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Rs. 43.50 share price, no binding agreement
CTC discloses pending deal over CTC Eagle

Negotiations for the sale of the controlling interest of CTC Eagle held by the Ceylon Tobacco Co. Ltd. (CTC) have begun and a tentative price of USD 0.625 (about Rs. 43.53 at current exchange rates) per share reached, CTC told the Colombo Stock Exchange on Thursday (CSE).

According to the disclosure made under the continuing listing regulations of the CSE, CTC has said that its main shareholder, British American Tobacco plc. and CTC itself have been in negotiation with a consortium consisting of the NDB and the Zurich Financial Services Group "to effect a restructuring which would put a price per share on CTC's holding in CTC Eagle at USD 0.625."

The disclosure however stresses that no binding agreement has been concluded and the conclusion of any such agreement depends on the receipt of certain approvals which have not been specified.

Business circles expected these could possibly include the green light from the regulatory agencies including the CSE and SEC as well as the Exchange Control authorities.

The disclosure said that the directors of CTC did not believe it would be appropriate to give specific details regarding the negotiations until they are finalised following final agreement between the parties concerned.

"The directors of CTC will make a further statement either upon the agreement being reached or in the event negotiations fail," Thursday's disclosure said.

A large quantity of 165,300 CTC shares was concluded at prices of between Rs. 39.50 - Rs. 43 per share on Thursday. This was the biggest quantity of CTC shares done recently on the CSE trading floor. However, the CTC share price has been moving up in recent weeks from around Rs. 30-32 to Rs. 40-43.

An inquiry from an investor on whether a deal on the sale of CTC's holding in CTC Eagle was pending was also published in the letters page of a newspaper recently.

CTC explained that the recent global restructuring of its parent BAT Industries plc. which owns nearly 90% of the Sri Lanka company had resulted in its financial services business becoming part of the Zurich Financial Services Group.

CTC held 63.82% of CTC Eagle which had over the years obtained technical assistance and expertise from Eagle Star, a company previously owned by BAT but is now under the Zurich umbrella.

"In these circumstances, it is appropriate that the shareholding of CTC

Eagle be restructured to reflect the restructuring of BAT Industries and to ensure that CTC Eagle would continue to receive the expertise that it is dependent on," the disclosure said.

CTC holds a total of 12.76 million ten rupee shares of CTC Eagle. The company has in recent years been selling off what was described as "unproductive assets" including prime real estate and downsizing its payroll to maximise the viability of its core business.

But CTC Eagle which has a good record of profitability and bonus share issues would not fall within the definition of "unproductive." CTC Eagle was traded at Rs. 39 on the CSE on March 11.

About turn from last year
Plantations drag down corporate profits

Poor performance in the plantation sector has dragged down corporate profits in the current financial year according to a research report by John Keells Stock Brokers (Pvt) Limited. This is the reverse of the previous year when booming tea prices particularly added gloss to many profit and loss accounts.

This analysis shows that a "significant drag down" from the plantation sector had affected overall corporate earnings with companies with exposure to plantations seeing their results depressed from the previous year.

The research model indicated a decline of Rs.1.4 billion in composite earnings during the current financial year for pure plantation sector companies. This ignored other companies with plantations exposure.

This report said that corporate earnings during the current year would have been up 17% if the plantations sector was discounted. John Keells said that for the next financial year, the corporate profit growth in their model would be up 19% if the plantations sector was ignored.

"This analysis clearly brings out the drag down effect", the report said stressing that it ignored plantations sector profits of diversified holdings and other companies like Richard Pieris, James Finlay, etc.

Analysing the results of the companies whose financial year closes in December, the report rated the winners to be the manufacturing, food and beverage and banking sectors. But the banking sectors' profit growth had been much lower than in the previous year.

"Most losers had some form of exposure to the plantation sector. On the other hand, winners by large margins were from the manufacturing and food and beverage sectors", the report said.

It made the further point that with the economy slowing they did not expect companies in the manufacturing and food and beverage sectors to match their earnings growth trends this year.

Low global prices of milk powder helps turnaround
LMF returns to profitability

Lanka Milk Foods (CWE) Limited (LMF), crippled by a two-and-a-half-year long strike, has turned around and returned to profitability in the year ending March 31, 1998.

The company's Chairman, Dr. V.P. Vittachi attributed the turnaround "without much delay" to "prompt and bold decisions taken by the board of directors".

He reported that LMF in consultation with he Ministry of Labour paid the workers who went on strike a compensation package of Rs.36 million, thus settling the two-and-a-half-year old labour dispute.

LMF recorded a consolidated profit of Rs.77 million and a company profit of Rs.121 million for the year under review thanks to a substantial reduction in the CIF value of milk powder in the world market. The chairman said that meticulous cost controls exercised at all activity levels of the company had also helped profitability.

He said that the directors and the management staff are now in the process of revamping the company and actively working towards bringing both the company and its products "to their due status".

LMF said that as the government decision to make Sri Lanka self-sufficient in liquid milk is taking longer than expected, the company will continue to pack imported milk powder and send their product to all nooks and corners of the country "through the best distribution net work available in the country". Lakspray is one of the best known brands in the country.

Although the company had a profit of Rs.121.2 million for the year under review, the consolidated profit of the group was considerably lower at Rs.77.4 million. While the year's profit was sufficient to wipe off accumulated company losses of Rs.95.5 million and leave a retained profit of Rs.25.7 million in its books, the consolidated profit and loss statement continues to carry a retained loss of Rs.44.7 million.

Vittachi said that their efforts to improve the dairy industry in Sri Lanka will continue with LMF subsidiary, Lanka Dairies (Pvt) Limited, continuing to collect fresh milk and process it through ultra heat treatment. This product is marketed as what the chairman called "a consumer friendly long life, fresh liquid milk pack at a reasonable price".

He said that they were also using their fresh milk collections to diversify to other value added products like curd and yoghurt. Lanka Dairies was a carefully planned, long term strategy to bring back "the age old Sri Lankan habit of drinking fresh milk," and to develop the dairy industry here in keeping with government policy.

A second subsidiary, Danish Dairy Products Lanka (Pvt) Limited, importing a premium brand of full cream milk powder from Denmark, has been launched in 1996. Vittachi said that the Dano brand of milk powder was very popular in the Middle East and is expected to show a fair market growth in the future.

He said that they were unable to recommend a dividend for the year under review as accumulated losses have to be first set off.

He thanked all employees and management staff who rallied round the company, "specially under the troubled circumstances that prevailed during the year under review". He undertook to improve their career development opportunities within LMF.

LMF has an issued share capital of Rs.300 million, a revaluation reserve of Rs.105.1 million and a dairy development project reserve of Rs.80 million. The company is a major shareholder of the Distilleries Company of Sri Lanka in which it has a holding of nearly 38 million shares.

The directors of the company are: Dr. V.P. Vittachi (Chairman), Messrs. D.H.S. Jayawardena, R.K.Obeysekere, Z. Alif and C.R. Jansz.

CTC Eagle says there's a strong possibility
Global giants expected to enter local insurance field

There is a strong possibility of international competitors entering the insurance field in Sri Lanka through strategic alliances even with state insurers, one of the country's leading private sector insurance companies has said.

Gottfried Thoma, Chairman of CTC Eagle, said in the company's just published annual report that they have adopted "a new vision for the company to be a world class provider of financial solutions for protection and wealth creation" in anticipation of such a situation.

Thoma also said that the company has also embarked on new initiatives including service improvements, changes in distribution channels and organisational structures to meet the challenges ahead.

Although British American Tobacco Company Limited, the controlling shareholder of CTC, is divesting itself of its financial services business globally, there was no word in the annual report on whether CTC will do likewise in Sri Lanka. CTC Eagle, in which CTC has a 63.82% stake, was set up with technical support from Eagle Star, BAT's insurance vehicle in Britain, from which it has obtained technical assistance and expertise over the years.

There have been market rumours that talks are on with the NDB which, through the Capital Development and Investment Company Limited (CDIC), owns 15% of CTC Eagle, to take over a controlling share of CTC Eagle. The NDB by itself also owns 1.5% of the company.

On Thursday, CTC made an announcement to the Colombo Stock Exchange saying that Eagle Star is now under the ownership of the Zurich Financial Services Group and that talks are on with a consortium comprising of the NDB and Zurich to effect a restructuring of CTC Eagle.

CTC Eagle has just completed a successful year ending December 31, 1998 with an after-tax profit of Rs.126.2 million, up 16% from Rs.108.8 million earned a year earlier.

The group's consolidated result of Rs.118.1 million was up 18% from Rs.100.3 million earned the previous year.

CTC Eagle had seen a 22% growth in its general premiums, 21% growth in its life business and a 33.8% decline on its net general underwriting business, the company said highlighting its 1998 performance in the annual report now with shareholders.

The Ceylon Tobacco Company Limited is the major shareholder of CTC Eagle with a 63.8% slice of its equity. The Capital Development and Investment Company Limited which is a subsidiary of the NDB owns 15% while the NDB itself owns 1.5%.

Thoma said in his review that the company was pleased to present "excellent overall results" in an adverse financial market and decreased yields in investment income.

He noted that premium income had increased by 21.5% and profit after-tax attributable to shareholders grew by 17.8% to Rs.118 million.

CTC Eagle has specially thanked the Controller of Insurance for the support extended to the company to satisfactorily resolving the long-standing issue of dues from an insurance broker who failed to honour his commitment to the company.

Thoma also said in his review that the industry is eagerly awaiting anticipated changes to the insurance legislation in order to ensure equality amongst insurers and an improved control environment.

"In the meantime it is important that all insurers, including state insurers, agree on self-regulation through the active involvement of the Insurance Association. It is disappointing that attempts by insurers to agree on tariff and a credit policy, have not received active response from state insurers", he said.

The directors of the company are: Messrs. Gottfried Thoma (Chairman), Chandra Jayaratne (Managing Director), Joe Thangakone, Richard Juriansz, John Patrick, Ranjit Fernando, Peter Dunn, Tennyson Rodrigo and Ms. Marina Tharmaratnam.

Nestle boosts profits by over Rs. 100 million

Nestle Lanka Limited has concluded a successful year boosting its after-tax profit by over Rs.100 million during the year ended December 31, 1998 according to provisional unaudited figures now with shareholders.

The group's turnover moved up to Rs.3.5 billion from Rs.3.3 billion a year earlier while its trading profit was up to Rs.551.2 million from Rs.398.3 million during the comparative period the previous year.

The after-tax profit of Rs.403.6 million during the year under review was up from Rs.297.7 million earned in 1997, the interim statement said.

Nestle which had Rs.412.4 million available for appropriation as at December 31, 1998, has already paid an interim dividend absorbing Rs.107.5 million. Shareholders have been told that a final dividend will be proposed after the draft accounts are audited.

The company which has an issued share capital of Rs.537.3 million has a revenue reserve of Rs.326.8 million and net current assets of Rs.316.3 million.

Tea off to a good start in 1998

Sri Lanka's 1999 tea production had got off to a good start with a production of 24.7 million kilos, up from 23.2 million kilos a year earlier according to Sri Lanka Tea Board figures.

The tea trade said that although January alone is not a good indicator on what the year's production will be, the country which produced record tea harvests for the last three consecutive years may well be set for another record this year.

High growns had seen a shortfall with the January production at 6.3 million kilos, down from 7.1 million kilos a year earlier. But medium and low growns had caught up the lag - with the low growns particularly improving to 14 million kilos from 12 million kilos a year earlier. Mid-growns too improved to 4.4 million kilos from 4.1 million kilos a year earlier.

Sri Lanka continues to convert the bulk of its production to orthodox teas with a marginal loss of the production of CTC tea during the first month of the year - down to 1.7 million kilos from 1.8 million kilos a year earlier.

Bata's 1998 profit enables 22.5% dividend

Bata Shoe Company of Ceylon Limited has maintained trading profits for the year ending December 31, 1998 at approximately similar levels to the previous year but has lost on other income during the same period according to provisional unaudited figures now with shareholders.

The company's turnover at Rs.1.28 billion was up from Rs.1.27 billion the previous year while its trading profit of Rs.74.2 million compared to Rs.78.8 million earned a year earlier.

However, other income was a negligible Rs.51,000 compared to Rs.14.7 million earned in 1997. This left a pre-tax profit of Rs.74.2 million compared to the 1997 result of Rs.93.5 million.

While tax during the year under review at Rs.30 million was down from Rs.36.5 million a year earlier, the after-tax profit of Rs.44.2 million compared with Rs.57 million earned in 1997.

Bata which has an issued share capital of Rs.121.9 million has already paid an interim 7.5% dividend absorbing Rs.9.1 million and proposed a final 15% dividend which will cost Rs.18.2 million.

The company which carries capital reserves of Rs.14.2 million and revenue reserves of Rs.198.9 million has net current assets of Rs.338.5 million on its balance sheet.

Gloomy economic prospects for 1999

By Kanes
It doesn't look as if there will be an upsurge in economic activity in the world in 1999. The projections for the world economy by the IMF indicate that the overall world economic growth in 1999 will be the same as in 1998 - 2.2 per cent. Major industrial countries, however, will experience lower growth of 1.5 per cent in 1999 as compared to 2.5 per cent in 1998; in the United States, the largest economy in the world, economic growth will fall from 3.6 per cent in 1998 to 1.8 per cent in 1999 while in the European Community it will decline from 2.8 per cent to 2.2 per cent. Japan's performance is expected to be better, with output declining by 0.9 per cent in contrast to the decline of 2.8 per cent in 1998. Thus, all in all, economic performance of developed countries in 1999 will be lower than in 1998. This does not augur well for the developing countries, as slower growth in the developed countries tends to reduce the demand for their exports and the inflow of capital needed for their development.

Slow economic growth is partly the result of anti-inflationary policies pursued by the developed countries. The rate of inflation-price increase - is more or less the same in 1999 in practically all major developed countries and Japan is in the grip of a deflation.

Five countries of the European Union - Germany, France, Belgium, Italy and Spain - have unemployment rates exceeding 10 per cent and they are prevented from pursuing reflationary policies to raise growth and reduce unemployment because of the Maastricht treaty which enjoins limits to fiscal deficit, government borrowing, and inflation. Japan on the hand, has failed to revive domestic demand in spite of its stimulus packages; industrial production is failing and corporate profits are tumbling.

East Asian, Russian and Brazilian Crises

The other major factor which has contributed to low economic growth is the economic recession in East and South-East Asia caused by the currency turmoil. The sharp depreciation, withdrawal of foreign short-term capital, collapse of stock exchanges, loan defaults and banking disasters have led to an unprecedented shrinkage of most of the regions' economies. South Korea, Hong Kong, Malaysia and Indonesia which had negative growth in 1998 are estimated to experience negative growth in 1999 too; Thailand which had negative growth in 1998 is expected have positive growth in 1999 while Singapore which had positive growth is estimated to shrink. As East and South-East Asia is a major trading area, its reduced effective demand for imports, has adversely affected many countries which supply the goods. Export firms of these countries have reduced profits or losses resulting in retrenchment and fall in the prices of their stocks. The US for instance, sells about 30 per cent of its exports to Asia and Japan conducts about 40 per cent of its trade with other Asian countries.

The contagion effect of the East Asian crisis was felt by countries beyond the region, particularly Russia and Brazil. With currency depreciation of 72 per cent, stock market collapse of 85 per cent, inflation rate of 65 per cent and financial bankruptcy, the Russian economy shrank by about 5 per cent in 1998 and is expected to experience the same in 1999. Brazil, the largest economy in Latin America, saddled with widening budget deficits, flight of capital and slack exports, was forced to devalue its currency, the peso, and seek assistance to the tune of $41.5 billion from the IMF. It is expected to have negative growth in 1999. As Brazil provides a large market for the exports of its neighbours -one-third of Argentina's exports going to Brazil - several countries in Latin America are expected to be adversely affected by the "Samba Effect" and depreciate their currencies and experience slow or negative growth. The United States sells 20 per cent of its exports to Latin America, and consequently it will suffer reduction in exports and losses from the Latin American recession in the same way as it suffered from the East Asian crisis; Europe sells about 6 per cent of its exports to Latin America and it will not be immune from the Latin American debacle.

Fall in Commodity Prices

The recession is reflected in the decline in commodity prices. Commodity prices in the world market generally have fallen in the last three year 1996-1998. Average dollar prices of oil, rubber, copper and wheat are 40 to 50 per cent lower than three years ago, those of jute and sugar 30 to 40 per cent lower, wool and cotton 20-30 per cent lower and tin and rice 10 to 20 per cent lower. The prices per barrel of oil for example is $10.44 now compared to $19.50 three years ago; that of a bushel of wheat $2.51 in contrast to $4.24 and of a pound of rubber $0.38 compared to $0.84. The prices of tea, coffee and cocoa are higher than three years ago but lower than 12 months ago. In the last 12 months coffee prices fell by 33 per cent, tea prices by 14 per cent and cocoa prices by 10 per cent.

Commodity prices may fall even further. Crude oil for instance, according to some analysts is expected to fall to $7-9 a barrel. Demand for iron ore, copper, nickel. Aluminium and steel is declining with the reduction of industrial investment and slow growth in Europe and the United States.

In East and South-East Asia, prices of almost everything apart from commodities are falling - real estate, apartments, telephone services, television sets and food. In the optimistic belief that the boom would never end, business went on an investing spree and created oversupply in many goods and services from leather and lacquer to apartments, electronics, and automobiles. This trend was reinforced by new technology which boosted capacity while cutting costs. Low prices tend to stop new investment and push out the inefficient and weaker enterprises and thereby reduce overcapacity. Many firms merge with the stronger and the more efficient in order to survive as in the developed countries where, for example, big oil companies like Mobile, Exxon, British Petroleum and Amoco effected mergers in 1998.

The stock exchanges in East and South-East Asia have not yet recovered from the economic crisis which began in 1994. The average stock prices are still about 50 per cent lower than two years ago in Thailand and Malaysia, 30 to 40 per cent lower in Singapore, Indonesia, Hong Kong and the Philippines and 7 per cent lower in South Korea. In South Asia where stock prices rose in 1997 there was a fall in 1998 of 47 per cent in Pakistan, 19 per cent in Sri Lanka and 15 per cent in India. Stock prices in Japan at the beginning of 1999 were 32 per cent lower than two years ago. In New York and London, however, stock prices rose in this period. Further, all Asian currencies except China's renminbi, Hong Kong dollar and the Japanese yen are still weaker than they were in 1996, Indonesia rupiah by 71 per cent, Malaysia's ringgit, Philippine peso, Thai baht and the South Korean won by 30-35 per cent and the Singapore and Taiwan dollars by about 15 per cent. In the case of South Asia, the Indian and Sri Lankan rupee are about 17 per cent lower than in 1996 while the Pakistan rupee is 26 per cent lower.

The US Economy

The most unfavourable factor is the expected decline in US economic growth from 3.6 per cent in 1998 to 1.8 per cent in 1999. The US current account is also estimated to rise from 2.7 per cent of GDP to 2.8 per cent. What had prevented a world recession so far has been the rising consumption in the US; it rose even faster than salaries and debt and was consequently sustained by savings and this was made possible by the continuous rise in the stock exchange. Dow Jones stock index rose by 21 per cent in the last 12 months when stock prices were falling in most Asian countries. If the stock prices crash in the US, consumption will undoubtedly fall; this will cut its imports and aggravate the recessionals tendencies the world over. The US bubble in the stock exchange can burst from any one or a combination of causes such as a melt-down in Japan, devaluation of the renminbi, crash of Indonesia, collapse of Brazil or the Russian turmoil. The stock prices are at an excessively high level and the bust can come about quite unexpectedly. The Federal Reserve System has cut interest rates thrice to reduce the threat of recession, but eight years of continued economic expansion is unlikely to be sustained.

Unfavourable Trends

The picture for 1999 thus looks gloomy. The Asian, Latin American and Russian economies are unlikely to recover from their current downturn, and the US and Europe will experience lower growth. There are uncertain factors which may make the situation worse such as a possible crash in Indonesia, Brazil and Russia, devaluation of the renminbi and a deterioration of the Japanese economy. The recession has depressed world trade; between 1990 and 1995 world trade increased by an annual average of 2.7 per cent but it dropped by 5.8 per cent in 1997 and 4.1 per cent in 1998. Commodity prices as shown earlier have fallen to very low levels and are unlikely to recover until there is a resumption of economic activity in the world. Capital flight which has drastically reduced the foreign exchange reserves of developing countries, has reduced their capacity to import and this had adversely affected even developed countries. Meanwhile, the deflationary policies pursued by Asian and Latin American countries on the instructions of the IMF such as high interest, restriction of credit, cuts in public spending and in subsidies, instead of helping to revive the economies are having the opposite effect of depressing economic activity and increasing social discontent.

Allow market forces to determine prices

By Analyst
The government, although it has accepted the free market economy has not pushed ahead with the economic reform programme. Prices are best left to be determined by market forces especially where the markets are sufficiently competitive.

Remember the problem the consumer had with the price control on bread? The bakers baked only a small number of loaves of bread and used the flour to make buns and cakes, since the profit margin on a loaf of bread was not enough.

The price of bread was fixed by price control. After the removal of price control, the bakers have produced bread at several prices-a form of price discrimination on the basis of quality as well as on the market for what people can afford to pay.

What is important is that there is no shortage of bread as was the case earlier. There are several other areas where the government has interfered with market forces and caused unnecessary problems for the consumer.

It is useful to distinguish between two sorts of regulations. One aims to correct economic failures of the market. An example is a rule to control prices where the forces of competition are too weak to do the job properly - telephone charges and LP gas prices need to be regulated because these are supplied by one big supplier who controls a large market share.

The other sort of regulation is concerned with what might be called social failures of the market. An example would be the minimum wages laws. But such regulation is a tax and has the economic consequences of a tax.

It is always best to inquire what sort of regulation is being sought. The first sort of regulation poses few difficulties. A competitive market can generally be relied upon to price goods and services well. In such a market if there is no social case for price regulation, there is no case at all.

Transport

Everybody talks about the traffic congestion on our roads. Vehicles can move on our roads only at a snail's pace, especially during the peak hours. The speed of public transport like buses must have dropped at least by 50% during the last few years.

The real villain is the government itself by its discriminatory tax policy on petrol and diesel. In many countries there is hardly any difference in the retail prices of petrol and diesel. In Australia, the price of diesel is higher than that of petrol. So are the prices in many countries of the world. Unfortunately our petrol price is more than four times that of diesel.

The difference is due almost entirely to taxation. Petrol is taxed heavily while diesel is not taxed at all and the price is even below its cost by about 7% according to the Central Bank Annual Report. But apart from the 7% financial subsidy, the differential taxation causes what economists call, an economic subsidy on diesel, a subsidy so large that more and more vehicles driven by diesel, are imported.

Diesel has been too cheap in relation to petrol. This has distorted the entire structure of prices in the economy. It has also given a large incentive to import diesel driven vans and cars.

In colonial times both petrol and diesel were taxed through a specific tax - of so much per gallon and not an ad valorem tax. The ad valorem tax was introduced by the present government.

Only a specific tax can ensure that the economic price of these two joint products are correctly fixed and economically right. The pricing of diesel should also take into account the higher pollution cost of diesel. There are thousands of diesel driven trucks, buses and vans. Most of them produce smoke and pollute the environment which in turn cause respiratory diseases.

The government intervention in fixing the prices of petrol and diesel has created artificial distortions. People are converting their petrol driven vehicles to LP gas. Perhaps the government should encourage the conversion of diesel driven vehicles to LP gas as well. But the price of diesel is being kept too low. Since it has not been revised for several years inspite of annual inflation rates of 10-15%, the real price of diesel has been reduced to zero.

Is it any wonder that a large number of diesel driven vehicles particularly vans, are being imported. They cause traffic jams. Today traffic jams have spread wider and last longer than they used to. No longer are they confined to the city and they are increasingly frequent off peak and have spread to the suburbs as well.

The number of vhicles have doubled and trebled but the number of roads and the road mileage has hardly increased commensurately. Traffic is likely to seize up in the very near future. Not only are there more vehicles, more people are now travelling and travelling more often because travelling is unusually cheap.

If the government must intervene in any market, it must intervene correctly. The tax concessions given for staff transport provided by companies and the similar concession for the purchase of vehicles by agricultural undertakings and other favoured enterprises are short sighted and economically unjustifiable. They have only added to traffic congestion in the city and suburbs.

The economic subsidy on diesel has given a big boost to the import of diesel driven vans which have attracted more economic and commercial activity to the city. The economic hinterland of the city has been extended by the diesel subsidy. So a large number of children are encouraged to rush for admission to the schools in the city. So are patients from distant places attracted to the national hospital.

What is required is to disperse economic activity not to attract more of it to the city, a city bursting at its seams. Pollution, accidents, respiratory diseases and environmental damage from vehicle exhausts are costing the country dearly. Economic disincentives are needed to restrain the soaring levels of vehicle ownership and use.

Diesel prices must be raised to wipe out the economic subsidy. If the government is anxious not to pass the burden of taxation of diesel by way of higher diesel prices then some direct prohibition on the import of diesel driven vans and cars must be introduced as in India. But it is better to adjust downwards the price of petrol and raise the price of diesel. So that the government will obtain the same revenue. And wipe out the economic subsidy on diesel.

The revenue licence fees should also be upped to discourage the ownership of diesel vhicles. Vans and diesel cars which pollute more should be charged more. In Italy they pay upto 18 times as much as small cars parking space should be made more costly as there is a scarcity of parking space. More parking attracts more vehicles several cities like Tokyo have eliminated parking on-street and off-street in its centre. In some cities there are "park and ride" schemes with huge car parks on the outskirts and frequent shuttle buses to take drivers into town. Athens prohibited odd and even numbered vehicles on alternate days from entering the city.

The lack of a transport policy is lamentable the government must commission a study of transport congestion and decide on a policy how to restrict the growth of road traffic. The government has shown itself to be incompetent, lacking ideas and the administrative experience to implement even the obvious actions. The government doesn't even have a cabinet subcommittee devoted to transport.

Higher taxes on cars and vans are like cigarettes, a good way to raise revenue. Surely it is sensible to tax socially and economically damaging behaviour rather than such desirable activities as savings and hard work. There is a huge black economy which grew enormously under President Premadasa and has continued its growth under the present regime although at a much lower tempo.

There is considerable money in the black economy which is used to import vehicles and also to buy them so taxation of vehicles is a way of taxing this black money as well.

Free markets for development

Economists have been saying for years and so has the World Bank that it is necessary to get prices right by less state intervention in order to promote development the result will be a more competitive domestic micro-economy with strong links to the outside world.

The government has so far fared reasonably well in maintaining macro-economic stability given the necessity for financing the war. But it has not allowed a domestic price system to work, so that prices reflect scarcities and attract resources to the best uses. Fiedrick Hyek referred to the "false conceit" of the communist central planners who assumed that markets have no place in deciding how resources should be allocated in the economy. This was a costly mistake which played havoc with the communist economies.

Pharmaceutical Drugs

There is an on-going debate about the high prices of pharmaceutical drugs. Several people have pointed out that their prices in the local market are excessive when compared to their prices in neighbouring India. Some medical students have written to "The Island" expressing concern.

They should ask their teachers to teach them to prescribe generic drugs instead of branded drugs. If the doctors prescribe generic drugs, and if the pharmacists are qualified and licensed to dispense them and if they do so giving the consumers the choice, this problem would not get out of hand. Hasn't the government imposed price control on drugs? Who fixed the high prices then?

The authorities must understand that the drug manufacturing companies are multi-nationals who practise transfer pricing. Their costings have no meaning. Has price control been used by them to keep prices high? Would it not be better to remove price control and let importers import freely provided the drugs are tested for quality now that we have a drug control laboratory.

The State Pharmaceutical Corporation should be given funds to expand and compete, with the multi-nationals. Since the market is not sufficiently competitive the State Pharmaceutical Corporation must play a bigger role, never mind the long queues at its counters. The poor who need to buy the drugs at economical prices wouldn't mind the delays in service.

The lynch pin in the drug retail market are the doctors. The cosy relationship between the doctors and the pharmaceutical firms is well known. They will not prescribe generic drugs. They say western branded drugs are more effective.

On what basis do they express such opinions? Have they conducted any research studies? The marketing techniques of the drug manufacturers are questionable. They employ a horde of sales representatives to woo the doctors. They should confine themselves to promoting their brands through advertisements not seek to influence the doctors. The doctors of course should exercise their independent judgement without being unduly influenced to recommend the more expensive brands.

The medical profession has a lot to answer for the high price of drugs. They are the most entrenched professional monopoly. Margaret Thatcher brought them to heel in Britain.

Postal Service

A well-known scientist has commented that the postal employees provide a a good service. But that is not the point. The postal service must be run as a commercial service with a subsidy for the rural service if necessary. There is no case for a general subsidy.

The argument of the postal employees is that the Postal Department must provide a universal service and that the most remote villager is still entitled to be in touch with his fellow-men by post at a reasonable price.

Many people consider this an admirable principle and it may well be. But most people also consider that services tend to improve when their providers have to compete. What is too seldom asked is whether it is possible for consumers to benefit from universal service and competition at the same time.

At present the government provides the postal service more or less on a monopoly basis. Employees could say the government

provides a universal service, that serving remote areas is expensive and therefore they end to be compensated by enjoying a monopoly in the lucrative areas and use those profits to subsidise their loss making services.

There was similar thinking in respect of telephones. But now there is competition in the provision of telephone services and the consumer has benefited. A similar deregulation has taken place in the postal services in developed countries although in some countries like France state run post offices still have a monopoly in smaller or cheaper packages. But the real cost of providing universal service is not that significant according to studies in developed countries.

The postal employees don't want their department to be converted into a corporation which they feel is a step towards privatisation. But the structure of a government department is not suitable for carrying out a commercial activity. For example the revenue of the department goes to the consolidated fund in the Treasury and all the expenditure has to be voted by Parliament. Only a small amount of money can be retained for its expenses as decided by the Treasury.

A commercial activity cannot be carried out with such financial procedures. Attempts were made to provide more flexibility through the Advance Account system. But it too has its constraints with credit and debit limits and limits on the balance outstanding . Only the corporation structure can provide the financial flexibility required.

Of course it is no guarantee of commercial success. That requires the Minister's meddling to be curbed. Ministers use corporations a milch cows for political patronage and even for personal benefits. But such abuse of power must be dealt with by legal and through political accountability which is sadly lacking.

The question arises whether a trade union which represents only the narrow interest of an insignificant minority should dictate to the government on matters of national policy. The government is responsible to the people and whole.

The public are fed up with the lethargy, dishonesty and poor service provided by its employees. It is practically impossible for the head of the department to manage owing to the excessive strength and unreasonable use of power by the trade unions. If public policy affects them adversely they may ask for compensation but they should not dictate public policy. Strikes under such circumstances damage the states sovereignty.

The government employee must maintain its authority by punishing the offending workers calling out the military if necessary. The use of the state's military power to protect the public is different from a general suppression of trade union rights as resorted to in totalitarian states including the Communist regimes.

Several democratic countries have maintained essential services by calling out the military. President Reagan sacked thousands of air traffic controllers. The state must maintain its authority without giving into the unreasonable demands of its employees.

CIC catches on the swings losses on the roundabouts

Chemical Industries (Colombo) Limited (CIC) has seen a downturn in operating profits during the first 9 months of the current financial year that has been compensated by other income and interest savings. This has enabled the company to improve its bottom line from a year earlier.

CIC had a turnover of Rs.623.3 million during the period under review, down from Rs.638.4 million a year earlier. The operating profit was down to Rs.50.1 million from Rs.64.8 million, but other income of Rs.48.2 million (up from Rs.36.6 million) and lower interest and tax helped the company to post a bottom line of Rs.52 million against Rs.39.7 million a year earlier.

The CIC group had a profit of Rs.74 million after discounting minority interest during the 9 months under review, up from Rs.57.6 million la year earlier.

Shareholders have been told that the consolidated accounts incorporated the results of Crop Management Services (Pvt) Limited which managed Maturata Plantations. This management contract ended on October 31, 1998.

New head of Deutsche Bank in Colombo

Deutsche Bank has announced that Andreas Hoffmann has been appointed Chief Country Officer, Sri Lanka effective immediately. This appointment is in addition to his role as the Deutsche Bank Group's Representative in Myanmar. In his new position, he will also be responsible for Deutsche Bank's operations in Sri Lanka and will be its senior representative with regulators in the country. He will be based in Colombo.

Hoffmann takes over from Mathias Klug, who will be transferred to Deutsche Bank in Malaysia as Global Banking Services head of Corporate Account Management.

Hoffmann spent three years in Myanmar, where he successfully built up the bank's representative office in Yangoon. Prior to that, he spent a year in Singapore within the Credit Department. Since joining the bank in 1987 he has held positions in Head Office in Frankfurt as well as in New York, a Deutche Bank news release said.

"We are very pleased to announce Andreas' appointment as Chief Country Officer in Sri Lanka", said John Ross, Chief Executive Officer, Deutsche Bank Group Asia Pacific. "His considerable experience will be invaluable in managing operations in the country. This appointment underscores our long-term commitment to Sri Lanka". Mr. Ross added, "following a successful 2 years in the country, Mathias Klug will play an important role in the further development of our domestic corporate business in Malaysia".

Deutsche Bank in Colombo which recently downsized now employs 50 people and offers a full range of investment, commercial and private banking products to its target client base of large local corporates and multi-nationals, financial institutions, private and institutional investors as well as high net worth individuals.

Lion feels bite of beer duty hike

The Lion Brewery which has made a substantial investment in a new state-of-the-art brewery now in production is feeling the bite of higher excise duties slapped down in the 1999 budget presented last November.

Like its parent, the Ceylon Brewery Limited, Lion described the beer duty increase as a move "unparalleled for its inconsistency in policy" and said that the government had increased beer duties by a "staggering" 69% and 182% respectively for beers with an alcohol content of below and above 5%.

"In order to retain a semblance of brand affordability, the industry absorbed more than 50% of the duty increase. Nevertheless, in an immediate response to the price increase, beer industry volumes plummeted by 28%," the company said in an interim report to shareholders covering the first nine months of the current financial year.

Like the Ceylon Brewery, Lion also reported that for the first time in recent history, Christmas beer sales in December - normally the peak month for the industry - were lower than in another month of the year. But this month was not identified.

January and February sales too had been poor and Lion expect this trend to continue in the "foreseeable" future.

The company however has done well up to November, when the new duties became effective, posting an operating profit of Rs.193.6 million. Interest charges of Rs.43.6 million reduced this to Rs.150 million.

As the company is not liable for tax, this remained its after-tax profit. A 15% preference dividend of Rs.30.9 million reduced the carry forward retained profit to Rs.110.7 million.

The company said that a term/bridging loan of Rs.350 million had been converted to 15% accumulated preference shares of Rs.10 each on April 1, 1998. The dividend is payable quarterly with effect from June 30, 1998.

Janashakthi to fete field achievers

Janashakthi Life Insurance Company Limited will felicitate field staff who have distinguished themselves with awards for excellence covering 1998 at a BMICH ceremony on March 19, a company news release said.

It said that the main awards will be presented to the outstanding area representative, area development officer, business promotion executive, business promotion officer, business promotion assistant and area development office from among its 750-strong field force.

A Janashakthi spokesman explained that they did business through a network of a

area development officers countrywide. They had achieved a growth of over 30% in their general business last year for the second consecutive year while the life insurance business too had done well thanks to the untiring efforts of the field officers.

Janashakthi Chairman Nissanka Wijewardane will be the chief guest on the occasion of the excellence awards. Other guests will include the Managing Director C.T.A. Schaffter, Marketing Director Tryphon R. Mirando and other board members Sarath de Silva, N. Pararajasingam, W.T. Ellawela, Cubby Wijetunge and Prakash Schaffter.

Blue Diamonds make bad debt provision of Rs. 204 million

Blue Diamonds Jewellery Worldwide Limited, a member of the Ceylinco Group, has made a Rs.204 million provision for bad debts in the current financial year according to a statement to shareholders.

The year has been disastrous for the company with turnover slumping to Rs.90.8 million during the first 9 months from Rs.231.2 million a year earlier. A trading loss of Rs.245.4 million has been incurred during this period against a profit of Rs.55.7 million a year earlier.

While other income of Rs.13 million has reduced the loss to Rs.232.4 million, unappropriated brought forward profits of Rs.211.7 million had been insufficient to absorb this loss. The result is a carry forward loss of Rs.20.6 million in this highly capitalised company whose issued share capital runs at Rs.590.3 million.

Mr. D.R. Senanayake, Blue Diamonds' Deputy Chairman/Managing Director has told shareholders that the loss during the period under review "includes a further bad debt provision of Rs.204 million".

"We are compelled to make these bad debt provisions as a prudent measure due to the continuing Asian currency crisis and bankruptcies in the international jewellery trade and poor debt collections", he said.

He said that the company's operations and costs had been pruned to remain competitive. They have revised their marketing strategy and new distribution arrangements are being set up in the USA and South America.

"Initial sales results have been good and we expect these markets to offset the sales decline in South East Asia, barring any further and unforeseen problems", he said.

The company has claimed "intangible assets" of Rs.230.8 million in its balance sheet, up from Rs.2.1 million a year earlier. There has been a decrease in its investments which were down to Rs.288.2 million from Rs.366 million the previous year.

Blue Diamonds share price has plummeted to Rs.1.25 per ten rupee share on the Colombo Stock Exchange.

Modest dividends from two Eagle NDB Funds

Eagle NDB which describes itself as the country's largest fund management company has announced two "attractive" dividends in the first year of operations.

The company said at a news conference on Friday that unit holders in the Eagle Income Fund will receive Rs.1.10 per unit while those who have invested in the Eagle Gilt Edged Fund will receive Rs.1.03 per unit. There is no dividend from the equity dominated Eagle Growth Fund which had lost Rs. 8.5 million in the period up to Dec. 31, 1998.

Although this fund had outperformed the share index and had a plus position of 16.25% against the market's 12.27% before the nuclear testing on the sub-continent, it closed the year with the manager's buying price minus 10.57% against a negative 14.98% on the all share index.

The company described the rate of return of the two dividend paying funds as "very satisfactory" compared to commercial bank deposits which would have yielded 9% - 9.5% and NSB deposits which would have given a return of 9.6%.*

"Given the low interest rates that prevailed through most of 1998, this is a commendable return made possible by prudent investment decisions made by the fund manager", a company spokesman said.

Senior fund manager Gehan Rajapakse said that interest rates for most of last year were both stable and low. The Treasury Bill yield which was 10% in January reached a high of 13% only in November and Central Bank operations as well as the timing of government borrowing ensured an overall interest environment that was relatively low and stable throughout the year.

Eagle NDB has over Rs.6 billion under its management. With Rs.71 million worth of new units sold, its share of new business generated by the unit trust industry last year had been 69%, it said.

The spokesman said that this clearly indicated the trust people have in Eagle Mutual Funds. Redemption in last year had only been 1% which clearly implied that long term investors were dominant amongst the funds' clientele.

On the equity front, the Eagle Growth Fund expected the outlook in the coming year "may be well governed by elections" with the forthcoming provincial council elections to be followed next year by general and presidential elections.

"The direct result of this is the likelihood that attention will be diverted away from numerous policy initiatives that could have far reaching implications on the direction of the capital markets. Thus a sustained high level flow of foreign capital inflows to the market is unlikely to materialize and we expect market conditions to remain dull."

The managers, however, were hopeful about the prospect of greater trade with India under the Free Trade Agreement and said they would watch for companies that benefit.

Wella products relaunched through local agent

by Harini Dias Bandaranayake
Wella International, a multi-million-dollar, German owned, hair and beauty product manufacturer has relaunched their products through a new local agent, Hair and Beauty (Pvt.) Ltd.

"As Sri Lanka has gained prominence in the region in hair care, we see great potential here to launch new and improved Wella products", said Bernd Lacquai, hair technician, Wella Int., at a press conference on March 5. He said that Wella has planned to market their new line of products under four main categories of colour, hair care, perms and styling, exclusively to local hairdressers. This step, he said, is initiated to prevent the numerous hazards many new hair product users face as a result of their ignorance in using specific products for specific needs. "This is also because research reveals that hair dressers in Sri Lanka, as the main users of hair care products, hold a large market for us", he added.

Raul Viuardo, representative for Wella Int., said that one of the two new hair care product groups that Wella hopes to introduce to hairdressers are Lifetex. "The specialty of this range of product is that we have included a natural conditioning ingredient which would neutralize adverse chemical effects to the hair and would be good for the scalp", he explained. Koleston 2000, he said was another newly launched hair colour product range.

Viuardo further explained that Wella products undergo a number of rigid tests through many University laboratories in the US and through the hands of their scientists in Switzerland. Therefore, he said, each product is manufactured to fit different hair care needs.

Along with the revolution that mother nature is creating in the hair and beauty industry, Viuardo said, Wella products too aim at balancing chemical ingredients with natural ones. He said that every single product launched by Wella consists of at least one natural ingredient. This concept is not only adopted by Wella manufacturers in the current need for environment-friendly beauty care, but it answers a greater need for user-friendly care.

Wella hair care products through their new agent Hair and Beauty (Pvt.) Ltd., was relaunched on March 7. Two workshops to introduce the new line up of hair care products as well as to educate hairdressers of the application of such products took place at Bishop's College, Colombo on March 8 and 9. These two full day workshops were held especially for a total of more than 2,000 estimated hairdressers islandwide.

"More than 65% of hairdressers who had registered for participation in the workshops were from the outstations", Romany Rodrigo, Director, Hair and Beauty (Pvt.) Ltd., told "The Sunday Island", adding that nearly 80% of the participants were Sinhala speaking.

"Our next step is to launch a Wella studio in Sri Lanka, adding to the 87 Wella studios worldwide, where advanced and refresher courses can be offered to hairdressers who wish to further their education in hair care" Rodrigo said. She added that Hair and Beauty together with Wella plan to conduct courses for beginners in the future. " We plan to set up regional centers in areas such as Matara, Kandy, Galle, Gampaha, Negombo, Bentota, Kurunegala and Anuradhapura through which people interested in the hair care industry can further their knowledge" she added.

" Hair and Beauty sees these workshops and centers as an opportunity to provide employment to Sri Lankans by helping them to develop in the hair care industry", a Marketing Consultant of Hair and Beauty (Pvt.) Ltd. elaborated.

He said that even though Wella products are largely targeted in the up market, they will be distributed by his company throughout 1,600 outlets countrywide, including local pharmacies.

UAL celebrates ten years with strong performance

Union Assurance Limited, one of the three quoted private sector insurance companies, has celebrated its tenth year of operations with a 30% increase in its after-tax profit, up to Rs.102.9 million in 1998 from Rs.76.1 million a year earlier.

The company said in a news release that UAL which has done well both in life and general business had increased its earnings per share from Rs.5.27 in 1997 to Rs.7.18 last year.

While the general insurance profit was up 33% to Rs.88.9 million in 1998, the life surplus accruing to shareholders had also increased to Rs.19.5 million last year from Rs.15 million the previous year.

UAL's life fund which stood at Rs.498.7 million at the end of 1998 was up 42% from 1997.

UAL Chairman Hari Selvanathan said that the benefits of the acquisition of their branch offices and the restructuring of the company completed two years ago were now evident from the 1998 performance.

Selvanathan said that these results have been achieved after making all the necessary provisions on a conservative basis and setting aside additional reserves to strengthen the company's financial base.

UAL CEO Hydery Rehmanjee said that the company had performed well in all areas of its business in a year where market and profit growth had been stressed. A new fund management department managing their growing life and general insurance funds had enabled UAL to obtain the best possible results from its investments.

Rehmanjee said that in the final analysis the strength of an insurance company depended on its net assets. He claimed that UAL's net assets of Rs.565 million at the end of 1998 was among the highest among all insurers in Sri Lanka, up from Rs.523 million in 1997.

The UAL directors have recommended a 25% dividend to shareholders and also a bonus share issue of one new share for every two held. The dividend will be paid on the issued capital before the bonus allotment.

Pan Asia buys Globus system

Pan Asia Bank is acquiring a Globus system for its operations under a deal signed with Temenos Limited of the UK earlier this month, a news release said.

Globus describes itself as a "world renowned banking system that offers a unique, real time financial support environment for wholesale, retail, private and investment products of commercial banking."

The system developers have drawn from their considerable banking experience and created a innovative system that will fully meet the business demands in to the next century, the release said.

It said that the new system supports an exceptional range of banking products with excellent flexibility.

It said that although the investment is substantial, the bank realised that it had to provide for a growing customer base with more value added products and a highly personalised service.

The deal between Pan Asia and Temenos was signed by the bank's General Manager/CEO Daya Muthukumarana and director Sydney Jayasinghe with Deputy Chairman Kim Goodall signing for Temenos.

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