Holiday Training Camp for the student company officials

Young Entrepreneur Sri Lanka is the official member nation, approved by Junior Achievement International, to implement its programmes in Sri Lanka. Launched in March this year by the Minister of Education and Higher Education Richard Pathirana and Shaun Donnelley U.S. Ambassador, YESL has introduced the programme to 9 schools, covering 1500 students approximately. The most important and the most popular, out of these programmes, is the final activity, which is the Company Programme, As the main purpose of this programme is to educate and inspire young people to value free enterprise, understand business and economics and be work force ready, the Company Programme has provided ample opportunity to the students to obtain hands on experience in all aspects of running a business.

A holiday training camp was held in the Watersmeet Conference Centre - Mutwal-Colombo on August 14th & 15th followed by a seminar at Hotel Taj Samudra on the 16th. The participants were 100 school company officials from 17 school companies established in 9 schools the teachers in charge the consultants and principals. The schools in the pilot programme were: Ananda College Colombo 10, Anuala Vidyalaya Nugegoda, D. S. Senanayake College Colombo 7, Isipatana College Colombo 5, Lumbini Vidyalaya Colombo 5, Maharagama MMU Richmond College, Galle, Southlands Balika Vidyalaya Galle, Swarnamali Balika Vidyalaya, Kandy.

The programme was full of very warm exchanges of hands on experiences gathered by the company members in real work situations. Interaction with the Voluntary Consultants from established businesses provided learning situation made available on a customised basis. Each Company President, with the assistance of its Board of Directors, succeeded in presenting a true picture of the running of their business, throwing sufficient light into the challenges and barriers they had to face which according to them were overcome by the many victories and achievements.

The training camp was structured in such a way that each Company and each official shared the experiences with others, thus making it a participatory process all - throughout secondly expert advice was injected to the process by group sessions have facilitated by experienced Consultants from the business sector, who in turn applied a learning approach, scrutinising all hand books, guides and tools provided in the kit of materials Thirdly there were three main inputs, presented as introductions, to widen their horizons in the business field. They were three presentations made by: (I) Mr. Edward Hyd-Consultant to TIPS on Trade Related Aspects of Intellectual Property; (ii) Mr. Raja Bandaranaike, Manager, Marketing and Public Relations of Colombo Stock Exchange on Stock Exchange and Share Market and (iii) Mr. David Muller, Managing Director Rapid International (Pvt) Ltd. On Import Export Proceedings. Keynote address was delivered by Mr. Patrick Amarasinghe, President YESL and of FCCISL. He stressed on the need to be conversant with the whole process of conducting Junior Achievement Student Company Programme by strictly following the guidelines given in defferent Handbooks and materials. He also congratulated the schools, particularly the children, who ventured to establish pioneer companies, the Teachers who assisted and guided them, the Consultants who spent valuable time in providing necessary inspirations, the Principals who were brave enough to face the challenges of education, in a more pragmatic way and the Ministry Officials who approved and co-ordinated the programme. Mrs. Lorna Wright, Director of Watersmeet, welcomed the participants and invited them to feel at home in her institution, and produce a well designed model to give limelight to the youth who are lost in the present day darkness, with or without education. Ms. R. S. Lankananda, Deputy Director of Education represented the Ministry of Education and functioned as the official co-ordinator.

It was revealed that a total number of approximately 600 students are directly involved in the Companies, which around 85 of them function as Presidents and Directors. The total value of subscribed share - capital stands around Rs. 200,000/- while the anticipated share capital exceeds Rs. 1 million. The total turnover by now is not less than Rs. 800,000/-. Some of the companies have already worked out their interim dividends, which were reported in some cases to be as high as 21 percent, Aspirations expressed by the participating students and their parents indicate a clear turn off of the academic expectations of blindly following too high professional goals, to clearly indicated business enterprises, and entrepreneurship. Observations of the Business - executives who were present in the sessions, marked a very high rating in the success of bringing the private and free enterprise concepts in to the young minds. The students showed their determination to stand on their own feet and work for a society full of educated youth, who will in future follow a path of job creators rather than job seakers. The whole programme was designed and conducted by Mr. Premasiri Weliwita, Chief Executive YESL assisted by Vice President Mr. Pathmasiri Dias and Consultant Mr. Gamini Wijepura and the staff of YESL.

Bartercard records Rs. 2.3m in trade in 4 hours

Bartercard Lanka, Sri Lanka's only cashless trade exchange, recorded Rs. 2.3 million in barter trade in just four hours, when the company conducted its second Trade Night recently.

Representatives of more than 200 businesses, ranging from small proprietorships to conglomerates participated in the event, at which 40 members of Bartercard displayed their goods and services, and 240 barter transactions took place.

Describing the Trade Night as a 'resounding success', Bartercard's Managing Director Johnny de Saram said it was ample testimony to the fact that barter trading has now been firmly established in Sri Lanka as a viable alternative to cash business.

On display at the Trade Night were a diverse array of products and services, from hairdressing and make-up to floor tiles and bathroom suites, perfumes to vehicle servicing, photographic equipment, wearing apparel and outdoor advertising, all available to Bartercard members on trade.

Acting Australian High Commissioner, Lorraine Barker, who was the chief guest on the occasion said Bartercard provided its members with vital business opportunities and a marketing edge over their competitors. 'I was quite impressed to learn the significant benefits that accrue to members', , Ms. Barker said, listing increased sales, interest free credit, an opportunity to sell excess goods and services and third-party record keeping services as some of these benefits.

Thanking participants for their presence, de Saram explained that the purpose of the Trade Night was to provide an opportunity for members of the trade exchange to get to know one another and to network to their mutual benefit, enabling them to exploit the contacts to generate more business.

Tea comments

There was a sharp correction in the market for Low Growns this week with both the very best on offer and the bottom end of the market recording a decline in values. The average price for Low Growns peaked at Rs. 154.23 per Kilo at the auction of 12th August. The average for the following auction was slightly lower as a result of price dropping for poorer teas. This week's average should decline even further and may well slip below the Rupees 150 per Kilo figure. In the Ex Estate sale too prices were lower. But in this instance the most significant declines were for plainer BOPs from Western and Eastern planting districts. Brighter liquoring Western moved up in value and it was significant that the BOPFs are selling at a fair premium over the corresponding BOPs. The best Uvas realised long prices, but last week's levels were not attained and the greater volume that did not attract airmail bids lost out sharply in value.

The drop in prices for High Growns in the Tea for Price category was primarily due to buyers for the CIS being less active. This was in spite of auction quantities being at their lowest since September/October 1996. The unseasonal heavy rains recorded during latter July and August caused yields to decline in the High & Mid Grown sectors. As a result auction quantities in the Ex Estate catelogue will continue low at least until mid September.

A trade delegation from Iran is due in the country later this week. The delegation comprises of the two state organisations, the GTC and STO. This team is already in India and is reported to be in the market for ten thousand tons from all its regular supplier countries. In recent years Sri Lanka has emerged as the biggest supplier to Iran followed by India with minor quantities from other Asian producers.

For Share Market to recover
Govt. resolve and action required in the right direction

A long way to recovery
The Asian corporate sector recovery should be a three-legged sequential process:

* loss recognition;

* loss allocation; and

* recapitalisation.

In the immediate aftermath of the crisis, policymakers responded to the sudden emergence of problems by liberalising and deregulating to pave the way for recapitalisation. The Thai and Korean examples vividly demonstrate that plain policy change on deregulation will not entice investors. New investors do not: want any part of the past losses, so unless they are bared and cleared, the reconstruction process will not begin. Until the past excesses are flushed out in terms of loss recognition and allocation, recapitalisation cannot happen.

As authorities are slowly realising, the painful process of loss recognition and allocation is not automatic and must be facilitated, if not forced. In this article, we explain the process and track the progress made by regional economies.

(A) Loss recognition-a tale of hidden losses
The fall in asset markets and currencies has created huge losses everywhere in Asia. For instance, on the KL stock exchange alone, market capitalisation has come off more than US$275bn since early 97. Similar unrealised or realised a set revaluation losses were created by the fall in property prices across Asia.

Currencies gave rise to translation losses on foreign currency exposures, while the general slump in business led to idle capacities, payment defaults and margin shrinkage.

No automatic or voluntary disclosure
Given the extent of losses, it is eminently desirable from the viewpoint of corporate managers to not disclose all the losses, as it would only increase pressure on them (or might even result in their own ouster). Outside Hong Kong and Singapore, accounting standards and market discipline are such that losses do not come out in the open on their own.

Asian managers are using various means from sophisticated swap transactions to hide translation losses to crude measures like non-declaring results to stymie loss recognition, Banks are using loan restructuring means and collateral overvaluation to delay the inevitable. In Thailand, and to some extent Malaysia, property developers/investors are refusing transactions at lower prices, resulting in prices remaining artificially high for a longer time than necessary.

Govt. initiative needed everywhere
As the process is not likely to be automatic, governments must act to enhance the private sector recognition of losses:

1. Tighten non-performing loans (NPL) and provisioning guidelines for banks. Most important, the central banks must force banks to make realistic assumptions on collateral cover. The best way is to facilitate the sale of NPLs through institutions like AMC (Malaysia), because this would immediately expose the true losses. Thailand has progressed most on this front while the process is just emerging in Malaysia and Korea. Indonesia and Philippines are yet to begin. NPL guidelines have been tightened almost everywhere.

2. Implement stricter accounting guidelines.
Companies will find ways to hide losses if the accounting discipline is not tightened. The regional accounting standards have remained lax, with most extremely unclear on the crisis-created issues, like translation losses, exchange rate treatment or hyper inflation (in Indonesia alone). In Indonesia, many listed companies are refusing to announce the financial statements, while others are changing the currency base. Across the region, many companies are still not revaluing their investment portfolio to save on losses. Declaring contingent liabilities on cross-guarantees is poor too.

3. Transparent bankruptcy laws.
This is important to clear asset markets, without adequate foreclosure and bankruptcy laws, many existing management teams will just sit tight and not do transactions to avoid the actual incidence of losses. Governments' need to keep a fine balance excessively tight foreclosures, while extremely lax laws would harm the banking structure. Indonesia has just enacted new bankruptcy laws whose details are not fully known, while Thailand is still struggling, Malaysian S176A appears to be open to abuse in the hands of borrowers, while foreclosures are rising rather too quickly in the Philippines on extremely strict implementation by banks.

4. Severe penalties for misrepresentation.
In a way, transparency in corporate management is the most required even in normal times. And, in times like these, it is even more direly important that governments create strong disincentives to hiding any material information. This is to counterbalance the incentives that management have in hiding losses. Steps must be taken to ensure that suspicious or non-transparent deals do not recur without the market's complete knowledge. Indonesia and Malaysia need the most stringent action on this count, although the others are also not far behind.

(B) Loss allocation-who foots the bill
Losses have to be adjusted against somebody's equity or wealth. This is so obvious that it sounds tautological. In a normal environment, loss recognition automatically results in the allocation against the loss bearer's equity. When the losses are excessive, as is the case now in Asia, the process becomes distinct and complex.

Figure 1: Loss allocation process
As the diagram shows (Figure 1, losses should ideally first go against the equity of the residual investor (or owners) of the loss-generating assets. For geared corporations/individuals, if losses are larger than the owners' wealth - including revaluation and goodwill-(or maximum capability as defined under limited liability equity concept), they could be marked against the equity of creditors or banks. If the creditor equity is insufficient or 'untouchable' (like bank depositors' wealth), as is the case in many parts of Asia, the governments should bear the responsibility (using taxpayer money eventually). In an extremely unlikely case, these companies could solve the problem by finding strategic investors who will be ready to bear all the past loses. These nonmarket deals would either involve philanthropic institutions or political goodwill (like the value of improved bilateral relationship) that go beyond just the acquisition of the loss-making organisation.

Need to speed the process
Loss allocation and funding could be performed by market forces, if rules are clear and functional, and losses are not as large as to jeopardise the banking system. Hence, Singapore and Hong Kong do not have much to worry beyond loss recognition. There are three processes that the other regional governments must facilitate before moving to recapitalisation, the most crucial phase for recovery:

1. The management will do their utmost to protect their own interests. They will not only procrastinate and prevaricate about the losses for as long as they can, but also strive to transfer some of the losses to debt holders or governments by using their political connections or simply by stalling company operations.

This goes against the concept of 'residual investment'. Debt holders are unlikely to relent easily. If governments are seen bailing out majority shareholders, then investors sentiment will take a nosedive. In Thailand and Korea, equity write-downs and evicting of management have happened (mostly for banks and finance companies) but have yet to assume the necessary scale. Thailand's latest banking sector measures make a big progress in this direction.

2. Debt reduction and temporary nationalisation. The argument that wealth or equity destruction (which happens at the margin with the onset of losses) should not result in complete closure of operations (that would happen if only market forces are allowed to operate fully) is generally accepted by all. Governments must transparently identify the companies/operations that are strategically important for the economies.

If the losses exceed existing net-worth, governments should work towards eventual change in ownership. Before beginning the search for strategic buyers, they must bridge the gap between true value of liabilities and assets. Ideally, this involves debt reduction. Unless pressurised, debt holders would be slow in this painful process even when roles are unbiased, proposed deals are fair and market forces are allowed to operate.

Thus, governments must assume the role of arbitrators and initiators to quicken this process. Regional governments, perhaps with help from multilateral agencies, must work with debt holders to reduce (and not just restructure) the debt. The Indonesian government is continuously working on the private sector's external debt but not with much success in terms of reduction, while the Korean government has lost its zeal after successfully restructuring of banks' short-term external debt. Other governments have done little on this front.

Where debt reduction is not the complete answer or is impossible, governments will have to assume ownership until they fund the losses that cannot be borne by anybody else. This could happen if governments do not want to take the hit. Ideologically governments must convince the need of this to their taxpayers as well as investor community.

Additionally, governments must show that nationalisation is temporary. Some banks have been taken over in Thailand, Korea and Indonesia. Government-led mergers with loss funding guarantee by authorities are unlikely to find much favour with investors as it does not necessarily contain the capital write-down and eviction existing owners.

3. Asset auctions and closures. For companies whose operations are inherently non-viable and survival is unimportant from a strategic viewpoint, governments must facilitate asset take-over by creditors. This requires clear bankruptcy laws which are weak almost everywhere. Once creditors take over the assets (or collateral), a mechanism has to be set up for their auctions. Thailand's FIDF-FRA-AMC schemes is the best progressing mechanism of the region. Malaysia and Korea have just made their start.

Corollary - facilitator funding should not generally be a problem. It must be remembered that facilitators, like AMC in Malaysia or Thailand, are just interim owners of non-performing assets. If they do their jobs in an unbiased manner, their funding would suck out liquidity on one side but release liquidity on the other. Even if such institutions are funded through the creation of money, as long as the liquidity generated is withdrawn through central bank's open market operations (OMO) in the short term and through the winding-down of the facilitators eventually at zero loss, the domestic funding is also virtual. The FIDF funding in Thailand created liquidity crunch for private sector only because it went into the funding of finance companies' losses.

(C) Recapitalisation - liberalisation is not the only answer
Any market system requires 'residual investors' for all operations. At the margin, economic crises wipe out one set of equity holders who need to be first eliminated and then replaced. The corporate sector recovery can start only then. For recapitalisation, apart from the above listed as prerequisite, governments should note the following:

1. Deregulation/liberalisation is a must.
The crisis has created losses that have severely affected the region's wealth. After the loss allocation, the region will have little left for recapitalisation, unless it decides to work with the artificially created government equity (nationalisation) or does not mind selective subsidisation that transfers wealth and otherwise, governments must attract new equity from outside, which requires liberalisation of ownership guidelines. Korea and Thailand have made important progress on this front. Malaysia is extremely hesitant, while Indonesia has a much longer way to go on loss recognition and allocation before embarking on this. There have not been any changes in the Philippines.

2. Only viable institutions will survive.
Crisis-beaten strategic investors are unlikely to take over operations that do not generate sufficient returns. Over-supply industries, for instance property and construction almost everywhere in ASEAN, should ideally see many closures or mergers. In other industries, such as agri-based industries in Indonesia, governments must remove unnecessary price and non-price restrictions and monopolies to enhance potential returns. The IMF has succeeded in forcing the Indonesian government to change restrictive regulations. Otherwise, the rest of the regional governments have not done anything of significance to boost long-term returns. In fact, many are still seen as protecting non-viable and non-strategic companies.

3. There is a need to reduce long-term cost of capital.
It is is a common misconception among authorities that equates cost of capital to short-term interest rates. Monetary easing or short-term reserve creation does not entice long-term investors, whose investment horizon is decades. As the example of Japan shows, even when rates are very low, investors invest only if they do not anticipate any major troubles in the foreseeable future that can increase the cost of capital and harm the actual business. In a way, appropriate measures (starting from loss recognition) automatically feed into reduced risk premiums. Additionally, regional governments must strengthen regulatory institutions, undertake continuous public relations exercise to answer investor fears and clarify its own actions.

Conclusion: A lot of resolve and action required before share markets recover
Share market recovery will not come along with or before the economic revival in Asia. In fact, if the right steps are not taken to cause a sustainable long-term market recovery, even economic recovery could be short-lived. Policy easing will only cushion the blow temporarily and buy some time, while liberalisation alone will not produce any results - it has many prerequisites.

Need to show understanding and gumpotion far more than what they have shown so far in liberalisation. Investors should understand governments' one-time subsidisation of losses and temporary nationalisation for strategic investors, while governments must communicate the clear path.

For investors the entire process involves a lot of uncertainty. Chances are that just like Japan, Asian governments might end up subsidising majority shareholders and fail to clear the losses. Many governments might continue their climb on wrong trees by focusing on just bringing interest rates down or spurring demand. Such moves would temporarily benefit existing shareholders of weak companies, but in the final analysis harm everybody.

If governments tread the right path, only those companies' existing shares who do not face huge losses and, hence, the threat of equity replacement will benefit in future rallies. Indices like the SET or KOSPI could show a sustainable three-digit rise over next three years, but many of the index constituents of those rallies have still not come into being.

In crisis-hit Asia, the maximum market risk is uncertainty over whether governments will make the right move. Investors should wait until they see some comprehensive signs leading to recapitalisation (of which there are not many across Asia). Investors who believe in regional governments' ability to do the above should be selective as stock risks are far higher than market risk - they must stay with sure survivors.

Nilesh Jasani
Socgen Securities

The Central Bank's Spot Rates for transactions with Commercial Banks announced on the morning of August 28, 1998 were as follows:

The approximate middle exchange rates of following currencies calculated on the basis of cross rates quoted by Gulf International Bank, Bahrain as it appeared in Reuters Financial Information System on August 28, 1998 were as follows:

Average rates at which the following currencies were quoted by Commercial Banks in Colombo for Telegraphic Transfers at mid-day on August 28, 1998 were as follows:

Average Weighted Prime Lending Rate (AWRP) and Lowest Prime Rate (LPR)
The Average Weighted Prime Lending Rate (AWPR) during the week ended August 21ST, 1998 was 14.5 per cent for all banks. The Lowest Prime Rate among banks during this week was 12.8 per cent.

Average Weighted Deposit Rate of Commercial Banks (AWDR)
The Average Weighted Deposit Rate (AWDR) of Commercial Banks for the month ended June 31st, 1998 was 9.6 percent.

* Ex Dividend Price