The Island business

Company announces legal action
Trading on Grain Elevators to resume on Monday

The suspension on the trading of shares of Ceylon Grain Elevators Ltd. (CGE), one of the top market capitalized companies on the Colombo Stock Exchange (CSE), will be lifted on Monday, the CSE announced on Thursday. Since Friday was a public holiday, there was no trading on that day.

This followed an announcement to the CSE by the company of the imposition on it of a customs penalty of Rs. 1.2 million for allegedly diverting duty free maize imports to the free market.

CGE in its announcement described the customs order as a "forfeiture'' of Rs. 1,194,595,704 and claimed that "there is no basis in law and in fact for the imposition of a forfeiture of this nature.''

The company said that it is in consultation with its legal advisors with a view to taking steps to challenge the forfeiture imposed by the director general of customs. It said that it would make a further announcement in due course on the steps it has taken.

Analysts are keenly watching how the CGE share will perform on the bourse once trading resumes on Monday. Several brokers have been strongly recommending the share as one with considerable growth potential for the past many weeks before the first news of the July 22 customs order first broke.

In a market focus, Asia Securities last week said that they see "a possibility of retail selling'' once trading resumes and it is also likely "that uncertainties over the timing and outcome of the court case could be a drag on the stock's valuation in the short term.'' Asia therefore downgraded its "buy'' recommendation on the share to "hold.''

CGE said in its announcement to the CSE that the "forfeiture'' was treble the value of the maize in excess of 12,000 Mt supplied to the Triposha program of the health ministry and maize supplied as special grain feed to farmers directly and through dealers.

The customs have given time till Aug. 28 for payment of the "forfeiture,'' CGE said.

Asia said in its report that it understood through its contacts that CGE has been selling crushed maize imported duty free as an intermediate product for direct consumption and further processing by other animal feed manufacturers.

"Apparently, this activity has been conducted on the basis of the provisions of the memorandum signed between the company and the government. It is understood that the MOU allows CGE to sell intermediate products (with a high maize content) as `straight feed' for further processing and direct consumption.

"Also, we understand that these straight feeds were sold mainly to government departments and rival feed millers and that the aggregate value of such transactions is around Rs. 300 million,'' Asia said.

The brokerage said that it believes that CGE "has a strong case in its favour'' as it has been selling intermediate products in the domestic market for about 8 years now "and that too on the basis of the provisions of the MOU signed between the company and the government.''

"Secondly, given the quality of its management, strong financial performance and outlook, we find it hard to believe that CGE would have intentionally evaded duty on grain imports especially when the reported duty evasion (reportedly on aggregate intermediate turnover of Rs. 300 million during the past eight years) is not really significant,'' Asia said.

It reported that legal opinion the company had taken was in its favour and CGE is likely to go to courts on this issue.

Posts after tax profit of Rs. 102.6 million
Record year at Mercantile Investments

Mercantile Investments Ltd., which celebrates its 35^th anniversary this year, has posted its best ever performance with a profit after tax of Rs. 102.6 million, up 26% from a year earlier, the company has announced in its just published annual report and accounts for 1997/98.

The company which began business in 1963 with a capital base of Rs. 50,000 - "modest even for that time'' it says - now boasts shareholders' funds of over Rs. 395 million. In addition to its finance company business, the group has investments in hotels with three quoted hotel companies under its banner. They are Tangerine Beach Hotels Ltd., Nuwara Eliya Hotels Ltd. and the newest Royal Palms Beach Hotels Ltd. The group also has a 10% stake in Hotel Services (Ceylon) Ltd., the owners of the Hotel Ceylon Intercontinental.

The group broke ground for its entry into the hotel industry with the commissioning in 1971 of the Nilaveli Beach Hotel, the first Tourist Board approved development on the East Coast. Despite difficult conditions following the outbreak of the war, this hotel continued in business to the present day.

Reviewing the year, the company's chairman, Mr. George Ondaatjie, has reported that MI had been able to maintain a healthy growth in both income and profits with increases in lease and hire purchase business by 36% and 22% mainly contributing to this increase.

"The cost control measures and new strategies adopted in recoveries coupled with the increase in revenue helped the company in recording a profit after tax of Rs. 102.6 million which is a growth of 26% over the previous year,'' Ondaatjie said. The previous year's post-tax profit was Rs. 81.5 million.

The company had no liability to taxes both during the year under review and the previous year due to substantial capital allowances arising out of leased assets and brought forward tax losses, the report said.

The chairman said that in a declining interest rate scenario during the period under review, the deposit base of the company had grown 44% to Rs. 757 million at year -end. The loan portfolio had also increased 19% to Rs. 693 million.

"The shareholders' funds of the company also increased to Rs. 397 million at year-end. The company was able to maintain required liquidity and capital adequacy ratios well within the recommended Central Bank regulations,'' Ondaatjie said.

He said that they had reorganized their insurance division during the year and recruited additional marketing personnel to increase targets. The results were reflected in increased insurance commissions totaling around Rs. 5 million at the end of the year.

"The company made strategic investments in the tourism industry during the year under review. The benefits of these will accrue in the future. The initial public offering of Royal Palms Beach hotel in March 1998, promoted by Mercantile Investments, was oversubscribed. In addition, 10% of Hotel Services (Ceylon) Ltd., owners of the Hotel Ceylon Intercontinental, was acquired,'' Ondaatjie said.

Heed also announced that MI would promote a new BOI company this year. A parcel of land behind their Galle Road, Kollupitiya, building has been provisionally allotted by the UDA for this purpose. The new company will offer a modern fitness centre, a restaurant, apartments and a large parking structure.

Mercantile Investments' holdings in quoted hotels according to the accounts are: Associated Hotels Co. Ltd., owners of the Lihiniya Surf at Bentota, 1,019,859 shares, Ceylon Hotels Corporation 40,000 shares, Hotel Services (Ceylon) Ltd. 1.8 million shares, Tangerine Beach Hotels 1.7 million shares, The Nuwara Eliya Hotels Ltd. 260,508 shares, Royal Palms Beach Hotels 4.3 million shares.

The company also owns a slice of 127,000 shares in Wornels Reef Ltd., an unquoted company operating a beach hotel at Beruwela.

Dividends totaling 175% have been paid to MI shareholders during the year under review on a share capital of Rs. 25 million. The previous year, the dividend payment was 100%.

The directors of the company are: Messrs. G.L.A. Ondaatjie (chairman and managing director), Naveen. D. Rajapakse (deputy chairman), Sumith Adihetty (deputy managing director), G.G. Ondaatjie (finance director), Lucian. V. Perera (legal director), Bernadette Assauw (deposits director), Mahes Amarasekera (recoveries director), Angeline Ondaatjie (executive director), Travice Ondaatjie (executive director), Kolitha Rodrigo (executive director), Gamini Divitotawela and Justin. S. Dominic.

Namal tilts strongly towards equities
Will it pay in the current scenario?

The National Equity (NEF), Sri Lanka's first unit trust, has increased its overall asset allocation in equities from 64.17% last year to 78.8% in 1998, National Assets Management Ltd. (NAMAL), the fund's managers have told unit holders.

Namal has reported that the composition of NEF's income has changed "significantly'' with dividends and capital gains giving substantially more returns in 1998 that the previous year. The return from these areas had surged to 68.7% of total income this year from 15.8% the previous year, the managers have said.

Analysts however noted that the sharp downturn on the Colombo Stock Exchange in recent weeks may change the picture at least as far as capital gains are concerned. As at March 31, 1998, the market value of NEF's equity portfolio was Rs. 772.1 million while its cost was Rs. 949.6 million. The market value is expected to have declined further with the downturn on the CSE since April.

The year under review, however, has seen Rs. 56 million realised profit on the sale of investments, up from Rs. 17.8 million a year earlier. Dividend income was Rs. 21.5 million, up from the previous year's Rs. 16.5 million.

Namal has said that its last tax free dividend of 80 cents per unit declared in March has given investors in the fund a cumulative Rs. 6.80 return per Rs. 10 invested at the inception of the fund six year ago. However, the ten-rupee unit redemption value was down to Rs. 7.77 on Wednesday's while the manager's selling price per unit the same day was Rs. 8.30.

The manager attributed three reasons for the change in asset allocation and the composition of NEF's income. They were:

*Weighing asset allocation towards equity on the expectation of lower interest rates during the year and impressive corporate results.

*Shifting asset allocation within the equity portfolio in order to enhance the long-term performance. The fund had divested shares, wherever possible with capital gains, and reinvested in shares it perceives to have high potential growth in the future.

"The net divestments in shares amounted to Rs. 20.3 million allowing the fund to preserve the cash available for future investments and distribution,'' the managers said.

*The NEF's entitlement to distribute tax-free dividends ended in March 1998. "The strategy of increased exposure to equities and therefore deriving the majority of income from equities, dividend income and capital gains, will minimize the impact of taxation on unit holders,'' the managers said.

The managers reported that efficiency in fund management had increased during the year under review. This is demonstrated by the cost to income ratio decreasing from 20.7% in 1997 to 19.8% in 1998.

The NEF which has 16,000 unit holders in its books expects to improve its performance as conditions in the Colombo stock market look up.

The company has paid Rs. 2.8 million as registrar's fees, Rs. 11.6 million as manager's fees and Rs. 2.5 million as trustee fees during the year under review.

The DFCC Bank is the biggest stakeholder of Namal, the managers, with a 34.99% stake. The other stakeholders are the People's Bank and ETF Board (19.99% each) and ADB and Capital International Inc. (12.49% each). The Trustees of NEF are the Hongkong and Shanghai Banking Corporation Ltd.

The financial period under review saw Namal launch two new unit trusts, the Namal Growth Fund and the Namal Investment Fund. According to Mr. C.A. Cooray, the company's chairman, "this will provide the small investor or saver an opportunity of realizing the fund management expertise usually available to high net worth individuals and large organisations, at an affordable cost at a single location.''

The Namal Growth Fund whose fixed offer period ended in August 1997 had collected Rs. 97 million as at March 31, 1998, and invested Rs. 71 million in equities, placing the balance in short term deposits.

The Namal Income Fund launched in November 1997 collected Rs. 104 million in four months. This fund does not invest in the share market and is active in corporate and government securities.

The depreciating yen

by Kanes
The health of the Japanese economy is of crucial importance to the rest of Asia. Japan is the largest foreign investor and aid giver in the region; it provides the largest single market for Asia's exports and it is the major supplier of imports to most countries; it is at the same time the most important source of bank credit. A strong Japan would expand the demand for Asia's exports and increase foreign investment and bank loans to stimulate the ailing Asian economies to speed up their recovery. These hopes, however, are unlikely to be realized as Japan, after eight years of stagnation, appears to be sliding into an economic depression.

Negative Growth
The Japanese economy which grew by 3.7 per cent in 1997 is expected to show zero or negative growth in 1998. It contracted by 1.3 per cent in the first quarter of 1998; at an annualized rate this is equal to a negative growth of 5.3 per cent. The US economy, by contrast, is expected to grow at 2.7 per cent in 1998 and the German economy by 2.6 per cent. Unemployment rate is at the record level of 4.1 per cent as compared to 3.3 per cent in April 1997. Weak consumer spending is reflected in the fall of 50 per cent in land prices since 1990, decline in housing investment for 16 months and the fall of wholesale prices of about 1.7 per cent.

Banks are still suffering from over-borrowing and over-lending in the 1980s which saddled them with about 77 trillion yen or $570 billion of doubtful debts. Some $85 billion in bad loans was written off in 1997/1998 but there is $156 billion of non-performing loans left and of this $50-100 billion are likely to go bad. It is expected that banks would take about three years to clean up the mess and start lending again. There are fears of a debt deflation in Japan as in the 1930s when falling prices increased firms' debt burdens and depressed demand further.

Interest rates are so low-with the official discount rate at 0.5 per cent-that they cannot go down further, but confidence is so weak that firms and households are reluctant to borrow even at near zero rates. In fact, Japanese asset managers are expected to invest $150 billion overseas next year, four times the amount of the previous 12 months, because of low interest rates in Japan. Lack of confidence in the banking system has also induced the people to increase their deposits with foreign banks. The only alternative are a permanent tax cut and increase in public spending to stimulate the economy. Increase in public expenditure will not crowd out private investment as there is little private investment taking place. The US and other developed countries have been persuading Japan to take these measures for some time.

Although the Japanese authorities have vowed to push ahead with reforms such as reduction of taxes, increased public spending and restructuring of banks and have made various announcements, they fall far short of a clear commitment to a concrete programme to revive the economy. Stimulative spending of $800 billion over six years have failed to kick start the economy, the temporary tax cut in December 1997 resulted in increased savings rather than spending because it was not permanent, the latest stimulative package of 16 trillion yen or $114 billion passed in April is beset by a conflict between central and local governments and is not expected to take effect before the second part of the year. Japanese authorities have announced that they would reduce taxes even below levels in the West but this is yet to be seen.

Japan has taken some other measures recently to revive the economy. A new Financial Supervision Agency was set up in June to take over the inspection and supervision of financial institutions from the Ministry of Finance. Its main task is to liquidate bad loans and it has already began to check the bad loans amounting to $157 billion of the top 19 banks. Plans have also been formulated to establish a ''bridge bank'' to take over failing financial institutions and a new commission to resolve disputes over property held as collateral, a major obstacle for getting bad loans off bank's books. The government is also making arrangements to formalize the use of the hitherto unutilized $214 billion fund set up last December to recapitalize banks and protect deposits.

The government also has stated that it would cut taxes after the upper house elections in July. Japan's effective corporate tax is 50 per cent as against 41 per cent in USA and 33 per cent in UK and the highest individual tax rate is 65 per cent-which are relatively high. These measures, however, have apparently not convinced the public of the government's commitment to carry through a concrete programme of revival and the stock market and the yen are continuing to fall.

Adverse Effects of Japan's Recession
Japan provides a market for nearly one-fifth of the exports of East Asia. It is their largest single market. The current recession has tended to reduce East Asia's exports to Japan and delayed its recovery. For example, 20 per cent of China's exports go to Japan. Japan has further reduced her investments in East Asia where she invested about $11 billion in 1997. China, for instance, estimates that Japan's investments in China would decline from $4.3 billion in 1997 to $2.3 billion in 1998-or nearly by half. Indonesia, Malaysia and Thailand which were perhaps the largest recipients of Japanese investments in the past, can expect little investments from Japan this year or even a few years ahead.

This is compounded by the virtual stoppage of Japanese bank credit in East Asia According to the Bank of International Settlement, Japan had $250 billion in loans outstanding in Asia at the end of 1997 or 32 per cent of total foreign loans to the region. About $30 billion of this is likely to go bad. Japan had recalled $26 billion of loans in the second half of 1997 and stopped new lending. For example, Japanese banks had lent $76 billion to Hong Kong; but they have now closed down local offices of seven banks and recalled 10 per cent of loans granted to leading companies. In China, about 30 per cent of bank loans are estimated from Japanese banks but China has not been subject to pressure by Japanese banks like Hong Kong. Recalling loans and restriction of new credits when East Asia is gasping for liquidity are bound to delay its recovery.

Yen's Depreciation
The deepening recession in Japan is reflected in the depreciating yen. The yen reached its highest point of 79 to the dollar in April 1995 and since then has fallen in value to around 140 to the dollar in June 1998-the lowest point in seven years. It is continuing to fall and may even reach 180 or 200 to the dollar before long. In fact, Japan Research institute expect the yen to fall to 170 against the dollar. Intervention to stabilize its value serves little purpose, Japan has spent about $20 billion of its reserves since April to defend it but failed. The United States joined Japan to intervene jointly on June 17 when China began to complain about the yen's depreciation. Although the joint intervention pushed up the yen that day it began to fall thereafter as the market had no confidence in the Japanese government's willingness to put the economy night.

The depreciating yen is forcing all Asian currencies downwards, including Australia's and New Zealand's, and making it difficult for the currencies of crisis-stricken economies to recover. It is even threatening Hong Kong's and China's currencies which have so far remained stable despite the Asian currency crisis. Any depreciation of the Hong Kong dollar and the Chinese renminbi in the context of the Japanese recession would cause another round of Asian currency depreciation and even trigger a Wall Street crisis which would cause a worldwide depression. It is, however, unlikely that China or Hong Kong would devalue their currencies. It is true that the governor of the central bank of China said ''the depreciation of the Japanese yen is having a very negative impact on Chinese exports and imports, and the utilization of foreign capital'' but Chinese Premier Zhu Rongji has stated that China would not devalue its currency in the near future.

The depreciating yen makes Japan's exports cheaper and Japan's imports more expensive. The Japanese Ministry of Finance argues that a depreciating yen by boosting exports prevents the Japanese recession from becoming a depression. Sony, the Japanese transnational says that every yen the dollar gains increases its sales by $36 million. This is the major reason why Japan is allowing the yen to depreciate-it enables it to export its way out of recession. The depreciating yen tends to increase the US trade deficit with Japan, but the US is somewhat silent on this matter, as any check on Japan's exports at this stage in the absence of a domestic revival of demand, is likely to aggravate the recession. Further, a weak yen would help to keep US interest rates and inflation down and stock prices high.

On the other hand, the depreciation of the yen raises the yen cost of imports, for instance, of oil and raw materials. According to the Japan Research Institute, the ideal exchange rate for Japan is $1-123 and anything lower is unfavourable. For example, if the rate is $1-138, the negative effect of higher import prices neutralizes much of the positive effect of cheaper exports. On this theory, depreciation of the yen beyond a certain point instead of helping Japan to recover, will aggravate the current recession. As the present exchange rate is around $1-140 and therefore unfavourable, the expansion of domestic demand by tax cuts and public spending to revive the economy is all the more important.

The yen's fall would also tend to boost the yen value of dollar assets of Japanese banks and squeeze their capital adequacy ratio and the ability to lend. One yen depreciation against the dollar is estimated to equal one trillion yen of credit crunch. Thus, sharp depreciation of the year could delay the restructuring of Japanese banks to help the recovery.

The depreciating yen hurt directly those Asian economies whose exports compete with Japan's such as ships, electronics, and motor vehicles of Korea and Taiwan. The Hunydai Economic Research Institute in Korea forecasts that South Korea's exports would fall by $1.9 billion this year if the yen remains at 140 to the US dollar and further that there would be a shrinkage of exports of $11.8 billion over the next four years if the yen falls to $1-150. The fear of the depreciating yen has also led to a sharp fall in the Korean stock prices.

Taiwan's exports of electronics and other high-tech products also compete with Japan's and the Taiwan industry is much concerned about the depreciating yen. Malaysia has been forced to reduce exports of Malaysian made TVs, VCRs and washing machines to Japan as the weak yen has made Japanese factories more competitive. Depreciating Asian currencies, consequent, to the yen's depreciation on the other hand, is hurting exports of China and Hong Kong who are maintaining stable currencies.

The developing countries of Asia would benefit from cheaper imports from Japan. As all these countries manufacture goods with components imported from Japan, some of their exports too can be more competitive. Their terms of trade would be more favourable and their trade deficits with Japan would tend to be less. The depreciating yen would also reduce the debt service burden of yen loans. Most of the east Asian economies have substantial yen debts and they will benefit from lower debt service.

In China, for instance about 30 per cent of the loans as mentioned earlier, are from Japanese banks. These advantages, however, are likely to be offset to a great extent by the adverse effects of yen's depreciation-fall in Japan's imports from these countries, decline in Japanese tourist arrivals, diminution of Japanese Investment and loans and recall of bank credit.

There is a broad consensus among Asian analysts that the depreciating yen will usher in a deep recession or depression in Asia. It has been estimated that for every 1 per cent the yen falls against the US dollar, Asia's economic growth falls by 0.1 per cent. If the yen falls to 170 to the dollar or more, according to this calculation, it may not only trigger a second wave of currency depreciation in Asia but also worsen the recession in the region and tend to cause a worldwide recession.

Economic populism - at what price

By Analyst
In the past monarchs levied taxes and spent the money as they pleased. Some engaged in costly wars, others built tombs and monuments. But these monarchs were well aware of the limits of taxation.

They knew that productive enterprises must grow and people prosper. If the people are taxed too much they become less energetic, less productive and beyond a point may even revolt as happened during the French Revolution.

So these monarchs did not wish to kill the geese that laid the eggs but instead protected their stock.

This should be equally applicable for modern democratic states. But there is one important difference. Unlike the monarchs of the past, the politicians in a democracy have to be elected first. So they have to woo the voters to get elected to power.

They do so by making promises. They promise to provide new public services by the state. Thy promise to make what economists call transfer payments to the poorer sections of the community.

The present government promised to give bread at Rs. 3.50 and Samurdhi benefits to the poor. Past government introduced free education and converted the health service which was available to the poor during colonial times into a universally free health care system.

But the money to finance such programmes have to be found by taxation. If the question of how to finance such programmes is ever asked, the answer is that the rich would be taxed to provide for the poor.

Goods and Services
But in fact, the bulk of government revenue comes from indirect taxes like customs duties, turnover taxes and the tax, and not from income tax. Indirect taxes are invariably borne by the consumers who are by and large the middle and lower classes.

So the new services to the public promised by politicians as well as the transfer payments such as grants and subsidies to the poorer classes have to be financed largely by the poor themselves and not by the rich.

In any case, even if the entire wealth of the rich is confiscated, it will be a pittance and by no means adequate to finance such expenditure.

For a long time the state was able to hide the connection between taxation and the provision of extra public services and transfer payments. How did it do so? The government unlike any private sector borrower,can borrow without limit, because all money is issued by the state. The state has a monopoly of the issue of money so it can always repay its debt by creating new money if necessary.

The public are willing to lend to the state on the basis that such lending is a risk free investment to them. So the government is able to spend beyond its means and go beyond the willingness of the people to pay taxes.

The Tudor monarchs in England used the printing press to good effect with the invention of paper money. But such issue of new money creates inflation and raises the prices of goods. People find that their purchasing power has declined.

There is however the money illusion. People are deluded into believing that their money incomes go up. But the cost of goods and services may rise much more than their money incomes owing to excessive taxation or inflation caused by excessive government borrowing, particularly by borrowing from the banking system, when the Central Bank feeds the banks with the necessary liquidity to enable them to lend to the government. In extreme cases the government will borrow directly from the Central Bank creating inflation directly.

So people keep on demanding more and more public services and politicians promise them that only because they don't understand that they are paying for such services either through higher taxation or through inflation, the former reducing their money income while the latter reduces their real income.

In developed countries where the people are literate in economics, they question politicians as to how they hope to finance their promises to provide more services or more benefits and subsidies. In developing countries like ours, it is the duty of the professionals to expose the hollowness of such promises by politicians.

Ever since Independence the politicians have taken the people for a ride making and implementing radical welfare measures like universal free education and universal free health care, services which no developed country can afford to do without serious repercussions on economic growth.

Public Expenditure not Productive
Initially perhaps the government had to spend large amounts on health and education to provide the infra-structure such as school buildings, hospital buildings, medical equipment, etc. But the state has been unable to continue such investments because there are other more pressing needs for spending, such as the economic infra-structure of roads, bridges, ports, telecommunications, power, etc.

As the Central Bank Report for 1997 states "public investment in this area has been declining over the last fifteen years in the wake of increased resource constraints due to the growth in security expenditure and structural weakness of the budget."

Total public investment on economic and social infra-structure has declined from 16.5% of gross domestic product in 1980 to 5% in 1997. As a percentage of total government expenditure, infrastructure investment declined from 36.1% in 1980 to 18.9% by 1997. These are very significant declines and explain the sorry state of our schools, hospitals and transport services. They cannot be improved without spending money, money which is very short indeed.

As the Central Bank points out, it is now realised that such infrastructure services can be supplied by the private sector as well and the government has taken some measures to encourage it to do so.

The private sector has made an entry into power generation.

But the attitudes of the bureaucracy must change. Bureaucrats do not view the private sector with much sympathy. They do not realise that the private sector enterprises must obtain a return on their capital commensurate with the risks involved. They don't realise that the private sector will want to minimise the impact of foreseeable risks.

Much time was wasted in prolonged discussions about the price to be paid for electricity to be purchased by the C.E.B. Bureaucrats still have an attitude of mind which wants to checkmate the private sector enterprises. They are not happy with the private sector entering their preserves.

The East Asian NICS developed primarily through co-operation between their private and public sectors. We have yet to see any such co-operation developing. The private sector barons still go after politicians for favours, instead of concentrating on their business to meet competition.

Bureaucrats do not pay bills on time. The faster the flow of monet in circulation, greater will be the volume of transactions.

Cash management in the Treasury is like that of an insolvent company. Money voted by Parliament is dispensed in driblets. Meanwhile departments and agencies order goods, purchase them and use them but do not pay the bills.

The invariable excuse for delays in payment is that the Treasury has not released the funds. Such delays in the part of the government, the largest player in the economy, raises the need for working capital and retards the development of small and medium scale enterprises which are often the most dynamic sector in any economy.

The government is keen to assist the small and medium enterprises but bureaucrats nullify such efforts by delaying payments. During colonial times the government was the best paymaster. But not so now. The private sector should ask for interest payments on delayed payments.

Although the government has accepted a role for the private sector in providing physical and economic infrastructure services, it has not proclaimed a similar role for the provision of social infrastructure like health and education.

The last budget gave tax concessions to private hospitals. But private schools are still looked at with a jaundiced eye. Free education and the government monopoly of education is a sacred cow.

There is still ambivalence on the question of the medium of instruction. It is no doubt essential for children to know their mother tongue to inter-act with people in our society. But is Swabasha the best medium of education to acquire modern scientific knowledge? Are'nt the parents the best judge of how to educate their children?

Why should Muslim students be forced by law to be educated in Tamil if their parents prefer to educate them in Sinhala? Won't it strengthen relations of the Muslims with the majority of the people?

Why are international schools looked upon with hostility? Do they undermine equality at opportunity more than the discrepancies that already exist?

The benefits of free education have been captured by the middle classes in the urban areas. The best teachers are in the big prestigious schools in Colombo and the major towns. Essential teaching materials and laboratories are only available in 20% of the schools. 80% of the schools do not have any libraries.

Many schools in the rural areas do not have proper roofs to protect them from wind and rain. Nor do they have proper water supply and toilets. Where then is the equality of opportunity?

Parents of children attending the international schools have to pay for their education unlike those who obtain the superior education provided in the prestigious state schools under the scheme of free education. Some parents of such children also lie, cheat and deceive the school authorities to admit their children to such schools.

There is no equality of opportunity under the so-called national system of free education wheel the state controls education meticulously depriving the schools of any initiative or creativity in teaching.

The poor do get some education, a second class education which is no better than what was provided in the vernacular schools during colonial times, which was also provided free.

Studies in other countries have also shown that it is the better-off who benefit disproportionately from such welfare schemes. Studies in Britain showed that in health care, the wealthiest fifth of the population received 40% more public spending than the poorest fifth, in secondary education 80% more; in bus subsidies four times more; in university education five times more.

So to enhance equality of opportunity in education what is required is to levy fees from the middle and upper classes who obtain education from the prestigious state schools as it was prior to the introduction of free education.

Self-interested bureaucracy
Some one has pointed out that it is not necessary to have a Ministry of Eating to teach children how to eat. So is it for education Government officials have an interest in expanding the scope of their departments - the bigger the bureaucracy, the better the promotion prospects for them. They also love to exercise power.

Teachers like to be government employees rather than be employed by the private sector - their task is much easier; they have nobody to account to. The bureaucracy also prefers to monopolise areas of activity, rather than work in competition with the private sector not merely in order to grow but for the sake of an easier life. They will be shown up for their inefficiency and lethargy if the same activity is carried out by the private sector.

So the CEB doesn't want private power suppliers and education officials in any private schools. Free state provided education is a sacred cow. Politicians are afraid to make any changes. The mind set of the people is that it is a good thing which the wicked World Bank and the upper classes want to deprive the poor.

The Swedish Sociologist Mancur Olsen explained in his book "The Logic of Collective Action" how interest groups come to be formed and why, once they are formed, they are extremely hard to disperse.

So we have various pressure groups opposing the entry of the private sector into activities carried out by the state. The employees in the state enterprises oppose any sort of corporatisation or privatisation.

State employees do little work while getting pay and perks along with job security for life. As for education, the banner hoisted by the pressure groups is that of "fairness". Under this banner the middle class beneficiaries of state education along with teachers and educational bureaucrats seek to protect 'the transfers' of income to themselves rather than engage in economic production.

Collectively the public realise that state enterprise and state activity is producing very poor results; but as individuals each seeks his own benefit and politicians like to spend other people's money.

Spending money gives power to be used to benefit one's interests. Public spending is the main way in which politicians can exercise power in a democracy.

It is a naive belief that politicians are in power to serve the people - that they are self-less servants of public good. As Benjamin Franklin pointed out "as soon as a party has gained its general point, each member becomes intent upon his particular interest while thwarting others that few in public affairs act from a mere view of the god of their country whatever they may pretend."

Once the automatic assumption that governments act entirely in the public good is dropped, the motives of the politicians who exercise power can be seen for what they are.

People still believe that the state has resources to do anything. But they do not like to pay taxes or even pay for the services provided by the government. They tap electricity and water illegally. They are tempted to be "free-riders", calculating that others will pay. Economists treat as public goods those services like providing law and order or security where the "free riders" cannot be excluded.

Such services must be paid for by taxation. But there are other services like basic education or primary health care which have some characteristics of public goods, but are not really public goods which have to be financed by taxation. This applies to secondary education or university education.

As the government revenue is taken up with fighting the war, the money available for these services will not be adequate. So the quality of such 'free' services will necessarily drop while the demand for them will increase.

Other public goods like police service are also starved of funds. The lack of money undermines the capacity to govern, particularly when the shortage of money is for the true public goods like police, the service of the Courts, the prisons etc.

So, we have today the trappings of democracy, such as regular elections, freedom of the press but the rule of law is fast breaking down. It is the rule of law that buttresses all other freedoms. A government that fails to maintain the rule of law loses legitimacy. A set of rulers who do not maintain the rule of law, are as Benjamin Franklin said, "no better than a band of brigands".

Recently the National Water Supply Board has taken action to disconnect illegal tapping of water. The CEB was reported to have charged a business enterprise in a Free Trade Zone for tampering with the meter and cheating. Always the people concerned pay up or regularise their illegal free-riding.

This shows that given the choice between having such goods or services or not having them, people are willing to pay. The difficulty arises only when there is a third choice; having them without paying for them.

In a closed economy because of this free rider problem, it is impossible to discover how much people are willing to pay. The recent increase in telephone call charges would no doubt lead to less calls during the peak hours. Since there are other suppliers in addition to Sri Lanka Telecom it is possible to discover what level of call charges can be sustained without a fall in demand which cuts into total revenue and profits.

So in education too there should be private providers. The state monopoly in education must be tempered if the quality of education is to improve.

State-of-the-art Fuji film centre

By Franklin R. Satyapalan
Richard Ebell, Executive Director of the Hayleys Group on Wednesday announced the opening of the country's first-state-of-the-art photofinishing centre at Union Place, Colombo.

"This would mark the advent of the revolutionary Advanced Photo System (APS) technology in the country," he said.

Hayleys photoprint, being the sole distributors here for Fujifilm photographic and imaging products, will own and operate the new centre, the country's first exclusive "Fujifilm image service equipped with state-of-the-art film processing and printing machinery and herald a new era for amateur and professional photographers in Sri Lanka, Ebell said.

Besides being the only photofinishing centre in the country capable of providing the entire spectrum of APS services, the Fujifilm Centre also reinforces Fujifilm's image in Sri Lanka, he said.

The centre will concentrate on providing specialised premium quality services for selective and more discerning customers, while Hayleys Photoprint continues to provide technical and marketing support to its customers islandwide, Ebell said.

Director/General Manager Ashan Abeyesundara said the centre had been designed with emphasis on providing a comprehensive service to customers at a spacious, air conditioned outlet with adequate parking facilities and personnel who have been specially trained in processing of advanced photo system (APS) film and the normal amateur film used by most customers.

Among the specialized services available at the Fujifilm centre are one hour services for prints from postcard size upto poster size and customized products such as decorative prints, multi-prints and cropped prints.

The centre is also equipped to provide black and white film processing and printing, half-an-hour service for postcard and jumbo size prints, instant passport and visa photographs in colour or black and white, positive film (slide) processing and mounting and photo to photocopying services.

This would be also an exclusive centre for Fujifilms range of colour and black and white negative films, colour positive films, cameras, as well as other accessories such as photoframes, albums and batteries, Abeysundera said.

Hiroshi Sakura, Fuji photo films regional marketing manager in Singapore, said that the Fujifilm image service will enable customers to experience the full benefits of the partnership between Fujifilm and Hayleys photoprint.

The advanced photo system which has become popular in Japan, USA and Europe is a very new concept in Sri Lanka, said Hayleys photoprint's Deputy General Manager Vijitha K. Silva.

He explained that at the heart of advanced photo system is an 'intelligent' film, which carries optical and magnetic data tracks that record the environmental conditions at the time of exposing the film.

This data analysed in the processing of the film to produce an excellent print. For instance, if the photograph is over exposed or the light too low, that information is recorded on the film. In processing, these conditions are accounted for - and the result a quality print and consistent reprints, Silva said.

Fujifilm's APS film, brand named 'Nexia' is returned to the photograher in its original cartridge, thus the actual film is never seen. Known as Negative return in cartridge (NRIC), this innovation is of significant benefit for its users, as it eliminates accidental damage to the film after processing, especially during storage, said Silva.

The Nexia film brings in its wake an entire new range of products from cameras, processing equipment to electronic and digital image processors.

"Fujifilm is the only company to manufacture the entire product range required for this new system. Both APS film and cameras are available at the new centre," Silva said.

"The advent of this new technology in photography has brought about a new dimension to the photography industry in Sri Lanka, Abeysundera added.