The Island business

A sudden jump in the share price of Hotel Services (Ceylon) Ltd., the owning company of the Hotel Ceylon Intercontinental from Rs. 11.75 to Rs. 16 per ten-rupee share sparked speculation on the possibility of possible interest in what is considered a very valuable asset located on prime property.

"At today's prices, it would cost anything up to Rs. 2 billion to build a five star 250-room hotel like that," a leading businessman said.

On Wednesday, 20,000 shares of this infrequently traded company were transacted in two parcels at a high of Rs. 16 and a low of Rs. 15. The Rs. 16 close was Rs. 4.25 above the last transacted level.

On Thursday, the price dipped by a rupee and there were eight transactions totalling 33,300 shares. When the market closed on Friday, only an odd lot had been done.

In recent months, George Ondaatjie, leading resort hotel operator controlling Tangerine Beach, Royal Palms and Nilaveli Beach Hotels acquired over 10 percent of Hotel Service which is controlled by the Asian Hotels Corporation, owners of the Hotel Lanka Oberoi and part-owner of the Trans Asia in Colombo.

Ondaatjie snapped up what he considered a bargain at Rs. 6.50 a share. More recently, Ravi Thambyah who controls the Hotel Renuka and Renuka City Hotel took an 8 percent block at prices of Rs. 7 and Rs. 9.

Another major stakeholder of the company is Sanjeev Gardiner, chairman of the Galle Face Hotel which prides itself of being a "resort in the heart of the city." The Gardiner stake acquired by Sanjeev's father, the later Mr. Cyril Gardiner, totals about 8.5% of Hotel Services equity, well informed sources said.

"If anybody is eyeing the company, either the controlling shareholder, Asian Hotels in which there is a substantial Malaysian interest, or some or all the local hoteliers must be willing to part with their shares. Broking and business sources are mentioning a Rs. 22 price, but that seems sheer speculation at this point of time," one well informed source said.

There has been some discussion between the local hotel interests on whether they could get together a consortium to buy up a majority stake if it should become available at the price that has been mentioned, these sources said.

But one negative is that the Intercontinental is not on freehold land like the Oberoi. It is built on land belonging to the Tourist Board leased out to the hotel's owning company. A couple of years ago, the Tourist Board increased the lease rental on the property very sharply. From the original peppercorn rent it went up by 2,000 percent.

"That would make Hotel Services, with an issued capital of Rs. 176 million (17.6 million ten-rupee shares) less attractive than a company with freehold ownership of its property," one businessman said.

At the twenty two rupee price that has been mentioned, the company would be worth a little over Rs. 387 million which would be a bargain if there was freehold ownership. One hotelier said that a new 124-room resort hotel opened cost Rs. 600 million to build.

"If the Hotel Services shares can be had at Rs. 22, it would be interesting. But don't forget the leasehold factor and also that tourism is a fickle business," one hotelier said.

The dispute relating to a Rs.115.5 million exchange control penalty imposed on Lankem Ceylon Limited in July 1997 has not yet been resolved, the annual report and accounts of Colombo Fort Land & Building Co. Ltd., Lankem's parent, reveals.

Lankem has totally denied contravention of relevant provisions of Section 7 of the Exchange Control Act and filed an appeal to the Finance Minister against this penalty on August 6, 1997.

The Colombo Fort Lands report said that no response to this appeal has been received as yet. Lankem is a member of the Colombo Fort group of companies.

The exchange control penalty related to the transfer/issue/sale/purchase of shares of Lankem Tea & Rubber Plantations (Pvt) Ltd., (Formerly George Steuart Management Services Ltd.) and Kotagala Plantations Ltd. and the sale of debentures issued by Kotagala.

The Colombo Fort Land & Buildings report has also said that the legal action filed against Kotagala by the Securities & Exchange Commission (SEC) regarding non-compliance of the SEC Act has been dismissed by the Colombo Fort Magistrate. The SEC has appealed against this decision to the Court of Appeal.

Exchange Control has also imposed a Rs.11.7 million fine on Lankem Tea & Rubber Plantations on November 20, 1997 for an alleged violation of the Exchange Control Act. The company has denied any such violation and appealed to the Finance Minister on December 10, 1997 to which there has been no response to date, the Colombo Fort Lands report said.

The claim of Rs.30.1 million made by George Steuart & Co. Ltd., on July 15, 1997 against Lankem Tea & Rubber Plantations has been denied by the company and referred to arbitration.

All these matters have been listed as contingent liabilities in the notes to the accounts of the Colombo Fort Land & Building Co. Ltd.

The Colombo Fort Group has reported "phenomenal" profit growth in the year ended March 31, 1998, but the auditors have raised questions on the viability of two group subsidiaries and bank guarantees extended by the parent and one subsidiary exceeding group net assets.

The company's Chairman, Mr. R. Senathi Rajah, said that the group's pre tax profit at Rs.267.9 million was up from a loss of Rs.103 million the previous year.

"The main contributions to these excellent results were from the trading activities of E.B. Creasy Group, The Colombo Fort Land & Building Co. Ltd., York Arcade Holdings Ltd., Colonial Motors Ltd. and Union Investments Ltd.", he said.

However, the profit attributable to Colombo Fort Land & Building Co. Ltd., the holding company, is only Rs.4.2 million, up from a loss of Rs.68.8 million a year earlier. Although the company was holding retained losses of Rs.87.9 million in its books, the directors have recommended a 6% dividend absorbing Rs.6.5 million and raising the retained loss position to Rs.94.4 million.

The company's auditors, KPMG Ford, Rhodes, Thornton & Co. , have reported that two subsidiaries, Muller & Phipps (Ceylon) Ltd. and Dutch Dairy International (Pvt) Ltd., "have been incurring losses for the past several years and their liabilities exceed assets by significant amounts".

The auditors have said that no provision had been made in the accounts for investments made by Colombo Fort Land & Buildings in these subsidiaries.

The auditors have further said that the company and its subsidiary, E.B.Creasy & Co. Ltd., have given bank guarantees on behalf of its subsidiaries and related companies in excess of group net assets as at March 31, 1998.

Senathi Rajah said in his review that the consolidated turnover of the Colombo Fort Group was up 57% during the year under review to Rs.5.46 billion from the previous year's Rs.3.47 billion.

He attributed this growth to enhanced sales revenues from its plantation companies, Agarapatana and Kotagala, Darley Butler, Lankem, Muller Phipps Group, Colombo Fort Holdings Group and the parent company itself.

Senathi Rajah said that group operations now cover diverse sectors - real estate, plantations, investment trusts, manufacturing, trading and distribution, hotels and travels.

"The group is optimistic of the future, with such a well balanced business portfolio that would enable it to withstand any economic vicissitudes. Notwithstanding the current state of political and economic uncertainty, we look to the future with renewed confidence with the certainty that when peace and stability returns to the country, we shall be able to take full advantage of the many opportunities which are bound to arise", he said.

The board of directors of the company are: Messrs. R. Senathi Rajah (chairman), A. Rajaratnam, P.A.D. Samarasekera and A.M.de S. Jayaratne.

Industry analysts expect 1998 tourist arrivals to top 380,000, with the projected increase conforming to their estimated 4% arrivals growth for the year.

According to Tourist Board figures, November arrivals at 38,421 were up 20.1% from a year earlier. This growth was spurred by a sustained arrival growth of 22% from Western Europe together with a recovery in arrivals from South and East Asia.

A John Keells research report said that South Asian arrivals were up 5.2% while the East Asian recovery was more dramatic with a 36.6% increase.

This report said that the rally which began last September has pushed up tourist arrivals in the 11 months from January to November 1998 to almost 336,000 - up 2.7% year-on-year.

Analysts expect December arrivals to top 45,000 pushing up the 1998 total to over 380,000, providing a 4% arrival growth for last year.

Germany, Sri Lanka's biggest tourist traffic generating market, fueled growth in Western European visitor arrivals with France and the Netherlands providing useful support.

Japanese traffic increased strongly by 85% in 1998 to lead the recovery in East Asian arrivals. The John Keells report attributed arrivals growth to the tourism ministry coordinated promotional campaign together with civil unrest in Indonesia which is a key competing destination.

Analysts expect the present rally to extend for the remainder of the winter season on the strength of current bookings.

As most hotel owning companies have financial years from April 1 to March 31, analysts who project tourist arrivals for this period to exceed 390,000 said that this will favourably impact on the performance of quoted hotel companies with a March financial year ending.

The John Keells report said that apart from the city 5-Star properties, most other hotels in Sri Lanka rely mainly on Western European traffic. Given the above 20% arrivals growth recorded by this segment, John Keells' researchers maintain their forecast of healthy occupancy for resort hotels during the current financial year.

"Conversations with the management of several leading resort hotels confirmed our view", the research report said.

This research is also optimistic about the performance of city 5-Stars which suffered occupancy drops due to a slow down of mainstay Asian arrivals. They "are likely to improve occupancy in the second half of the current financial year on the back of a turn around in Asian arrivals", the John Keells research report said.

The managers noted that blue chips were trading at their lowest prices for the decade giving long term investors an ideal opportunity.

""If the security situation permits and with a slight improvement on the foreign investor sentiment towards the region, better returns could be expected in the future", they said.

Asia Securities, one of the country's leading stock brokers, hopes that the All Share Index on the Colombo Stock Exchange which is now under 600 points will rise to about the 700 point level by the end of the first half of this year.

In a report dated January 18, Asia said that although corporate earnings growth is clearly slowing, a sharp fall in interest rates from the fourth quarter of 1998 onwards has enabled equity prices to find support well above the 7-year lows witnessed in September 1998.

Asia believes that in this scenario, local institutional and retail investor activity in the first half of this year will be largely dictated by the direction of interest rates. It attributes this to the "marked lack of alternative investment opportunities".

Asia, which reckons that sluggish corporate performances have been more or less discounted into equity prices, also does not believe that significant foreign selling would emerge, "as confidence in Asian emerging markets looks to have recovered to some degree".

With little likelihood of interest rates reversing their current downward trend in the short term due to rising liquidity in the money market, Asia expects a further "liquidity driven rally" in the second quarter of this year after poor corporate results for the financial year ending March 31, 1999 are fully absorbed by the market.

"Consequently, we are targeting the All Share Index to rise to around the 700 point level by end 1H1999 and believe the scope for potential gains in the Sri Lankan market are greater than the associated risks", the Asia report said.

Taking a 6-month view, the brokerage said that they believed it is unlikely that any particular sector will out-perform the market. This was based on their expectation of slowed overall economic growth denting corporate performance well into the first half of this year.

"We are witnessing an externally led slowdown in all of the major sectors (banking, conglomerates, plantations and export oriented manufacturers), barring the tourism and consumer industries", the report said.

Coconut prices are reaching for the skies and a parcel from Horakelle Estate managed by the National Livestock Development Board had recently fetched an auction price of Rs. 12,010 per thousand nuts - the highest in recent memory.

"There is a tremendous shortage of nuts in the Gampaha and Kurunegala districts," said an executive of a coconut estate management agency which also acts as a selling broker for coconuts. "It is mostly due to the lagged effect of a very bad drought two years ago."

He said that at the height of the drought, the vegetation on coconut estates was scorched and there wasn't a blade of green to be seen. "It was one of the worst ever droughts," he said.

He said that high yielding 50-acre estates under their management had seen crops that were as small as 3,000 - 5,000 nuts.

"But along the coast from Wennapuwa to Puttalam, the coconuts are fairly large and are prized by buyers. Kalpitiya coconuts are a favourite of maalu pol buyers who want green nuts for domestic use. They could offer prices as high as Rs. 12.50 - 13 per nut."

Some desiccated coconut millers are unable to function viably with prices as high as at present and are thinking of suspending production. But others are compelled to keep their mills working and carry the loss.

by Kanes
The objectives of the Agreement are "to promote through the expansion of trade the harmonious development of the economic relations between India and Sri Lanka" and "to provide fair conditions of competition for trade between India and Sri Lanka. "The means of achieving this is free trade through the elimination of tariffs. Actually, India does not need a free trade agreement to promote its exports here for it has already expanded its exports without zero tariff to become Sri Lanka's largest supplier of imports. Between 1993 and 1997 our imports from India doubled in value and this occurred at existing tariffs; what it means is that even at current tariff levels Indian goods are cheaper than from most other countries and further concessions like free trade are hardly necessary. India will continue to be Sri Lanka's largest foreign supplier for a long time whether there are tariffs or not, for its cost of production is lower than that of Western suppliers and nearness gives it the advantage of lower freight and quick delivery.

It is actually Sri Lanka which wants this free trade agreement. Sri Lanka's exports to India are very small when compared to India's exports to Sri Lanka; in 1997 for instance, Sri Lanka's imports from India amounted to Rs. 33,023 million while its exports to India were Rs. 2,582 million or about 8 per cent of imports from India. Sri Lanka believes that it can sell more goods to India if India eliminates import tariffs and allows free trade. As SAPTA regional trade liberalization is perceived as too slow, Sri Lanka has used a bilateral trade pact to create free trade between the two countries. But will this Free Trade Agreement increase Sri Lanka's exports to India by a significant amount?

Limited Exports to India
The Free Trade Agreement assumes that Sri Lanka has a variety of goods which can find a market in India once India removes the import tariff so as to make them more competitive. The plain fact, however, is that Sri Lanka does not have such a variety of goods and this is illustrated by the limited range and the negligible value of Sri Lanka's exports to India. The fact that a country like Singapore exported abut Rs. 34,512 million worth of goods to India in 1996 as compared to Sri Lanka's exports of Rs. 2,582 million indicates that it is not so much high tariffs as the non-availability of goods in Sri Lanka which India demands that is preventing an expansion of exports to India. Singapore has the goods which India demands such as TV picture tubes, paper board, accounting machines, telecommunication equipment, electronic micro-circuits, polythene primary forms, ball bearings, electronic machinery, switchgear, and parts and components of different machines and equipment but Sri Lanka does not have them or have them only to a limited extent. The export production structure of Sri Lanka is designed both by domestic and foreign investment to grow crops and manufacture goods to be exported to the West and not to South Asia/India. The current pattern of exports to India reflects the underdeveloped structure of production in Sri Lanka.

Sri Lanka's Major Exports to India 1997 (in Rs. Million)
Agriculture		Industrial		Scrap
Pepper	290	Parts, accessories of electronic machines	384	Iron Scrap	412
Rubber	257	Nylon Polyamides	121	Paper Scrap	131
Tea	78	Acrylic Alcohol	85	Copper Scrap	97
Areacanuts	49	Acrylic Knitted Fibre	72	Zinc Scrap	49
Lac. gum, resi	33	Plastic Products	51
Pepper Oil	27	Glycerine	32
Conch Shell	24	Electronic tranformers	18
Dried Fruits	22	Rubber Surgical article	12
Nutmeg	18
Mace	16
Cloves	13

There were only 23 products whose export value exceeded Rs. 10 million each and only six products whose export value exceeded Rs. 100 million each as shown in the table. More than a quarter of our exports consisted of goods not produced here strictly but discarded: iron, paper, copper and zinc scrap which added up to Rs. 689 million or 27 per cent of our total exports to India. They are hardly the products on which we can build a viable export structure. Apart from pepper, rubber and tea, other agricultural products are of small value and the demand for them fluctuates much. Tea, of course, is for blending of India's tea exports. By and large, all agricultural exports have an uncertain future as they are imported mainly to meet shortfalls in domestic production.

The future lies with industrial goods but our industrial exports to India are only a handful and of small value. There were only two products whose value exceeded Rs. 100 million each - parts and accessories of electronic machines and nylon polyamides. Apart from these there were only six items whose value exceeded Rs.10 million each. It is unlikely that we can expand our industrial exports to the Indian market until we broadbase our manufacturing sector and manufacture a wide variety of goods. Free trade may not help when the variety and volume of exportable goods are limited.

Even if we produce the goods India demands - now or later - they need to be competitive in price and quality. India, it must be remembered is a self-sufficient economy producing almost all the goods which Sri Lanka expects to export there and generally at a lower cost of production. In fact, a good number of these products are exported by India to Sri Lanka. In addition, Sri Lanka will have to face competition in the Indian market from exports of East and South East Asian countries who have all depreciated their currencies and are already hurting some of Sri Lanka's exports. They have also the advantage of a consumer preference for their brand names which have a long established reputation in the market. It is therefore simplistic to assume that Sri Lanka can have easy access to the Indian market if the prices of their goods are reduced by the elimination of import tariff.

There is further the possibility that even under zero tariff Sri Lanka's access to the Indian market will be restricted by non-tariff restrictions. It was mentioned earlier that the Free Trade Agreement refers only to the elimination of tariffs but not to the elimination of quantitative import restrictions. If import restrictions are not removed pari passu with elimination of tariffs, there will be a further obstacle to Sri Lanka's exports. Exporters can only hope that although the removal of non-tariff barriers is not specifically mentioned in the agreement, the authorities in India will carry it out.

Negative List and Rules of Origin
The Free Trade Agreement does not guarantee free access to all Sri Lankan exports as it excludes about 400 items from preferential trade. These items - the Negative List - are not yet known, but they are likely to include several items of export interest to Sri Lanka. Already it has been officially indicated as mentioned earlier, that India's negative list includes garments, petroleum chemicals, alcoholic spirits and coconuts and coconut oil. Garments constitute Sri Lanka's main export to the world - about 50 per cent of our total exports. They have attracted the largest amount of foreign investment in recent years and provide employment to over 160,000 workers. Garments exports may face difficulties in developed countries in the future with the phasing out of the quota system by 2005 mainly on account of stiff competition from other Asian exporters, but Sri Lanka will not be able to turn to the Indian market for relief as garments will be denied preferential access. We tend to forget that India is a big exporter of garments - much bigger than Sri Lanka - and a powerful competitor to Sri Lanka.

The manufacture of a variety of alcoholic spirits has increased in recent years with foreign investment in several enterprises, but they are unlikely to find a market in India without preferential access. A new petroleum refinery too may be established in Hambantota and this may lead to increased production of petro-chemcials, but preferential access is denied to them in the Indian market. We do not know how many other products of export interest to Sri Lanka will be in the Negative List of about 400 but it is likely to include more on account of the new 'Swadeshi' policy of protecting domestic industries in India.

The Rules of Origin may also shut out some of Sri Lanka's potential industrial exports to India as the minimum local value addition is fixed at 35 per cent. Sri Lanka's industrial exports generally have a high import content; the input of raw materials are normally imported, for example, textiles in the case of garments, oil in the case of petroleum products and metal and minerals for metal and mineral products. The domestic value added in the case of garments is about 30 per cent but in any case garments are in India's negative list. Value addition in chemicals, petroleum, rubber and plastic products is around 21 per cent and of basic metal products 25 per cent. Of course, petroleum chemicals are in the negative list but rubber and plastic products are not. When we exclude garments and chemicals, we have only a few manufactures left for export and even some of them may not have 35 per cent local value added. The local value addition, however, is reduced to 25 per cent if the input/raw materials is imported from India, provided the local value addition and the value of Indian raw materials both are not less than 35 per cent. This is an indirect way of promoting Indian exports: Sri Lanka can export more goods to India provided it uses Indian raw materials to manufacture them. After all, a concession cannot be given for nothing in return!

Free imports will undermine domestic agriculture and industry
While the increase in Sri Lanka's exports to India as a result of the Free Trade Agreement is uncertain, an increase in the imports from India is certain. Imports from India as mentioned earlier, doubled in value in the last five years even at existing tariffs and there is little doubt that they will increase more without tariffs. Although our negative list has not been compiled yet, we are told that the government will safeguard domestic industry, agriculture and fisheries through the negative list. The negative lists are subjects of negotiation and if one party acts unilaterally the other party too will do the same; for example, if we include in the negative list a product of much export interest to India, then India too may do the same for a product of much export interest to Sri Lanka. Thus, we cannot be certain what goods will be in the negative lists until they are finalized.

The crucial point is that unrestricted imports of food items such as rice, onions, potatoes, chillies and pulses are likely to destroy the livelihood of thousands of Sri Lankan farmers. Even at 35 per cent import tariff at present, Indian food products are cheaper than Sri Lankan produce, and if the tariff is removed the Sri Lankan farmer has no chance at all. The C.I.F. costs per kg of imported Indian rice in 1997 was Rs. 14.57, maize Rs. 10.39, big onions Rs. 11.01, red onions Rs. 19.36, potatoes Rs. 11.83, dried chillies Rs. 44.31 and lentils Rs. 33.98. Sri Lankan farmers cannot produce any of these crops at the Indian cost of production and are likely to be wiped out when the market is flooded with Indian imports. It is hoped that these products will be included in the negative list.

Similarly, free imports of cheap Indian manufacturers are likely to undermine import-substitution industries such as textiles, paper, plastic goods, cement, tiles, cooking utensils, sanitary ware and others, throw thousands of workers out of their jobs and create social unrest. Suspension of tariff preferences in case of serious injury to domestic producers can be done only in consultation with India and this can be difficult and tedious. Similarly, anti-dumping measures can be taken only if dumping can be proved and this tends to be protracted and expensive.

There are some of us who dismiss these import-substitution industries as inefficient and do not justify protection, but they are an integral part of any strategy of export development as they are the export Industries of the future. No country can export manufactures without building the capacity to produce them and for this purpose, import substitution can provide the necessary impulse. It would be naive to expect Sri Lanka to become a fully-grown exporter of manufactures unless it first sets up industries to manufacture goods to replace imports and gain experience in management, technology, marketing and quality. This is the strategy pursued by most countries in East and South East Asia. The authorities may not be very sympathetic to domestic industry as shown by their removal of the 35 per cent import tariff on textiles without any concern for the local textile industry. The freeing of imports to expose domestic import substitution industry to foreign competition instead of goading it to improve its competitiveness may backfire and wipe out the country's industrial base: businessmen will find it more profitable to import and sell rather than produce and sell. The trade deficit with India will be even bigger.

by Analyst
The efforts by Russia to create a capitalist or free market economy have by and large failed. Russia has defaulted on her foreign debt. She is in the grip of a weak and corrupt government. There is no rule of law. Manifactures and agriculture are dying although commerce survives.

Russia has been captured by a system of "clans" - loose knit groupings of industrial and financial interests, each with a clique of politicians at its head, a mass media under its control and strong arm men at its disposal - this is what an American diplomat has described. This scenario is not far from our own local environment.

As Dr. Karl Popper, author of "The Open Society and its Enemies" says a free market economy cannot exist unless there is the rule of law. The rule of law is important for business to be carried on. In Russia it is difficult to identify where a business transaction ends and robbery begins. If a legal system is not in place first, there cannot be a free market system.

There must be a difference between buying and selling and robbing. When robbery takes over in a big way, the markets are stifled. This applies not only to outright robbery but even corruption which is quasi robbery. Trade comes to a halt where robbery and corruption becomes all pervading.

Merely having the institutional structure of this courts and the police are not enough. They must check crime and dispense justice within a reasonable period after this commission of the offence.

The police have been converted to the People's Alliance Police Force and has ceased to be the police service of the state. We see this in the North Western Provincial council elections run-up. Crime is escalating, especially violent crime. The police are closely linked to the politicians on the one hand and the underworld criminals on the other. This latter connection has been confirmed by a D.I.G. himself.

The police and the politicians are also enmeshed in the illegal trade in drugs and liquor. It's the old enigma which the Roman noticed. Who is to look after the guardians?

The rule of law is there first of all to avoid violence - indeed it would be a good defamation of it. Does anyone doubt that the rule of law has disappeared from our society? The rich and the powerful, the politicians and underworld gangsters commit murder, rape, arson, with absolute impunity. Businessmen who are supposed to be entrepreneurs, who seek market opportunities and risk their capital to exploit them, are instead exploiting loopholes in the Customs and other government regulations. When there are no loopholes they bribe the Customs and other officials to ply their trade.

Industry and agriculture are both in the doldrums, unable to compete in world markets given the inflation and inordinately high level of taxation, whilst their competitors in Thailand, Malaysia, Indonesia have devalued their currencies 30 - 40% and more. The government thinks it is doing wonderfully well. There are none to blend as those who will not see.

Corruption has reached an all-time high with the president herself being accused of 'dishonest practices' by the president of Evens International, an American company which is claiming millions of dollar for breach of contract. As the economy slows down more and more bank loans will go bad particularly in the two state owned banks when the criteria for lending is political clout or the personal friendship of the bank managers with their clients.

The capital of these banks is too low to permit this increase in provisions for bad loans without falling below the international capital adequacy norms laid down by the bank for international settlements.

We need the state but we need it to enforce the rule of law. If the state is unable or unwilling to enforce the rule of law we are on the road to chaos, not only political chaos but also economic chaos.

No economic enterprise can function unless there is law and order. The politicians are above the law and there are so many of them. A deputy minister violates fundamental freedoms of a citizen. He is a law breaker but sits in the assembly of lawmakers. Had he been charged under the normal criminal law and convicted he world be in jail.

But with a rigged machinery of state, rigged in favour of the ruling political party, there is no hope of charging a ruling politician under the criminal law. In this environment a politician cannot only resort to corruption but he can resort to extortion as well. That will be the next stage as was see in Russia.

Inflation and growth
Many politicians and ordinary people don't seem to realise what the ongoing war entails for the economy. Some argue that other countries have developed with an on-going war, so why not Sri Lanka? The world's biggest economy, the U.S.A. fought a war in Vietnam while ultimately made her the worlds largest debtor nation whereas it was previously a world creditor.

Our local war has led to very high levels of taxation. Our GST rate is 12 1/2% whereas in Singapore it 5%, and yet it doesn't provide adequate revenue for the government and perhaps needs to be raised further. This is also the national security levy. These high tax rates have raised this level of costs in the economy.

But yet the government does not get adequate revenue even to balance its budget on current account. Its budget deficit still runs above 7.5 % of the gross domestic product with no hope of reducing it in spite of bluff and bluster.

The high budget deficits also contribute to this raising the wages and costs of the producers. The Central Bank blithely manages the exchange rate closing its eyes to this dangers of a high cost economy which will have to opt out of this globalisation process. Some naively believes there we can achieve a reasonable growth rate in a closed economy although our past experience showed how import substitution policies failed miserably.

But running an open economy means that this government should be committed to having a level of taxation and a level of inflation which as not out of alignment with the rest of the world. Openness to the global economy can be a source of many economic benefits - imports of investment goods from abroad which cannot be made at home at comparable cost, transfer of technology and ideas from developed countries and above all, access to foreign savings which can help overcome the severe shortage of capital.

In the long run, investment is the key to economic growth and countries that invested a higher share of their GDP while maintaining macro - economic stability achieved a faster rate of economic growth. But investments should produce returns.

If our economy is having a higher rate of inflation and taxation our industries and even agriculture will not be able to compete with imported products. Merely lowering tariffs and signing a free trade agreement with our closest neighbour and also a competitor is inviting trouble unless we adjust the cost and price levels. We need to free our labour market and liberate the entry and exit of firms of our industry and agriculture are to be competitive.

Macro-economic stability is crucial. It is here that we need to pay serious attention to the economic consequences of the war. It is difficult to maintain macro-economic stability with the on-going war. How do we prevent our wages, costs and price levels from rising any further to make our economy competitive? We must reduce the budget deficit drastically.

There are only two ways to reduce the budget deficits: by increasing revenue faster than the increase in expenditure or by reducing expenditure. Increasing revenue through higher tax rates is out of the question since the rates are already too high. Nor can expenditure be reduced given the war and the free welfare services like education, health and the subsidies.

We have to face two serious economic problems: how to reduce budget deficits without increasing taxes and how to mobilise the investment funds required to ensure faster growth. If we choose to run the economy at a higher rate of inflation than that of other countries, we will have to put up with higher interest rates and a depreciating currency relative to the other countries.

This is the policy we have followed all these years. But unless we depreciate sufficiently to offset the higher rate of domestic inflation relative to that of the outside world, our industries and even our agriculture are in grave danger being unable to compete with imported products. Our whole development strategy through export promotion is also in jeopardy.

Growth fundamentals
Instead of merely lowering tariffs and waiting for an influx of trade to boost economic growth we need to focus on the fundamentals. What are these fundamentals? Firstly, we need macro-economic stability and secondly, good governance.

The rule of law is fundamental to the maintenance and growth of the free market economy. The rule of law is the basic or bedrock of democracy. The term 'democracy' as used by our politicians, has connotations other than what it has in the industrial countries which developed this concept.

The Athenians realised that democracy could degenerate into a tyranny of the majority. They were always suspicious of populists. The Greeks had an institution to safeguard their democracy from populists - "ostracism". They sent to exile those political populists who sought to rouse the ordinary people with false promises.

There was the unjust sentence passed on Socrates, after a political trial where the prosecutor was the head of a party. Athenian democracy had committed dreadful mistakens - crimes against humanity such as the destruction of Delos where all the island's menfolk were killed and all its women and children sold into slavery.

We had our own crimes such as the 1983 terror against the Tamils. Today we see in the North Western Province how the leaders of the government regard their political opponents as morally evil (and their own party as good). That leads to hatred which is always bad, and to an attitude which emphasizes power instead of contributing to its limitation.

Our struggle for economic development also involves a struggle for the rule of law and for good governance. They are as much fundamental to development as investment. Even if we mobilise funds for investment from international capital markets, we cannot entrust such funds to corrupt politicians and bureaucrats to spend them on projects however good they are in term of cost benefit ratios.

We have today reached the stage where corruption stinks to high heaven and any funds mobilised for investment will go down the drain. So priority should be to establish the rule of law and to holding the president and her ministers accountable for their actions.

The absolute legal immunity of the president under the constitution does not help. The politicisation of the police service and the public service has meant that the ministers too go scot free even if they indulge in crime and corruption.

The police service has become not the police service of the state but the police service of the People's Alliance. Many top heads of department too have become stooges of the ruling political party. The situation is reminiscent of the communist states where the bureaucracy necessarily had to be members of the communist party.

The permanent commission on bribery and corruption was effectively stifled. There is no institution to investigate bribery and corruption although complaints against Ministers have been lodged by the public. What a democracy? It is incumbent on the state to guarantee for all its inhabitants the right to life, liberty and security of person. The Sri Lankan state failed to provide this guarantee to Tamils and ultimately they decided to fight for their own state.

We see in the North Western Province Provincial election run-up how the opposition political party and its supporters are being deprived of the same right to life, liberty and security of person. The candidates are shot at, a supporter is murdered and instead of making a genuine efforts to provide security, we hear hypocritical and nonsensical rhetoric by ministers of the government.

These fights are derived directly from the universal declaration of human rights as adopted by the United Nations several decades ago. It constitutes the criterion by which the legitimacy or authenticity of a democratic order can be judged. In a genuine democracy fundamental rights of all citizens are protected by the state. Human rights today are available only to the ruling party and its supporters. Others, rights are violated with impunity.

The will to work hard and to produce more depends on the people's faith in the social order. They should be confident that the fruits of their labour will accrue to them. Several businessmen have been killed by gangsters in recent months. This weakening of law and order is a threat to the economy. People often refer only to the impersonal factors such as the power of technology, of markets as causing economic development. But there is as much evidence that changes in public attitudes and in the value system in society are equally important for development.

The weakness in our value system is obvious. We have no commitment to anything, not to democracy, not to economic developed. The typical response of the elite, who should be the driving force in society is "I do not want to get involved." So what can be nipped in the bud, grows stronger and soon becomes a menace as politicians have become today.

We have allowed them to rise above the law, not only the president who has been given legal immunity during her term of office, but every petty politician. All around us are signs of a moral gap: in business, in politics, in government and in daily life.

Adam Smith realised that the free market economy must be buttressed by a moral foundation several philosophers like David Hume and other right down to Milton Friedmann today, set out an ethical framework for the market economy. Other economists have underlined the importance of law and institutions.

Our free market economy lacks a moral foundation. We are seeking a retreat to traditional loyalties and values which are inherently divisive in a plural society such as we have inherited. The 'history' invoked bears no relation to the reality.

Religious fundamentalism is rising not only among the Muslims but now among the Hindus with their Hindutva, a religion which was earlier eclectic and tolerant but is now becoming militant and intolerant.

We entired this phase in 1956 as a culmination of the Buddhist revival of the nineteenth century. The attempt to build an exclusive identity on the basis of ethinicity and religion has caused us immense problems and conflict. Our failure to maintain law and order permitted the riots against the Tamils on several occassions until the program of 1983 when the state under J. R. Jayawardene completely abdicated its authority to the hoodlums.

We are witnessing a similar undermining of law and order again, this time not only against ethnic and religious minorities but against political opponents as well. All round we see the triumph of evil over good. Nothing seems to pay more than violence and corruption. Are we descending to the state of nature envisaged by Hobbes?

The Securities & Exchange Commission (SEC) has advised all listed companies to provide a specific year 2000 disclosure in their quarterly accounts and annual reports as part of their compliance with the continuous listing obligations of the SEC and CSE, the SEC Director General Kumar Paul said.

Some companies have already begun making this disclosure in the quarterly accounts covering the period ended December 30, 1998. Annual reports covering the current financial year (for March companies) and the financial year just passed (for December companies) will also include such disclosures as a part of the continuing listing obligations of companies.

One of the first companies to make the disclosure has been the Capital Development and Investment Co. Ltd. (CDIC) said that its computer systems and processes have been appropriately checked out internally to counteract possible failures or disruptions from the Y2K bug.

The SEC has said that the disclosures should include the definition of what the company understands as being Y2K - compliant; the potential impact of this issue on the company's business, cost and revenues; and plans to address the Y2K issue.

Y2K is a term used to refer to the problem associated with the performance of some computer systems on the dawn of the new millennium. It has been the normal practice for computer software and hardware to use only two digits rather than four to record the year in date fields.

Thus 1998 would be denoted by the digits 98. With this 2-digit format, many computers cannot distinguish the year 2000 from 1900 as it is denoted by digits 00.

The SEC guidelines have required companies to indicate the significance of this problem in their business on the scale no impact, insignificant impact, some impact, substantial impact, serious impact and very serious impact.

It has asked that such disclosures be reasonably specific with the information including the company's Y2K plans covering business operations and, if material, its relationship with suppliers, customers and other relevant parties; and whether the company is tackling the problem using in-house technical expertise or is relying on external IT consultants.

Other information disclosures required include the progress of Y2K related efforts and the expected date of compliance including the period of testing. Disclosures have also been called for on the estimated cost of such efforts including whether and how this has been accounted for in the financial statement.

The SEC has also asked companies to describe what contingency plans, if any, they have or will be developing on this matter. If there is no contingency plan this should also be disclosed.

If companies have not made any plans to address Y2K issues, they too should be disclosed, SEC has said.

It would also be advisable if the company could consider its potential liability to third parties if its systems are not Year 2000 compliant resulting in possible legal action for breach of contract or other damages, SEC said.

The company must disclose too, if it will be not be Year 2000 compliant and inform shareholders of the likely results of such unpreparedness. The disclosure should be specific and quantified as far as practicable.

"Additionally, we would suggest that the disclosure should be as clear and comprehensive as possible in non technical language and endeavour to answer important question such as `will the company be ready and what progress has been made in this regard'," the circular said.

"A disclosure should include the material, historical and estimated cost of addressing the Year 2000 issue such as modifying or replacing software and hardware and the hiring of expertise in this regard", Paul said.

The SEC has also circulated two informative booklets issued by the Joint Year 2000 Council for the information of all listed companies.

"We trust that these booklets will be useful for your company in addressing the problem in an organised and timely manner", SEC said.

Although the recent Brazilian crisis is considered a further setback for emerging markets, one of Sri Lanka's leading stock brokers said that its impact on the Colombo bourse "is expected to be marginal".

"This is due to the markets in recent times being supported strongly by domestic investors", John Keells Stock Brokers said in its weekly review for the week ending January 14, 1999.

The Brazilian crisis had impacted on the Colombo bourse with the all share and Milanka indices shedding 9 and 29 points respectively during that week, the report said. Price declines were seen more on highly capitalised blue chips, probably anticipating selling by foreign investors, it said.

Brazil stunned global financial markets on January 13 with a 9% devaluation of its currency and the resignation of the President of its Central Bank.

Global markets shed high percentages fearing a repeat of the Mexican peso crisis in mid 1990 and the East Asian crisis, the John Keells report said.

Brazil said that it would follow a more flexible interest rate and currency policy and its Central Bank removed the tight mini band that the real (the Brazilian currency) previously traded resulting in a 9% weakening against the USD.

Brazil, like most crisis-ridden East Asian countries and other Latin American countries, has depended on foreign funds for its economic agenda.

In fact, it is estimated that US banks have lent over US$286 to the country. While there are fears that the current devaluation could get out of control like what happened in Mexico in 1990, a repeat of the East Asian scenario is also feared, the John Keells report said.

Mexico decided on a moderate devaluation in 1990 that was not accepted by the market. The currency collapsed resulting in a recession not only in the country, but the region.

"On the other hand, when Thailand devalued its currency in 1997, it led to a string of devaluations in neighbouring economies, resulting in the region's financial system collapsing", the report said.

The Sri Lanka Standards Institution (SLSI) in association with the Central Environment Authority (CEA) is organising a seminar to create an awareness of ISO 14 000 standards covering environmental management and its implications in international trade.

"Through this awareness programme SLSI expects to educate the senior managers of organisations on details of different aspects of the standards, applications and the approach in developing the systems", a SLSI news release said.

This seminar which is due to be held on July 18 will see CEA officials outlining the regulatory aspects on environment.

SLSI which has already trained 16 staffers as ISO 14 4000 auditors said that these standards cover basic elements of an effective environment management system and the relationship of this system with environment impact assessment and E-co labeling.

SLSI said that those organisations who have already developed ISO 14 000 system could now seek certification from them. The procedures for such certification will be explained at the forthcoming seminar.

SLSI is also providing assistance to a limited number of organisations to develop environment management systems. Already, 4 organisations have been identified for receiving this assistance which is intended to help developing them in Sri Lanka.

SLSI said that they will charge no fee for this service "as it is necessary to maintain the impartiality of SLSI certification in the future".

However, those receiving such assistance will be required to function as models for other industries to share their experience in developing the systems.

SLSI expects international emphasis on ISO 14 000 certification. It said that many developing countries have already initiated certification based on these standards.

"With the growing concern on environmental aspects globally, ISO 14 000 certification is expected to play an important role in international trade in the future", SLSI said.

The Ceybank Unit Trust has seen a sharp decline in the value of its portfolio during the six months ended September 30, 1998 with the portfolio value down to Rs.707.3 million from Rs.1,082.8 million a year earlier.

The managers of the fund said that a turbulent environment prevailed on the Colombo Stock Exchange (CSE) during the period under review. However, the decline in the net asset value of Ceybank units at 27% was lower than the value lost by the All Share Index (30%) and the Sensitive Price Index (36%).

The managers said that the growth investment income of the fund had grown to Rs.29.9 million during the period under review due to a 83% surge in dividend income over the previous period despite a 34% decline in interest income.

Net investment income excluding capital gains had grown by 22% to Rs.22 million supported by the decline in expenses including management fees by 34%.

However, the net investment income including capital gains was down 67% to Rs.13 million from Rs.40 million posted during the previous period. This was mainly attributable to a realised capital loss of Rs.9 million "in rebalancing the equity portfolio in the background of the falling equity prices".

At the beginning of the financial year on April 1, 1998, Ceybank held 69% of its net assets in equities with a dominant share (48%) in the banking and finance sector.

"Although the moderate equity exposure by the fund provide little boost during the short rally in April, to some extent it insulated the value of the fund from the subsequent plunge in share prices. However, the significant exposure of the fund to high market capitalised liquid stocks which was generally held by foreign investors led to severe downward pressure amid intense foreign selling to reduce their investment in Asian markets", the managers said.

By early September, when the All Share Index had tumbled to a 7-year low of 461, Ceybank had gradually invested in the market to take advantage of lower prices of selected stocks. It followed a strategy of disposing stocks that had not dropped sharply and reinvested in counters that were subject to heavy sell off by foreign investors.

At the end of September 1998, Ceybank held 69% of its assets in equities with the banking and finance sector absorbing the lion's share of 39%.

"While reasonable exposure of the fund in the fixed income securities provide stability, to some extent, to pass through the rough road ahead, the investment strategy adopted will enable the fund to show steady recovery once the cloudy sky is cleared", the managers said.

Discussing the future outlook, they said that a melt down in Asia and Russia will have an impact on economic growth in Sri Lanka. With world leaders taking aggressive steps to boost their economies, the managers were hopeful that listed companies here would report "a reasonable earnings growth for the ensuing year even in this pessimistic environment".

The board of directors of the Unit Trust Management Co. (Pvt) Ltd. has decided to award Sarasavi scholarships to the unit holders of Ceybank Unit Trust and Ceybank Century Growth Fund and any unit trust launched and managed by the company in the future, unit holders have been told.

These scholarships are to be funded by making use of the retained funds of the shareholders of the management company - Bank of Ceylon, Merchant Bank of Sri Lanka, Carson Cumberbatch & Co. Ltd, Unit Trust of India and HSBC Asset Management (Hongkong) Ltd.

"Under no circumstances will the monies of the unit holders (of the Ceybank Unit Trust and Ceybank Century Growth Fund) be used to offer the scholarships", the management company said.

Children of eligible unit holders gaining admission to an approved university will be assisted financially to follow undergraduate courses, the management company said.

Sarasavi Scholarship winners will be entitled to 10 monthly cash awards per academic year for the duration of the undergraduate program with Rs.2,000 paid at the beginning of every academic year and further 9 monthly payments of Rs.1,000 each during the rest of the academic year.

The extent of scholarship assistance may be reviewed by the directors of the Unit Trust Management Co Ltd from time to time.

To become eligible for Sarasavi Scholarships, the unit holder or their children have to satisfy the management company that they had been admitted to follow an undergraduate course at an approved university; will continue the undergraduate program full time; and that he or she (that is the parent or the undergraduate) must have held Ceybank Units for a minimum period of 3 years at the time of university selection. Such units must also be held for the duration of the scholarship.

The directors of the management company will decide on the basis of selection of beneficiaries giving priority to studies in fields where a significant contribution can be made towards the country's economic growth and development.

The management company said that they will endeavour to award Sarasavi Scholarships to all eligible unit holders satisfying these conditions. However, if the number of applicants are more than the number of scholarships available for a year, the selection will be based on the aggregate marks obtained at the GCE A/Level Examination with first priority given to those qualified to enter an approved university.

The Capital Development and Investment Company Limited (CDIC), now an NDB subsidiary, has performed strongly in the year ended December 31, 1998 according to provisional unaudited figures issued to shareholders.

The company has changed its financial year which previously ended on March 31 to December 31 and there were no comparative year-on-year figures. However, the performance during the 9 months ended December 31, 1998, both in terms of income and operating profit, was lower than earnings a year earlier.

CDIC income for the year under review was Rs.58.6 million and its operating profit Rs.38.9 million. After meeting an interest charge of Rs.1.3 million, the company had a net pre tax profit of Rs.36.8 million which remained its after tax profit as there is no tax liability.

The bottom line of Rs.36.8 million was down from Rs.44.1 million earned during the 9 months ended 31.12.97.

With retained profits of Rs.52.6 million brought forward, CDIC had Rs.89.4 million available for appropriation during the year under review. A sum of Rs.50 million of these funds had been transferred to the general reserve during the year ending 31.3.98. As a result, there was a profit of Rs.39.4 million in the company's books at the end of 1998.

CDIC has an issued capital of Rs.245 million. Its investments were valued at Rs.363.2 million which included Rs.225.4 million in listed companies with a market value of Rs.351.8 million.

The Colombo Stock Exchange (CSE) and the Securities & Exchange Commission of Sri Lanka (SEC) have provisionally approved the application of Aitken Spence Hotels Limited to de-list the company, the CSE announced.

The CSE said that in keeping with de-listing requirements of the SEC, the board of directors of the company will arrange with a suitable party an offer to purchase holdings of minority shareholders at a fair price to be decided in consultation with the CSE.

Under the SEC rules, shareholders who object to such a de-listing have the opportunity of making representation to the SEC giving the reasons for such objections.

Mr. Ratna Sivaratnam, Chairman/CEO of the Aitken Spence Group said that about one and a half years ago, over 97% of the shares of Aitken Spence Hotels Limited, owners of the Neptune and Kandalama hotels, had been taken over by Aitken Spence Holdings Limited, formerly Ahungalla Hotels Limited, owners of Triton Hotel.

"About 800 shareholders still holding about 2.5% of Aitken Spence Hotels now get no return on their investment and have made representations to the company to sort out their problem," he said.

Sivaratnam said that they will buy over these shares at a small premium over their last transacted price and wind up the company whose assets thereafter will be held by Aitken Spence Hotels Limited.