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Indian principal helps restructuring
Lanka Ashok Leyland to sell office to pay debts

Lanka Ashok Leyland Ltd., now going through bad times and carrying Rs.153.9 million in accumulated losses in its books is attempting to revive the company by adopting several strategies to effect short and medium term improvements to the business, shareholders have been told.

These include the disposal of their office building at Duplication Road (R.A. de Mel Mawatha) to raise cash to pay off outstanding debts.

The company's chairman, Mr. Asoka N. Senanayake, said that they hoped to save about Rs.2.5 million per month in interest payments by this arrangement and save approximately Rs.30 million a year.

Saying that the year under review "continued to be very difficult for the company'', he said that the consolidated turnover had fallen a further Rs.600 million from the Rs.756 million dropped the previous year. Losses too had increased to Rs.158.4 million from the previous year's Rs.119.6 million.

"The reduced turnover and profits are due to high costs and low margins, which in turn was forced on us through severe market competitors'', he said.

Aggravating these problems was the continuing depreciation of the Sri Lanka rupee against the US dollar which had pushed up the cost of imports. The chairman said that they were unable to pass on the increases to customers due to market competition.

Additionally, the company's interest burden has grown by Rs.38 million to Rs.101.6 million in the year under review due to heavy indebtedness and penal interest payable on overdues.

Senanayake said that LAL's principals, Ashok Leyland of India, had given them an interest free credit limit of USD 2 million which will save them Rs.28 million in interest. Also, Ashok Leyland had given them approximately 10% to 15% discount on the pro forma prices that will given them a further benefit of about Rs.30 million a year.

Other strategies that are being implemented including pruning cost and tie-ups with other local body builders to supply locally assembled chassis.

LAL was also looking at direct manufacture or providing a local partner with know-how for the manufacture of rubber based spare parts for the local as well as export markets.

"We have made every endeavour to cut down on expenditure wherever possible. We are confident that during the coming months the company will be able to show better results with the measures which we plan to adopt'', Senanayake said.

The company's auditors, KPMG Ford, Rhodes, Thornton & Co., has reported that with the losses of the last two years, the company's current liabilities exceeded its current assets by Rs.164 million and its total liabilities exceeded its total assets by Rs.107 million.

The company has also recorded losses of Rs.37.8 million up to August 31, 1998 according to the management accounts. This raised a doubt about the company's ability to continue as a going concern.

The auditors have also said that following discussions with LAL officials and according to the contents of a letter of representation by the chairman on behalf of the board, it had been stated that LAL had no intention of discontinuing its business and is now engaged in an effort to restructure.

They have also said that LAL was confident of making the operation profitable in the near future with continued managerial/financial support from Ashok Leyland.

"Considering the above, it seems LAL will be able to continue as a going concern depending on the success of the restructuring activities and provided there is continued support from Ashok Leyland Limited in which event the adjustments required to the recorded asset amounts and classification of liabilities may not arise'', the auditors said.

LAL had been operating profitably for seven years up to 1996 when it posted an after-tax profit of Rs.48.4 million, up from a profit of Rs.42.1 million the previous year. From 1991 up to 1996 the company 's profits exceeded Rs.20 million annually according to a 10-year review issued with the last annual report.

As at 1998, when the company's shares had a market price of Rs., it had a net liability per share of Rs.2,500.

The directors of the company are Asoka. N. Senanayake (chairman), R. Jagannath, R.J. Shahaney, L.P. Kodikara.

Renuka buys into Intercontinental

The Renuka Group of Hotels have bought substantially into Hotel Services Ltd., owners of the Hotel Ceylon Intercontinental and will be invited to take a seat on the board of the owning company, industry sources said.

Renuka who operate two very successful city hotels, Ren-uka and Renuka City, have acquired the Hotel Services shares that belonged to the troubled Merchant Banks of Sri Lanka (MBSL) and the Employees Trust Fund (ETF) totaling over 11% of the company.

The buyers paid Rs. 6.50 for the MBSL shares and Rs. 9 for the ETF shares, industry sources said.

A spokesman for the Renuka Group, of which Mr. Ravi Thambyah is chairman and CEO, said that the fact that the Intercontinental was a prime property relatively unburdened by debt unlike most of the other five-star hotels in Colombo attracted them to the share.

"Although short term returns are unlikely, we think the medium term pros-pects are there. Then, of course, there is the value of the property itself,'' a Renuka spokesman said.

Some months ago Mr. George Ondaatjie and the Mercantile Investment Group of Companies also acquired a stake of around 11% of Hotel Services, also at a Rs. 6.50 price. Ondaatjie was attracted to invest for the same reasons as the Renuka Group.

"Renuka runs two profitable hotels which has done well under difficult conditions.

Their performance both in terms of occupancy attained and service offered to guests has won them a niche market,'' a hotel source said.

George Ondaatjie's resort hotel experience and success, first at Nilaveli in Trincomalee and later at Tangerine Beach in Kalutara, together with Renuka's expertise in two city hotels, will give the Intercontinental useful management input at board level, the industry expects.

A fourth stakeholder in Hotel Services is Mr. Sanjiv Gardiner, chairman of the Galle Face Hotel, with a 6% interest and a place on the board.

The Hotel Services board which met last week under the chairmanship of Tan Sri Wan Azmi Hamza, Chairman of the Asian Hotels Corporation who control the Lanka Oberoi, has already decided to expand the board and offer a place to Thambyah.

Hamza was here for the annual general meeting of Asian Hotels which has a major share in the Trans Asia Hotel in addition to its controlling interest of Hotel Services and the Lanka Oberoi's owning company.

Brewery to absorb Lion's share of new tax

The Lion Brewery, the Ceylon Brewery subsidiary which has added substantial new capacity to the brewing industry in Sri Lanka, has decided to absorb a major portion of the increase in the excise duty on beer imposed by the 1999 budget.

Company sources said that they would be absorbing much of this duty increase in an effort to minimize price increases to the consumer and try to maintain the volumes necessary to keep the new state-of-the-art brewery viable.

The budget introduced a two-tier duty structure for taxing soft liquor linking the excise duty to the alcohol content in beer. As a result, beers with 5% or less alcohol has been hit with a 50% duty increase while the high alcohol beers will have to carry a hefty 150% duty increase.

Although the additional tax will cost brewers between Rs. 10.25 to Rs. 15.38 per bottle, Lion has increased its retail prices only by an average of Rs. 4.25 per bottle and absorbed the remainder.

Lion had earned Rs. 51 million during the first half of the current financial year. But with the full impact of the duty increase coming into effect, profitability in the rest of the year is expected to decline.

Bata enters last quarter with enhanced profits

The Bata Shoe Company of Ceylon Limited has seen a small decline in its trading profit during the third quarter of this year ended September 30,1998, but its 9 months profits are running comfortably ahead of earnings a year earlier, a memorandum to shareholders has said.

Bata had seen turnover during the third quarter decline to Rs. 308.9 million from Rs. 342 million a year earlier and the trading profit shrink to Rs. 11 million from Rs. 13.5 million in the comparative period the previous year.

But the company's 9 months turnover at Rs. 1,010,685 million was up from Rs. 1,008,663 and its trading profit at Rs. 72 million was comfortably ahead of the Rs. 45.5 million earned during the comparative period the previous year.

Although taxation at Rs. 28 million during the 9 months under review was up from Rs. 21 million a year earlier, and also there was no extraordinary earning (Rs. 14.7 million) as in the previous year, the period under review has seen Bata recording a bottom line of Rs. 44 million, up from Rs. 39.1 million a year earlier.

Bata has already paid to its shareholders an interim divided absorbing Rs. 9.1 million for the current financial year.

The company had an issued share capital of Rs. 121.9 million, capital reserves of Rs. 14.2 million and a revenue reserve of Rs. 216.9 million as at September 30,1998.

Browns boosts mid-year profits sharply

Brown & Company Limited has substantially enhanced profitability during the first half of the current financial ending September 30, 1998, with the trading profit rising sharply toRs.34.6 million from Rs.4.6 million a year earlier.

These profits have been achieved on an increased turnover of Rs.890.8 million, up from Rs.543.2 million the comparative period the previous year.

The first half has also seen other income rising to Rs.7.2 million from Rs.4.6 million a year earlier. This has given the company a total trading profit of Rs.41.8 million, over four times the Rs.9.2 million earned a year earlier.

Browns' share of profits of associate companies at Rs.120.5 million was also up from Rs.95.4 million a year earlier. However, interest charges have grown to Rs.46.2 million from Rs.33.1 million during the comparative period in the first half of last year.

The pre-tax profit for the period under review at Rs.116.1 million was up from Rs.71.6 million a year earlier while the after-tax profit of Rs.88.8 million had grown from Rs.48.3 million a year earlier.

Much of Browns profit share from associate companies comes from its stake in the Hatton National Bank.

The asset rich company which had an issued share capital of only Rs.7 million earlier this year made a bonus issue of 2 new shares for every 1 held raising its issued capital to Rs.91 million.

Our food imports II

by Kanes
A study was made in the article last week on cereals, sugar and subsidiary foodstuffs imported into the country. We shall study the other major imports this week, the most important being dairy products and fish.

Milk
Imports of dairy products, mainly milk and milk products are fairly substantial. In 1997 about 41,977 metric tons of milk and milk powder valued at Rs. 5,336 million were imported mainly from New Zealand - 63 per cent and Australia 23 per cent. In addition, 697 metric tons of cheese were imported to the value of Rs. 193 million and 675 metric tons of butter were imported to value of Rs. 75 million. The main supplier of butter was New Zealand - 93 per cent while cheese was supplied by Australia 60 per cent and Austria 29 per cent. The total value of dairy product imports in 1997 was Rs. 5,614 million. Domestic milk production meets only about 20 per cent of the country's requirements of milk and milk products. In 1997 domestic production was 331 million litres a good part of which was collected by Milk Industries of Lanka Company (MILCO), Nestles Lanka Limited, International Dairy Products Limited and a few other milk processing units to produce different types of milk products: pasteurized milk, flavoured milk, condensed milk, curd, yogurt, butter, cheese and ice cream.

Domestic milk production has remained stagnant at 331-333 million litres in the last four years while milk consumption was rising and imports were increasing. The value of milk imports rose by 32 per cent in the past four years. Among the reasons for this stagnation are the waiver of 10 per cent import duty, unattractive producer price and the liberal import of milk powder. The authorities fear to raise the import duty as it would hurt the consumer but cheap imports undermine the local dairy industry. A joint venture called Kiriya Milk Industries between MILCO and the National Dairy Development Board of India is designed to revive the industry, but there has been only talk for the last four years. There are no signs of this joint venture having got off the drawing board. It was described as a panacea for all the ills of the local dairy industry but the initial enthusiasm has apparently evaporated and the authorities are silent on its progress. There is no doubt that a comprehensive programme of action is imperative to develop the dairy industry and thereby create rural employment and income. We fail to understand why such a key project as the joint venture with India has not been activated for four long years!

Fish
Many foreigners are surprised that a country surrounded by the sea like Sri Lanka has become one of the largest fish importers in the world. In 1997 the value of our fish imports was Rs. 4,331 million; they comprised four major categories: dried fish, dried sprats, Maldive fish and preserved or tinned fish. Imports of dried fish in 1997 were 33.657 metric tons valued at Rs 1.392 million; main suppliers were Pakistan 59 per cent, Indonesia 18 per cent and India 11 per cent. In addition, we imported 15,850 metric tons of dried sprats valued at Rs. 747 million mainly from Thailand 80 per cent and 3,146 metric tons of Maldive fish valued at Rs. 442 million from Maldives, 81 per cent. Thus, all dried fish imports amounted to 52,653 metric tons valued at Rs. 2,755 million. Sri Lanka's imports of preserved or tinned fish - mainly mackerels - in 1997 amounted to 21,049 metric tons valued at Rs. 1,532 million. The principal supplier was Chile - 82 per cent: Peru supplied 5 per cent. There were also imports of 1,762 metric tons of frozen fish valued at Rs. 96 million and 32 metric tons of fresh fish worth Rs. 18 million. Altogether, we imported about 75,500 metric tons of fish valued at Rs. 4,402 million.

Domestic fish production has been virtually stagnant in the last three years: 1995 -238,000 metric tons, 1996 -228,000 metric tons and 1997 - 240,000 metric tons. It meets about 76 per cent of the country's consumption requirements. A major reason for the stagnation in production is the restriction of fishing in the Northern and Eastern seas on account of terrorist activities. The country has the potential of being self-sufficient in fish in peaceful conditions. Fishermen are being supplied with fishing crafts and mechanized boats at subsidized prices by the authorities. In 1997 for example, 107 mechanized day and multi-day boats and 383 traditional crafts were issued at a subsidy of Rs. 65 million, but this is insufficient to tackle the problem. How is it that developing countries like Pakistan, Indonesia, Thailand and Maldives have surplus dried fish and far away Latin American countries have surplus preserved fish for export to us at very low prices?

The price of local fish is relatively high in Sri Lanka. In 1997 the average producer price of all kinds of fish was Rs. 110 per kg while the average retail price for all species of fish was Rs. 154 per kg - ranging from Rs. 297 a kg of Seer fish to Rs. 65 a kg of Salaya - the cheapest. The C.I.F. cost of imported fish, on the other hand, as shown below is much lower- lower even if port charges, harbour dues, import duty and transport costs to warehouses are added to the C.l.F. cost.

Thus, the average C.I.F. cost of a kg of dried fish from Pakistan was Rs. 40.82 and from Indonesia even cheaper - Rs. 35.95. If we deduct from these prices the cost of freight, insurance, port charges, transport costs, salting and drying costs, the price of fresh fish in these countries would be about 50 per cent lower, i.e Rs. 18-20 a kg. This is about one-fifth to one-sixth the average producer price of fish in Sri Lanka referred to earlier - Rs. 110 per kg. Similarly, if we exclude insurance, freight, port dues, transport costs, factory processing costs, cost of tins and preservative oils, from the Chilean preserved fish price of Rs. 71.64 a kg the fresh fish producer price is likely to be 50 per cent or more of the C.I.F. cost. The crucial question is can we produce fish here at these prices? If we have not done so, it is imperative that we study how these countries who export fish to us, produce fish at such low cost.

Fruits and Nuts
Imports of fruit and nuts cost us Rs. 490 million in 1997. We imported 4,132 metric tons of apples valued at Rs. 143 million from Australia - 34 per cent, USA - 29 per cent and Pakistan - 22 per cent. Dates imported amounted to 7,907 metric tons valued at Rs.90 million; the main suppliers were Iran - 50 per cent and UAE 46 per cent. Fresh grape imports were 917 metric tons valued at Rs. 60 million; they were from USA - 46 per cent and Australia 16 per cent; dried grapes imported were 1,610 metric tons valued at Rs. 62 million mainly from Iran -46 per cent and UAE - 39 per cent. These three kinds of fruits have not been successfully cultivated in Sri Lanka although inferior types of apples and grapes have been grown in some areas. It must be noted, however, that Thailand, although a tropical country, grows grapes successfully. There is one fruit which can be successfully grown in the country - the orange, In fact there was large-scale cultivation of oranges in Bibile some time back until a blight destroyed the orchards. Oranges are grown in home gardens even now but not on a large scale but import of cheap oranges are discouraging even this cultivation. Import of oranges in 1997 amounted to 4.221 metric tons valued at Rs. 76 million; the main supplier was Pakistan - 74 per cent.

Imported oranges from Pakistan are relatively cheap - C.I.F. cost being Rs. 12.67 a kg. Local oranges cost much more. Generally, fruits imported from Pakistan or India are much cheaper than from the USA or Europe. For example, apples from USA cost us Rs. 41.63 per kg C.I.F. and from Australia Rs. 39.38 per kg in 1997 whereas apples from India were Rs. 33.69 and from Pakistan Rs. 19.44 per kg.

Sri Lanka also imports cashew as domestic production is inadequate. In 1997 about 114 metric tons of cashew were imported at a value of Rs. 31 million mainly from Mozambique 88 per cent. Coffee imports of 87 metric tons amounted to about Rs. 17 million while tea imports for blending and re-export were 4.231,655 kg valued at Rs. 473 million. Tea imports, however, have not been included in our food import figures.

Meat
Imports of meat, live animals and poultry in 1997 were valued at Rs. 304 million; sheep and goats Rs. 11 million from India, live poultry Rs.68 mlllion mainly from Netherlands, Canada, Germany and USA and meat - 2,385 metric tons valued at Rs. 214 million mainly from Australia 55 per cent, Singapore 13 per cent, New Zealand 8 per cent and USA 7 per cent.

The C.l.F. cost of a kg of boneless beef from Australia was Rs. 368.85, boneless mutton (sheep) Rs. 109.55 and of boneless mutton (goats) Rs. 75.85.

Food Preparations
Imports of food preparations amounted to Rs. 3,435 million in 1997. Of these, cereal and milk preparations were valued at Rs. 1,452 million; major items in this group were malted milk Rs. 680 million from Australia, 31 per cent, UK 27 per cent, India 22 per cent and Netherlands 17 per cent, wheat flour Rs. 191 million from UAE - 50 per cent and Singapore 41 per cent, starches Rs. 127 million from Thailand, 40 per cent, France 12 per cent, and India 12 per cent, and infant food Rs. 120 million from the UK 53 per cent, Indonesia 17 per cent and Netherlands 16 per cent. Among other cereal preparations were tapioca and sago Rs. 40 million, rusks Rs. 26 million and sweet biscuits Rs. 10 million.

Vegetable preparations including cooking oils and fats amounted to Rs. 892 million. Of this, vegetable oils alone were Rs. 754 million. The total amount of animal and vegetable fats and oils imported were Rs. 3,205 million but the greater part of this was for industrial use. Thus, 64,745 metric tons of palm oil were imported to the value of Rs.2,100 million mainly for soap making. The C.I.F. cost of palm oil from Malaysia was Rs. 27.69 a kg - much cheaper than local coconut oil. There were also 9,077 metric tons of palm kernel oil imported to the value of Rs. 370 million at Rs. 41.08 a kg C.I.F. Both palm oil and palm kernel oil were imported mainly from Malaysia and Singapore. As palm oil is edible, it is also used for cooking, usually mixed with coconut oil. In fact, some of the coconut oil sold in the market is adulterated with palm oil. Among the edible/cooking fats and oils imported are margarine Rs. 193 million mainly from Australia 55 per cent, Singapore 14 per cent, Malaysia 13 per cent and Indonesia 11 per cent, Sunflower seed oil Rs. 16 million, sesame oil Rs. 12 million, soya bean oil Rs. 15 million and several others. Among other vegetable preparations are fruit juices valued at Rs. 62 million, tomato products Rs. 18 million and potato products Rs. 10 million. Finally, miscellaneous food preparations imported in 1997 amounted to about Rs. 1,091 million. The most important items in this group were yeasts Rs. 450 million from a variety of sources including Australia, Turkey, Netherlands and China, cocoa and cocoa products including chocolates Rs. 160 million, Soya bean flour Rs. 86 million and sauces, soups and ice cream. Many of these food preparations can be produced locally; in fact, some of them are already being produced on a small scale.

Why decisions should be left to free markets

by Analyst
Many of the problems that people fight over, have economics at their core. Consider the so-called ethnic problem which has caused the civil war in the north and east. It began as a matter of human rights violations and discrimination against the Tamil minority. But it has led to the demand for separation and this demand is resisted by the majority community because it is seen as unreasonable since it involves the claim to a disproportionate share of resources for a community, large numbers of whom will continue to live in the south and not move into the so-called Tamil Eelam.

Many other problems that agitate the people like jobs, wages, investment, growth, all have economics at their core. The country needs leaders and ministers who understand economic problems and can design policies to solve such problems. But unless the nation changes the method of recruitment of Ministers, the country is doomed.

One should compare the qualifications and experience of our Ministers with those in Japan, Korea or even Thailand or Malaysia. We need a better quality of leaders who have the intellectual capacity to understand issues and this determination to implement change. They need administrative skills which can be obtained only through experience in managing large organisations, be they in government, business or in voluntary organisations. The people and the leaders of political parties have yet to realise this particular weakness in our system of democracy. It is not only leadership in government but even in business which requires high quality of men in positions of management.

Now that communism has collapsed, there is only capitalism left as a viable economic and social system. Democracy is a better system of government than dictatorships either of the right or the left. But there are no perfect human institutions or perfect social or economic systems. An institution by itself is not necessarily benign. It is the men who run these institutions that make them good or bad. Political parties are not necessarily evil as some well-meaning but naive social activists seem to believe. They want to do away with political parties.

But elections have to be contested and such contests require the mobilisation of supporters at grass roots level. Such mobilisation requires organisation and the political party is the medium of such organisation. In the democracies of the west, which we have copied, political parties do not attack each other violently, disrupt their meetings and kill each others members. Politicians and their supporters respect the fundamental rights of their opponents - their freedom of association, and right to live. Important issues are discussed and debated in Parliament. Select committees drawn from the government party as well as the opposition, study national issues are discussed and debated in Parliament. Select Committees drawn from the government party as well as the opposition, study national issues and make their recommendation.

In USA bi-partisan commissions drawn from Democrats and Republicans are appointed to come up with solutions. Presently there is "national bi-partisan commission on the future of Medicare" the publicly funded health insurance scheme for the old and disabled. Democracy needs an underlying core of ethical values. There is a crying in USA to impeach President Clinton for perjury and for obstruction of justice. Here our politicians engage in the obstruction of justice all the time. An oath or an affirmation has little value for them. Lying to Parliament in UK or USA would lead to a demand for resignation from Parliament.

How many of our politicians will retain their seats if such rules are enforced here. As for bi-partisan approaches to issues of national policy, we have to settle the civil war between the two main political parties before tackling the war with Prabhakaran.

Ethical Basis
Those who criticise the free market system as promoting selfishness and greed, forget that Adam Smith was the Professor of Moral Philosophy. He praised the rational individual decisions and argued that each of those decisions links into others, and the whole lot gets sorted out by the invisible hand without any apparent co-ordinator. Smith assumed that people would still be governed in their behaviour by ethical values while pursuing their individual self-interest.

The break-down in moral and ethical values is a phenomenon of the present century. In our own country it has taken place in the last three or four decades. So people confuse this break-down of moral values with the opening up of the economy. An efficient market based economic system actually requires a "socio-political context". Adam Smith understood this very well and wrote his lesser known "Theory of Moral Sentiments" to provide an ethical under-pinning for his theory of the market-economy.

Smith took for granted that the profit seeking nature of man would always be tempered by such sentiments.

But one of the most successful businessmen today, George Soros finds that they have all but vanished from present day business practices. The position is infinitely worse in our country. A Pettah businessman imports animal feed and sells it as dhal for popular consumption.

Businessmen-particularly those in the unorganised sector who constitute the large bulk of private businessmen, are not only dishonest, but they are also unscrupulous. Not only do they cheat the tax authorities, bribe and corrupt the administration, they resort to any sordid act to earn a few rupees, even poison the people with their products. Some engage in peddling drugs and introduce narcotics to the youth. They make poisionous brews that blind or even at times kill tipplers. But the activities of such social vermin are not an invariable feature of the free market system. They are a consequence of the breakdown of law and order and poor governance.

This is why Milton Friedman has pointed out that a suitable social and political environment is required for the success of a free market economy and why democracy seems to be more suitable in the long run to make the system work although it has flourished under dictatorships in East-Asia and South East Asia. If people who are enterprising and resourceful cannot get on, the market economy will not work. Equality is a defunct philosophy although many in our society still cling to it.

The politics of opportunity can be more powerful than the politics of envy as the opening of the economy in 1977 showed, although the momentum could not be kept up. Since 1956 it is the politics of envy that dominated our society. Bus transport companies were nationalised. So were the port, the banks, the oil companies and insurance. Schools were nationalised. If not for these grabbings by the state these private sector organisations could have accumulated much capital and invested it in other enterprises. As it is, the state corporations that took over these enterprises consumed capital and became a burden on the taxpayer.

The politics of envy led to a levelling down rather than any improvement. The state corporations are today in the grip of their employees. State bank employees rob the banks by giving bad loans and causing credit losses while often benefiting themselves. Employees in monopolistic state corporations like the C.E.B. or the Petroleum Corporation use their clout to extract as much wages as possible, never mind the extra cost imposed on the public. For many years these corporations fixed their prices below cost recovery levels. Now at World Bank prompting, cost recovery has become accepted policy of the government and the public have to pay the bill for the extravagance of ministers and bureaucrats who run them.

A higher standard of living for these employees will now have to come out of the pockets of the public directly unlike earlier when the public paid for it indirectly through inflation, which was less transparent state employees are supposed to be servants of the public. But the servant dictates to the master what he should pay under the threat of strikes. The claims of these workers is by no means just or fair. Not only is the over-all level of unemployment much too high. Its burden is carried disproportionately by the educated unemployed. These unemployed are still poorly organised.

But recently the unemployed graduates have made attempts to organise themselves and protest. Is it acceptable to sacrifice the job opportunities of the worst off and the living standards of the ordinary people to boost wages of those already employed and who do very little productive work in any case. But it is one thing to say that the reform of the labour markets, the overhaul of the employment laws and the provident fund laws is necessary, but another thing to conclude that confrontation is the only option. But far from tackling the problem of wage demands of employees in the state sector, the politicians are bent on raising their own salaries and perks. It is a tragedy of the country that it has produced such leaders who are bereft of self sacrifice. Benjamin Franklin would have compared them to leaders of a gang of brigands.

The success of Free Markets
Capitalism has led to a fantastic growth of prosperity in the world particularly in the West and East Asia including Japan. That it has improved the lot of millions of people in the developed countries is a fact. The rough and tumble of the capitalist market place is the surest and quickest way of lifting most of a country's population out of poverty. But governments including our own, still think otherwise. They think subsidies and hand-outs in the name of Samurdhi or otherwise can improve the lot of the poor.

A significant portion of any hand-out leaks to the bureaucracy. The government, although forced to accept free market capitalism for want of a substitute, do not have a commitment to it. Privatisation for example is seen as a way of raising revenue than as a way to promote competition and economic efficiency. Deregulation is portrayed not as a way to promote living standards but as something grudgingly done to accommodate to globalisation. The biggest mistake over the fifty years of Independence is to look upon the government as benevolent. People have learnt to look to the government for everything, forgetting that the government is also limited by resource constraints. The bureaucrats think regulations will curb abuses, forgetting that rules require resources by way of men and materials to enforce them. The honest and law abiding comply with regulations. Not so, those who know that it is more profitable to violate the regulations and bribe their way out. So the wicked prosper at the expense of the honest. This is the hall-mark of our society and economy. The only answer is further deregulation. Many rules are antiquated and serve no useful purpose anyway.

Faulty Economic teaching
Although economics is at the core of most problems in society, the teaching of economics in our universities is inadequate if not faulty. The classical economists viewed the market economy with a kind of awe and respect. To them it was amazing that millions of households, firms and workers without any visible co-ordination and guided mainly by self interest, managed to produce such extra-ordinary benefits.

The market for all its failures was to them a marvel. The economics taught in our universities used to be Marxist oriented. Nowadays it stresses the market failures rather than marvel at its achievements. Instead the message is that markets are inefficient, imperfect and that governments must intervene to correct them. This is not to say that there are no market break-downs or market failures in the jargon of economics. But one must pause to question whether the supposed remedy is really better. There is no better example of wrong economic policy than in the transport policy of the government. The Ministry of Transport is ignoring if not flouting the basic principles of economics, such as the role of prices and markets. Prices can't be held below costs for any length of time without a business going out of production. So bus transport owners reduce the quality of the service packing a bus like sardines, not keeping to a schedule if there aren't enough commuters to fill a bus load.

Markets work where there is competition. These are the principles to follow if the Ministry of Transport is to formulate a suitable economic policy. Of course the public is not willing to pay higher bus fares or train fares arguing that the service is too poor to justify fare increases. The government must at least for some time stay away from fixing fares and allow the market to determine them and allow newcomers to come in. After a time the best operators will emerge, while those unable to compete will chop out or be taken over by others.

The government must allow the natural market forces to have a say and establish fares but check overloading. Route monopolies should be allowed to emerge through the play of market forces and they be given formal status afterwards. If the public want a better transport service they have to pay for it. There is no such thing as a free lunch in economics. It is the job of the government to convince the people that fares should be left to be determined by market forces. While monitoring overloading .

Economic studies have shown that economic policies are crucial in at least three different ways - firstly, openness to world markets was decisive for rapid growth. There is statistical evidence that open economies grew faster than closed economies. Secondly prudent fiscal policy is crucial. When countries grow fast, savings which are more dependent on increase in incomes than on higher rates of interest, grow fast. This is why it is essential to make growth the number one priority as against welfare or equity.

There is a trade-off between growth and equity. Growth makes higher growth possible. The government cannot increase public spending without either raising taxes or increasing borrowing, both of which have negative effects on growth which tend to cancel out any direct contribution to the Gross Domestic Product of such public spending. There are no under-utilised capital equipment that can take the slack through public spending as in developed countries in recession. Thirdly, good government is crucial to growth. Bribery and corruption in public administration and inefficiency in the machinery of government, do a great deal of harm to economic growth.

There is hardly a large contract which is not tainted with corruption. Corruption is alleged in the highest circles and tenders awarded at the highest level of government have come a cropper. We see how capital expenditure voted by Parliament is always under-spent by as much as 10 - 20% even when funds are provided through foreign aid. This is due to inefficiency and corruption.

The Treasury gives priority to recurrent expenditure which involves the payment of salaries to public servants and delays the release of funds for capital expenditure. We see reports of how nurses or teachers are not paid their wages and allowances on the due dates and have to threaten strikes to get their dues.

If the government resorts to borrowing to finance a greater role for itself, interest rates rise and less funds become available for borrowing by private sector business.

When governments intervene with the economy in pursuance of their idea of fairness, they damage economic efficiency more than they think. This is the price of fairness. The government also does more harm than good, when it tries to regulate. The entire gamut of rules and regulations enforced by the Customs on the behalf of the Exchange Control exact a heavy price in terms of economic efficiency. All attempts by the Export Development Board to reduce if not do away with them, have failed because bureaucrats love to exercise power and will not give up power easily. They love to exercise power over businessmen.

Even in the case of perceived market failures, intervention by the government, a weak and incompetent government does more harm than good. Some call, it the "fallibility of government" principle. So free market economists want the state to make fewer economic decisions and give many more decisions to the market. Bureaucrats are not good at deciding what makes commercial sense. Yet they still decide on prices and charges for services. So it is better to depend on markets even if they work imperfectly rather than allow bureaucrats to improve them.

The attempt to use the tax system as a tool of industrial policy, to promote investment in what the government thinks are important sectors, has been proved a failure. It has only led to the growth of corporate and business lobbies, jostling for more and more tax incentives. The use of tax policy to promote ethical conduct has also repeatedly failed elsewhere. Raising taxes to promote temperance or curb gambling has proved to be poor public policy. The government must resist such attempts by moral do-gooders. There is a strong case for legalising kasippu or local pot arrack just as betting shops were legalised.

A distinction must be drawn between tolerating a social evil which cannot be eradicated and the active promotion of a social evil. There is no case for promoting new forms of social evils by legalising them. Where a social evil cannot be eradicated however, containing it and controlling it would be better. Correct economic policy explains much of the success of the East Asian and South East Asian countries.

Delay in Aitken Spence possession of third Maldivian resort

There has been a delay in the acquisition of Aitken Spence's third resort hotel in the Maldives due to a dispute between the Maldivian owner of the lease of the island and the Japanese operator currently running the resort, Aitken Spence sources confirmed.

"But we hope to have this problem resolved, get the resort refurbished during the lean period and have it fully operational for the next winter season,'' a senior company executive said.

Currently the lease owner and the Japanese are engaged in litigation in a Maldivian court.

Aitken Spence which already operates two highly profitable resorts in the Maldives had hoped to have this 110-room resort which it had wrapped-up in a USD 11 million deal for the current winter. But that has not come to pass.

The problem between the lease owner and the Japanese relates to the condition of the Olluhuvelli resort at the handover sources familiar with the issue said. But they were hopeful that the dispute can be sorted out and Aitken Spence could take over early next year so that the refurbishing work can be completed for the next high season.

"It would be definitely ready for the next winter season,'' the Aitken Spence spokesman said.

The company currently operates 166 rooms in two resorts in the Maldives. Ten more rooms have been added to the smaller Bathala resort increasing capacity to 48 rooms. The added capacity is expected to boost earnings by 35%, Asia Securities said in a recent research report. But earnings at the larger Rannalhi resort is expected to grow by a more moderate 10%.

The Maldivian operation has been extremely profitable for Aitken Spence whose earnings there are far ahead of the much bigger hotel operation in Sri Lanka, industry sources said.

The Asia Securities report also said that Kandalama, which together with the Triton at Bentota are the two biggest Aitken Spence Hotels here, has been able to increase its average room rate by about 12% during the current financial year thanks to the hotel developing a strong brand image at the higher end of the market.

This, together with moderately higher occupancy and exchange gains had influenced Asia to project a 40% growth in earnings there to Rs. 21 million in the current financial year.

Half-year profits shrink at The Finance

The Finance Company Limited, a member of the Ceylinco Group, has seen a shrinking of profits during the first half of the current financial year despite an increased turnover according to a provisional statement now with shareholders.

Turnover during the period under review at Rs.1.3 billion was up from Rs.937 million a year earlier while the net trading profit of Rs.27.3 million was down from Rs.35.9 million during the comparative period the previous year.

With other income of Rs.6.9 million (Rs.6.1 million a year ealier), the pre-tax profit for the half year was Rs.34.2 million, down from Rs.42 million a year earlier. After providing Rs.6 million for taxation, the same as in the previous first half, the company had a bottom line of Rs.28.2 million for the period under review, down from Rs.36 million a year earlier.

The Finance has an issued share capital of Rs.113.4 million, a capital reserve of Rs.390.2 million and a revenue reserve of Rs.206.6 million.

According to the summarised balance sheet as at September 30, 1998, the company has net current liabilities of Rs.173.3 million.

Indo Lankan Steels boosts profits

Indo Lankan Steels Limited, a company set up four years ago for the manufacture of steel rods for local distribution by re-rolling imported iron billets, has substantially improved profits during the year ending March 31, 1998, the commpany's annual report said.

The company has posted a gross profit of Rs.39.9 million during the year under review, up from Rs.38.8 million a year earlier. Its turnover too had grown to Rs.282.1 million from Rs.237.4 million the previous year.

The trading profit before interest was Rs.23.7 million against Rs.19.8 million a year earlier while the profit after interest at Rs.18.4 million was up from Rs.8 million the previous year.

The company which was not liable for taxation had a net profit of Rs.19.1 million available for appropriation, up from Rs.8.3 million a year earlier.

The directors have recommended a final dividend of 15% for the year on top of an interim of 10% already paid.

The directors said that the level of business and the year end financial position was satisfactory and they anticipated a substantial improvement in the level of activity in the ensuing year.

The company has an issued capital of Rs.40.2 million, a capital reserve of Rs.40.4 million and revenue reserves of Rs.7.8 million.

The directors of the company are: Messrs. C.L. Mittal, V. Mittal, K.V.M. Fernando, A.L. Karunanayake, R.M.B. Senanayake, Tennyson Rodrigo, A.K. Jatia, D.A.T. Ranasinghe (alternate to Mr. A.L. Karunanayake), S. Ladduwahetty (alternate to Mr. Tennyson Rodrigo) and Mrs. S.H. Fernando.

Sampath brokers' favourite financial sector pick

The Sampath Bank is being persistently recommended by brokers as a good investment in the financial service sector at its current price level of Rs.45.

A research report from John Keells Stock Brokers described this share as "one of the most attractive counters in the banking sector, primarily on account of it's steady earnings growth performance".

John Keells said that the 9 months ending September 1998 had seen the bank boosting operating profit 18% to Rs.415.8 million driven by net interest income growth of 24%.

The period under review witnessed a net profit growth of an impressive 27%, up from 18% growth a year earlier, the research report said. Sampath's net profit for the period at Rs.291 million was up from Rs.229 million a year earlier.

John Keells said that loan growth up to September at 34% was ahead of the 31% average growth achieved by the quoted commercial banks while deposits growth at 23% was also running comfortably ahead of the quoted commercial bank average of 20%.

The research report expected the loan growth in the 4th quarter to stay at 10% in line with seasonal patterns. This would mean that average loan growth for this year at 33% will be down from last year's 40%.

As Sampath was adopting a conservative lending policy, loan growth next year too was expected to slow down to 30%.

The report noted that Sampath was actively pushing for deposits and have added three branches to the existing 29-strong branch network. In this context, deposits growth for this year was expected to run at 30%, up from 26% in 1997.

John Keells also said that Sampath's exposure to the equity market with a total investment of Rs.54 million at cost is relatively small. In this context, they expected provision for a fall in value of the portfolio to be restricted to Rs.25 million this year.

"This is not expected to have a material impact on the bottom line, given limited dependence on trading profits from the equity market to boost earnings historically", the report said.

NDB recruits Citibank CEO for No. 2 slot

The National Development Bank (NDB) has named Mr. Nihal Welikala, the former Head of Citybank in Colombo, as its new Deputy General Manager.

"This is a level two post in NDB with CEO Ranjit Fernando at level one", a NDB news release said.

As the NDB previously had no deputy general manager and this is a new position, banking circles regard this to be a significant appointment.

Welikala has previously served as an alternate director for the Asian Development Bank on the NDB board since its privatization. He has also been a director of Citi National Investment Bank, the investment banking joint venture of the NDB and Citicorp.

The new DGM who assumes duties on January 1, 1999, is a law graduate of the University of Sri Lanka and a qualified chattered accountant who worked for many years in the London offices of Ernst and Young.

He had a 11-year career as CEO of Citibank in Colombo and also served as director of the Sri Lanka Banks Association and was a founding director of the American Chamber of Commerce in Sri Lanka.

"We are delighted to have Nihal on board, as our new DGM', said Ranjit Fernando. 'We know his many years of local and foreign experience will add depth to our management team. I am also very pleased that he has chosen NDB over an attractive foreign posting that had been offered to him".

Welikala said that he was looking forward to his new operational role at NDB after having been closely involved with the bank for several years and having built-up a good understanding of its business.

Merchant Bank offers vehicle expertise

Merchant Bank of Sri Lanka Limited (MBSL) yesterday held a seminar on the "effective maintenance of vehicles" for the benefit of its leasing clients.

The seminar which covered areas such as engine life span, fuel consumption, electrical components and maintenance of vehicles was serviced by a number of experts in these fields.

A spokesman for the MBSL said that this is a first of a series that they hoped to conduct for the benefit of their leasing clients and they hoped that such training will help their clients to effectively service their commitments to MBSL.

The seminar was aimed at providing participants with an understanding of the basic structure and components of engines, how a vehicle should be maintained to obtain maximum fuel efficiency and for purposes of identifying basic engine defects.

Mr. Sunil G. Wijesinha, Managing Director of MBSL made the inaugural address.

Uni Walker wins ISO 9002

Uni WaLker's Office Automation division has won ISO 9002 certification for quality management, the company announced.

Uni Walker are authorised distributors for Panasonic office automation products like fax machines, telephones, photocopiers, typewriters, computer printers and audio visual products.

'This certification gives the company the distinction of being the only local service provider in office automation to obtain ISO 9002 certification, and places Uni Walker on par with the top international companies practicing a quality management system", a news release said.

Pelwatte improves mid-year picture

Pelwatte Sugar Industry Limited has boosted both turnover and profitability in the first half of the current financial year ended September 30, 1998 according to a provisional financial statement now with shareholders.

Turnover during this period was up to Rs.879.1 million from Rs.780.6 million a year earlier. The trading profit was up to Rs.189.6 million from Rs.122.6 million during the first half of the previous financial year.

Although other income during the 6 months under review was down to Rs.8.4 million from Rs.27.2 million a year earlier and taxation had increased sharply to Rs.50 million from Rs.20 million in the first half of the previous year, Pelwatte had a profit of Rs.147.9 million for the half year under review, up from Rs.129.8 million a year earlier.

The company has an issued share capital of Rs.695.7 million and net current liability of Rs.849.4 million in its books as at September 30, 1998.

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