fund owns a further 5.1%.

Amarasuriya noted in his review that Sri Lanka could benefit from an inflow of Indian investment. He said that at present there are about 42 Indian projects in operation here with a total investment of USD 28 million. Ten more projects worth USD 23 million are under construction.

"Although foreign direct investment flows to South Asia reduced, Sri Lanka may still be able to achieve its FDI inflow momentum due to these Indian investments,’’ he said.

He pledged that the bank would continue to work towards a new era in banking blending new technology with a warmer service.

The bank’s Managing Director A.L. Gooneratne said that the after-tax profit of Rs.658.5 million was up 11.3% from the previous year. This was significant in many ways in that it surpassed both GDP growth estimated at 4% for the year and inflation projected at around 4.7% in 1999.

More importantly they had achieved this profit growth under conditions where business in general had an average year with the economic mood pessimistic. "Few companies embarked on major initiatives and the attitude was one of `wait and see.’ Thus, given the pessimism that pervaded much of the economy, our post tax results are staggering,’’ he said.

He said that although they were more than satisfied on the bank’s performance they will not allow complacency to set in. One of their strengths was that they had always built on the previous year’s performance.

"Our challenge now is to increase margins in a tightly competitive environment and learn to work in economic conditions which are less than friendly,’’ he said.

Gooneratne was confident that their partnership with the DFCC Bank holds much greater promise for the future.

The partnership had resulted in a wealth of ideas and business strategies and business committees at the highest level are looking for more areas for creating more value through synergy. While they have taken a number of decisions on working together, the boards of both banks are convinced that the potential synergies of the alliance are much greater.

The Commercial Bank is retaining its 40% dividend payment for 1999. A 28% final dividend has been recommended by the directors on top of the 12% paid last November.

The directors of the Bank are: Messrs. M. J.C. Amarasuriya (Chairman), J. S. Mather (Deputy Chairman), A. L. Gooneratne (Managing Director), H.S. Wanasinghe, B. R. L. Fernando, M. L. Mack, P. A. Pematilaka, D. J. Amarasinghe and A. N. Fonseka.

Base oil prices down last year, but now rising
Caltex profits from low input costs and high interest earnings

Despite the sharp escalation in global crude oil prices, the price of base oil which accounts for about 80% of the input costs of Caltex Lubricants had bottomed down during the fourth quarter of 1999 and prices are still down on an year-on-year basis in US dollar terms, Asia Securities had reported in a research report on Caltex Lubricants.

However, base oil prices have climbed by over 20% since December 1999, the report said. But in the context of Caltex raising its lubricants prices by an average 15% in February, Asia did not envisage a significant deterioration in the company’s operating margins.

The report said that Caltex will be not be pushing to raise prices again if base oil costs continue to climb. This is because the company sets the market price, despite the advent of competition from imports, because competitors are restricted by law from under-cutting Caltex’ ex-factory prices at least until 2004.

Caltex has reported a 10% year-on-year profit growth to Rs.148 million in the fourth quarter of last year lifting cumulative earnings to Rs.659.3 million. Improved operating profitability combined with substantial interest income had boosted pre-tax earnings. However, a significant increase in taxation in the fourth quarter of last year had creamed off some of these earnings.

The Asia report noted that Caltex holds a government guaranteed monopoly on local manufacture of lubricants until 2004. In fact, competition from imported finished lubricants only entered the market last January "following a long delay in issuing licences to short listed importers after the expiry of Caltex monopoly in March 1998.’’

Asia said that the lack of competition in the fourth quarter of last year enabled the company to show a steady volume growth of 5% to 6% year-on-year.

Asia also estimated that the company had over Rs.700 million in short term investments at the end of last year and earnings from this source boosted its other income from Rs.0.5 million in the last quarter of 1998 to Rs.21.3 million in the fourth quarter of 1999.

Although the pre-tax margins were up to 30.8% at the end of the fourth quarter from 21.6% a year earlier, a sharply higher tax charge of Rs.63.3 million over the period had dampened the company’s net profit growth to a moderate 10% year-on-year to Rs.148 million.

Royal Palms settle NDB preference dividend

Royal Palms Beach Hotels Limited, one of the newest five star resorts along the southern coast, has been operating profitably during the current financial year with an earning of Rs.27.4 million during the first 9 months ending December 31, 1999, shareholders have been told. This compared with a Rs.9.9 million profit during the comparative period a year earlier.

The company has announced that it has appropriated Rs.48.1 million arrears of preference dividends payable up to March 31, 1998 to the National Development Bank (NDB). This had resolved the dispute between the company and the NDB regarding the arrears of preference dividends reported in the last audited balance sheet for the year ending March 31, 1999.

This payment has been made out of retained profits of Rs.75.8 million retained in the company’s profit and loss account. These profits comprised the 9-month earnings for the current financial year plus Rs.48.4 million brought forward profits.

After payment of the preference dividend, Royal Palms is carrying Rs.27.6 million retained profits in its books.

The company has an issued and fully paid capital of Rs.550 million comprising 40 million ordinary ten rupee shares and 15 million 15% cumulative redeemable preference shares.

Royal Palms is an associate company of Mercantile Investments Limited which also controls the Tangerine Beach Hotels Limited and Nilaveli Beach Hotels Limited and has a sizable stake in Nuwara Eliya Hotels Company Limited (owners of the Grand Hotel) which it manages.

Rs. 65 mn. after interest trading loss
Intercontinental sale profit boosts Oberoi owner’s bottom line

Asian Hotels Corporation Limited, the owners of the Hotel Lanka Oberoi and a 43.3% stake in Trans Asia Hotels Limited, has seen declines in group turnover and trading profitability after interest during the 9 months up to December 31, 1999, shareholders have been told in an interim report covering the 9-month period. The group incurred an after interest trading loss of Rs. 65.1 million during this period.

But a hefty Rs.89.5 million profit from the disposal of its subsidiary, Hotel Services (Ceylon) Limited, the owners of the Hotel Ceylon Intercontinental, has brought its bottom line back to the black. Asian Hotels owned 51.6% of Hotel Services.

The group’s bottom line at the end of the period under review was a profit of Rs.75.2 million, up sharply from a profit of Rs.22.2 million a year earlier.

The interim report indicates that the company is continuing to incur heavy expenditure in arbitration expenses incurred in its continuing dispute with Oberoi Hotels (Pvt) Limited of India who managed Hotel Lanka Oberoi. An expenditure of Rs.8.3 million had been incurred on this account during the period under review, down from Rs.44.4 million spent a year earlier.

Asian Hotels which owns the prestigious Crescat Residencies and shopping mall in Kollupitiya has one of the highest issued capitals among companies quoted on the Colombo Stock Exchange. Its issued capital is Rs.2.2 billion and as a result its earnings per share for the 9 months under review after extraordinary items was just 34 cents.

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