.

Mandatory offer for remaining shares
CTC distributes large chunk of Eagle sale cash

After close of trading on the Colombo Stock Exchange on Friday where it sold off its 64% stake in the CTC Eagle Insurance Co. Ltd., Ceylon Tobacco announced a 33% interim dividend to its shareholders signalling the distribution of a sizable chunk of the cash inflow to its shareholders. Even before the announcement was made, the CTC share price advanced by Rs. 4.50.

The deal which was concluded on Friday had long been pending and CTC had in fact made a disclosure on the subject indicating that an agreement in price had been reached in dollar terms with the Zurich Financial Services Group which in strategic alliance with the National Development Bank (NDB) made the acquisition.

The Zurich - NDB alliance, operating through the vehicle of the locally incorporated Zurich NDB Finance Lanka (Pvt.) Ltd., which now owns an 80% stake of CTC Eagle, will this week make a mandatory offer to the remaining 20% shareholders of the company who under the rules of the Colombo Stock Exchange (CSE) are entitled to the same Rs. 44.25 price paid for the big parcel.

The NDB and its subsidiary, Capital Development and Investment Co. Ltd. (CDIC) already held 16% of CTC Eagle which will now change its name to Eagle Insurance Co. Ltd. James Finlay held 5% while the public holding was 15%.

Chandra Jayaratne, the Managing Director/CEO of CTC Eagle has resigned from the board of the Ceylon Tobacco Co. Ltd. on which he long sat following the conclusion of the deal leading to the exit of CTC from Eagle. He will continue as CEO of the company under the new ownership.

The NDB’s Director/CEO Ranjit Fernando, Tennyson Rodrigo of CDIC and R.L. Jurianz of James Finlay will continue to sit on the Eagle board with Jayaratne, a professional accountant. The alternates to the foreign directors under the new dispensation will be Colombo lawyer U.L. Kadurugamuwa and Joe Thangakone and Marina Tharmaratnam, both senior managers at Eagle.

The chairman of the board will be Dr. Frank Schnewlin, a member of the executive board of Zurich with extensive experience in insurance, finance and risk management. The deputy chairman will be Alan Parsonson, Zurich’s manager for the Australia and South Pacific region who also has over two decades of senior management experience in insurance and fund management globally. A third Zurich nominee on the Eagle board will be Mr. Robert Sulzer.

Friday’s deal boosted turnover on the Colombo Stock Exchange to a 5-year high of Rs. 748 million with the CTC Eagle share price advancing Rs. 2 to close at Rs. 44 - up from the previously transacted Rs. 42 per share. The high for the day on the share was Rs. 44.25.

Ceylon Tobacco’s share price closed at Rs. 51, up from the previously transacted Rs. 46.50. Many brokers had a buy recommendation on the share whose price had been inching up even before the Zurich deal was formally announced.

CTC sources said that the company which has been investing on its core tobacco business will continue to do so and will also continue its ongoing program of downsizing on personnel by offering attractive early retirement incentives. CTC last year paid a 55% dividend to shareholders.

Milk powder still losing, Nestomalt the lead product
"Outstanding performance" by Nestle enables 75% dividend

Nestle Lanka Limited has reported an "outstanding performance" in the year ended December 31, 1998 with sales up 6% to Rs.3.9 billion from Rs.3.6 billion a year earlier and the profit available for appropriation up 36 percent to Rs.412.4 million.

The company has declared a final dividend of 55% on top of a 20% interim paid last December on the basis of the third quarter results, thus giving shareholders a total dividend of 75% for the year. Analysts said that this was Nestle Lanka’s best year since incorporation here 18 years ago.

Nestle has continued to maintain 1998 performance in the first quarter of the current financial year with both consolidated turnover and trading profits improving from the comparative quarter the previous year. Fist quarter sales at Rs.0.9 billion was up from Rs.0.8 billion a year earlier while the trading profit grew to Rs.120.8 million from Rs.110 million earned during the first quarter last year. After-tax profit for this quarter at Rs.82.6 million was up from Rs.75 million a year earlier.

The company’s Chairman/Managing Director, Mr. C. van Houtteghem, reported that the 1998 performance was achieved in the face of global recessionary conditions and with the country’s GDP growth declining to 4.7% from the previous year’s 6%. However, interest rates as well as inflation had continued to be held at "at reasonable levels."

Nestle is continuing to lose on its full cream milk business. Due to a shortage of fresh milk last year, the sale of full cream milk powder marginally decreased and the company continued to sustain losses in this sector. But it hoped that this situation will be overcome "in the near future."

The CEO said that emphasis will continue to be placed on the supply of premium full cream milk powder under the Nespray brand to consumers. He said that irrespective of a milk powder segment, the company’s overall growth during the financial year under review was "most satisfactory" with Nestomalt once again taking the lead over all other company products.

Nestle is now into a variety of food products with its range of imports supplemented with breakfast cereals and new varieties of chocolates from South Africa. The Maggi instant noodle range has been expanded with a sweet and sour flavour, and two instant noodles added to the existing chicken, curry, and cheese and onion range.

Nestle has also introduced a ready-to-drink beverage in ultra heat treated (UHT) packaging under the Milo brand manufactured here by an associate company and distributed by Nestle. Sales of this product had proved to be good, the CEO said.

A variety of the company;/s products including confectionery (Polo and Smarties) and Super 8 locally manufactured chocolate wafers are being offered in smaller affordable packages. Similarly Nescafe and coconut milk powder in 1.5 g. and 150 g. packs have been made available in supermarkets and retail outlets.

The company’s unique instant coconut milk powder had enjoyed a good trading year despite depressed economic conditions in the region with exports sales growing 12%. The product under the Maggi brand had been introduced to new overseas markets resulting in good growth and an expansion of the distribution network.

"However, Brazil still continues to remain a closed market for exports of coconut milk powder due to the continuation of an excessive countervailing duty imposed since 1994. We remain hopeful that the current international negotiations by the governments on this issue will prove successful", the chairman said.

Van Houtteghem said that the granting of numerous tariff concessions by the 10th SAARC Summit and the signing of the Indo-Lanka Free Trade Agreement required the company to enter 1999 emphasising competitiveness.

The directors of the company are: Messrs. K. Zingg (Chairman/Managing Director - retired 31.7.98), C. van Houtteghem (Chairman/Managing Director - appointed 1.8.98), M.W.O. Garrett, L.C.R. de C. Wijetunge, M. Rashid, J.E.S. Constantine and A.R. Rasiah (alternate to M.W.O. Garrett).

Pure Beverages slump after returning to profit

Pure Beverages Company Limited has seen a decline in performance during the first half of the current financial year with sales slumping and an operating loss of Rs.11.9 million posted against a Rs.45.9 million profit a year earlier. The bottom line attributable to shareholders was even worse - a loss of Rs. 41.5 million, down from a profit of Rs. 52.6 million a year earlier.

The downturn came after the company had returned to profitability last year after a prolonged work stoppage which led substantial losses, loss of market share and stocks in the supply chain drying up. One reason attributed for the reverse was the prolonged wet weather which reduced demand for soft drinks.

However, there was no explanation for the slump offered to shareholders in a just released interim statement incorporating unaudited 6-month results.

During the half-year under review, other income had declined sharply to Rs.2.8 million from Rs.58.8 million a year earlier and the slightly lower interest charges of Rs.30.4 million (Rs.35.9 million a year earlier) could not make good this lag.

The after-tax loss of the company for the six months under review was Rs.41.5 million, down from a profit of Rs.63.8 million a year earlier. After discounting marginal minority interest, Pure Beverages had a net loss of Rs.41.5 million during the period under review, down from a profit of Rs.52.6 million in the first half of the last financial year.

With retained losses of Rs.288.9 million brought forward, the company is now carrying forward accumulated losses of Rs.330.4 million as at March 31, 1999.

Pure Beverages has a share capital of Rs.756.3 million, capital reserves of Rs.467.6 million and revenue reserves of Rs.78.6 million. Discounting the accumulated losses, shareholders funds amount to Rs.972.1 million. The company’s net current assets are Rs.139.3 million.

Hackles up at LOFAC over Vanik claim

A Vanik news release claiming to have effected the country’s first international factoring transaction has raised hackles at Lanka Orix Factors Ltd. (LOFAC), a wholly owned subsidiary of LOLC which has been in factoring from 1992.

A news release from LOFAC managing director Sudarshan Senaratne said they had read the Vanik claim "with surprise because we were under the impression that we had pioneered both factoring in general and export factoring in particular."

LOFAC said that the Vanik announcement had said that "a factoring company in Germany will collect the payment due to the Ceylon Black Tea Co. on behalf of Vanik." This implied that the transaction had not yet been completed, LOFAC said adding that it would be reasonable to assume the transaction must be very recent " or they (Vanik) would have made the claim much earlier."

On the basis of these assumptions, LOFAC accused Vanik of making a claim that appears to be "palpably false" because they (LOFAC) had effected export factoring transactions on at least eight invoices begining January 1999.

"LOFAC’s transactions are recorded in the statistics issued by Factoring Chain International of which Vanik claims to be a member. We have scoured these statistics in vain for any record of a factoring transaction by Vanik before April 1999. Certainly they do not appear in the reports for February and March of this year where our transactions are reported."

The word had obviously leaked about LOFAC’s tart response to the Vanik news release because a PR company phoned those newspapers that had received but not published the original release asking that it be spiked.

The price of oil

by Kanes
The price of oil which was raised from about $11.29 per barrel in 1970 to over $50 per barrel in 1980 by the restriction of production by the organization of Petroleum Exporting Countries (OPEC), declined thereafter to as low as $9.96 per barrel in mid-March 1999. It was this price decline which prompted Saudi Arabia and 13 other members of OPEC to meet on March 23 and agree to reduce oil production by 2.1 million barrels a day or by 2.7 per cent in the hope of arresting the price decline and raising the price. The price actually rose to over $15 a barrel by the end of April 1999 but many analysts expect the price to fall in the near future. Some expect it to fall to about $10 per barrel while others estimate it to fall to as low as $5 per barrel owing to new technology and productivity gains.

The main reason why the price is expected to fall is that nearly all members of OPEC are in serious financial difficulties and desperate for revenue and consequently they will be tempted to cheat and exceed their quotas. Saudi Arabia, for example, is so tight for cash that it has cut the budget and urged the members of the royal family to reduce their lavish expenditure. Iraq is expected to increase its production rapidly once the sanctions are lifted while Russia, Nigeria and Venezuela are likely to increase theirs in order to revive their economies. It must be recognized that declining oil prices undermined the economies of OPEC countries in recent years, in 1998 alone their oil income fell by more than $60 billion resulting in budget deficits, balance of payments deficits, rise in indebtedness, and cuts in social welfare.

The OPEC is not known for strict discipline in matters concerning oil. In 1998 too, OPEC decided to cut oil production by 3.1 million barrels a day and their agreement led to an increase in price from about $13 to $17 per barrel. The higher prices, however, were short-lived as members began to exceed their quotas. Iran, for instance, refused to even acknowledge that it was producing more than its quota, insisting that it had secretly been given permission to produce an extra 300,000 barrels a day, and no disciplinary action was taken against it by Saudi Arabia. Venezuela too failed to adhere to its quota and there is no evidence that it will observe the agreement this time. The structural changes in the oil market also make it difficult to impose discipline. Twenty years ago, if a country wanted to exceed its quota it had to find extra tankers and buyers, one cargo at a time, overtly and other OPEC members could pressurize it to conform. Today, however, countries can get cash by selling future oil revenues in the market and violation of OPEC quotas shows up when it is too late to stop it.

Non-OPEC Production

Apart from cheating on the quotas, the other major reason why OPEC is unable to maintain oil prices at high levels is that non-OPEC oil production now exceeds OPEC-oil production. In 1998 for instance, non-OPEC oil production was about 37 million barrels a day in contrast to OPEC production of about 28 million barrels a day. This was not the case in 1970 where OPEC production of about 24 million barrels a day was about equal to non-OPEC output. Actually, it is the high price of oil in the 1970s and 1980s engineered by OPEC quotas that provided the incentive to oil production by non-OPEC countries at higher costs than in the Middle East. With oil so profitable prospectors searched for oil in inhospitable areas and the result was that high cost areas like the North Sea were exploited before low-cost ones like Iran. Extraction of oil in the North Sea costs about five times as much as that in the Persian Gulf of about $2 a barrel, and exploitation of such oil would not have been considered if oil prices had remained low at the pre-1973 levels.

Modern technology has reduced the cost of finding developing and producing crude oil outside the Middle East from about $25 a barrel (in todoy’s prices) in the 1980s to about $10 now. While the cost in the Middle East, as mentioned earlier, is below $2 a barrel, costs elsewhere are as follows:

(a) below $10: Indonesia $6, Nigeria $7, Venezuela $7

(b) above $10: Mexico $10, USA $11, North Sea $11, Russia $14

Russia’s cost of production is the highest and it explains why the fall in oil prices consequent to the East Asian crisis, led to the collapse of the Russian economy. The costs of others are $11 per barrel or below, and prices higher than $11 per barrel would make their oil profitable and induce them to raise their output. This will limit any price increase by OPEC by restricting their oil production. Further, Russia and Nigeria which are gripped by serious economic turmoil will continue to produce whatever the price. Oil exports provide 95 per cent of export earnings of Nigeria and Algeria, 80 per cent in Venezuela and 50 per cent in Russia.

Lower Demand for oil

The demand for oil is unlikely to expand in the near future for several reasons. The main reason is that the East Asian crisis has reduced the demand from East and South-East Asia including Japan. Japan and the five crisis-hit countries — Indonesia, Malaysia, the Philippines, South Korea and Thailand — had negative growth in 1998 and are generally expected to have negative growth in 1999. Their imports fell sharply in 1998 and estimated to increase only slightly in 1999. As 50 per cent of the Middle East’s exports go to East Asia, it is the East Asian economic crisis, which was the major cause of the recent decline in oil prices. As East Asia is unlikely to recover in 1999, oil prices too are expected to remain at low levels. The demand for oil is also likely to fall as a result of the undertaking given at the Kyoto Summit by developed countries to reduce their emission of greenhouse gases which will mean a reduction in oil consumption. Demand may fall further if the current US boom and high consumption come to a sudden end.

The demand for oil will remain low in spite of low prices also because of cheaper natural gas. Modern technology has made natural gas cheaper than oil even at the price of $10 a barrel of crude oil. In the mid-1980s it was the opposite: gas was more expensive than oil. Another factor which will keep demand low is taxation of petrol. Taxes on petrol are so high that they account for 80 per cent of the sale price in Europe and even more in developing countries, and consumers will hardly notice a drop in crude oil prices. In the US however, taxation is very low and price of oil is cheap.

Effects of Low oil Prices

Low oil prices have benefited the consumer, kept inflation low and promoted high economic growth in countries like the USA and provided much relief to oil importing developing countries like Sri Lanka. Low prices, however, have adversely affected all producers. In the USA for example, the price collapse has so far cost 24,000 jobs nationwide, with an additional 17,000 at risk in the first half of 1999. Almost 140,000 domestic oil wells have been abandoned in little over a year forcing US daily production down by 360,000 barrels. It is the prospect of low prices which is forcing the big oil companies to merge; British Petroleum and Amoco untied recently expecting to save more than $2 billion annually by laying off 6,000 workers; Exxon and Mobil have merged to save about $2.8 billion a year by eliminating 9,000 jobs. Conoco, Texaco, and Chevron are also likely to lay off their workers. Texas petroleum industry for instance loses about 10,000 jobs for every $1 drop in crude ore prices. At $10 a barrel all oil companies will have to cut their exploration budgets, as few oil investments outside the Middle East will be profitable.

The choice for Middle Eastern oil producers like Saudi Arabia is between cutting back their welfare state by reducing benefits and increasing taxes and finding ways of raising oil revenues. It is difficult to slash welfare benefits as the people have been used to them for about 25 years and cuts may result in social discontent and undermine the popularity of ruing regimes. They have decided therefore to increase oil revenues by cutting output and raising prices, but this is unlikely to succeed as OPEC is only a loose group of desperate countries lacking strict discipline and non-OPEC countries will be able to counteract OPEC’s moves by expanding their production. In such a situation, Middle Eastern OPEC countries will have no alternative but to expand production to earn more revenue even at low prices. Expansion of production need substantial investment but then the US oil companies are only too ready to make these investments. Apart from the Middle East oil having the lowest cost of production, it is of high quality and high value and will help the large US oil companies to overcome their financial problems. All the indications therefore are that the world oil prices will remain low for some more years.

Oil Reserves and Production

World’s proven oil reserves are about one trillion barrels and 65 per cent of them are in the Middle East; North America, Europe and Latin America have 8 per cent of the oil reserves each, Africa has 7 per cent and Asia-Pacific 4 per cent. At the present rate of production, the Middle East has 88 years worth of proven reserves and OPEC as a whole 73 years. Non-OPEC countries have only 14 years of reserves which means that OPEC will control a growing share of world’s oil reserves, and the Middle East’s grip on world oil supplies will intensify in the years to come. The oil reserves of the USA will last for only 10 years more and that gives a clue as to why it is so concerned about the stability in the Middle East and so ready to fight those who threaten its long-term interests.

Ban restrictive work practices like work to rule and go slows

by Analyst
The government doesn’t seem to realise that the threat to the economy posed by the prolonged industrial conflict in the banking sector. Remember the bank strike in the 1970’s when Dr. N. M. Perera was the Minister of Finance? Being an economist he realised the threat to the economy posed by the strike and put the national interest before the sectarian interest of the employees.

It was said that bank clerks who were picketing were assaulted by street thugs with bicycle chains. The bank clerks seemed to have learnt a lesson not to stage similar strikes for a long time. They seem to have learnt their lesson only too well for now they don’t engage in picketing, preferring to resort to unorthodox if illegal practices like ‘’go slows" and a collective lunch interval downing tools or pens for one whole hour, depriving the public of one hour of banking service.

When they are at their work stations, they deliberately work slowly and see that less public are served and also increase their waiting time before being served. These are restrictive labour practices outlawed in all democratic countries. While democratic countries generally recognise and tolerate strikes (except in essential services) subject to certain minimum conditions like prior notice, non-violent picketing etc; but nowhere are restrictive labour practices which sabotage the business of the firm tolerated.

Our labour laws go to excessive detail spelling out even the length of lunch breaks and rest hours which in other countries are left to be negotiated by the employees with each company. But they do not take cognisance of unfair and restrictive labour practices which damage the business of the employer.

When one side or the other doesn’t budge, it is usual for any government to refer the dispute to arbitration. But the bank employees, are defiant. They carry on with their ‘go slow’ and other industrial actions in spite of them being in contempt of court, and also illegal. The employees should have the right to sack such employees who resort to unfair and restrictive work practices, particularly the trade union leaders who called for such action.

The bank employees thereby don’t have to undergo the hazards of a strike such as the threat of violence by the political mafia. What is required however is not to resort to thuggery, but for the government to pass the necessary legislation to outlaw unfair and restrictive work practices which harm the employer.

Instead of trying to foist a Labour Charter upon reluctant employers the government should cover the loopholes now being exploited by trade unions such as ‘work to rule,’ go slows etc. Britain under Margaret Thatcher brought far-reaching changes to Labour and Trade Union laws which have not been reversed by the present Labour Government. In U.S.A. ofcourse hiring and firing are easy and no restrictive work practices are tolerated. As a result U.S.A. has extremely low unemployment.

Executive Pay and Privileges

The bank employees have rightly exposed the excessive salaries and perks of bank executives unlike in other free market economies, the pay and perks of these executives are not set by market forces. The Central Bank does not allow newer banks to pinch executive staff from the old established banks. Nor will bank executives be recruited by trade or industry. Then why are they being paid more than they are worth?

These Executives are not held responsible for their failures and poor judgements. They hardly ever supervise the bank employees who work under their purview. Even when they are terminated for incompetence, they are given golden handshakes. As for the state banks, their executives are mere lotus eaters. In one state bank an employee had carried out a fraud for many years a world record for undetected fraud.

Executives should be put on rolling contracts and their annual bonuses tied to the performance of the bank’s share price. The manager’s pay increases should be put to the annual vote of shareholders. If the bosses pay is ‘’excessive" it is because the big shareholders have failed to control them. The large controlling shareholders and institutional shareholders should be consulted before giving salary increases to the managerial grade.

Another problem arises from the structure of trade unions-Industry-wise trade unions should be discouraged. The public are lucky because two private bank employees are not in the industry wide Bank Employees Union. The employer should have the right to refuse to recognise such industry wide unions and deal only with company unions.

This will encourage the unions to be co-operative with management, because it is not in their interest to push for high wage claims when the company faces competition. Company unions will also be less militant.

Pay deals should also be limited to one or two years so that firms are not tied to multi year awards that an unexpected downturn in business would make it difficult to meet. This has happened in the tea plantations where the boom in prices collapsed suddenly within months after the grant of substantial wage increase to Minister Thondaman’s C.W.C.

Again, annual bonuses should be flexible and dependent on the availability of profits. In a good year bonuses of several months may be paid but this should not mean a permanent commitment to pay the same bonus year after year, even when the firm has incurred a loss.

Industrial Relations in state sector

The only thing that restrains trade union demands is the fear of loss of jobs. In the state sector

there is no such fear among the employees, since everyone assumes that the government will not allow its own organisations to go bankrupt. But unless a state corporation is engaged in a monopoly business, there is no inherent reason why a corporation should not be allowed to go bust or file for bankruptcy as China did recently in the case of a Guangdong Corporation.

The government should tell the state banks and other corporations that if they can’t run their business profitably they will not be bailed out by the Treasury. As for state corporations engaged in a monopoly business, they should be stripped of their monopoly status or privatised. The alternative is to ban all trade union action in monopoly corporations and refer all industrial disputes in such corporations to compulsory arbitration binding on the employer and employee.

The government must link wages in monopoly corporations to their profits after providing for a minimum return on the capital invested by the state and assuming selling prices are unchanged. It is not fair to raise the prices to the public to enable wage increases to be given to their employees. Wage increases must be through higher productivity. A National Wages Council must be established.

Inflation and Wages

The bank employees are basing their demand for higher wages on the prevalent inflation. But this is not an acceptable argument. Everyone in society is exposed to inflation and those who are on fixed incomes such as pensioners are the worst affected. Why should only bank employees be compensated for inflation?

This really means that the rest of society becomes poorer in relative terms. In short, in order to enable the bank employees to maintain their real incomes, the real incomes of the others have to fall. On the other hand, if the real incomes of the bank employees also fall like the rest of society, the banks will be able to all their goods and services more cheaply to the public.

The costs of intermediation namely the difference between the lending rate and the deposit mobilisation interest rate, is too high in the state banks and the other banks maintain the same high gap because it is very profitable for them to do so. In the case of the state banks they have no choice because their costs are too high carrying excess staff at unduly high salaries.

The present demand is to compensate them for inflation. If such demands are refused then the real wages of bank employees will fall as in the rest of the economy and real interest rates will also fall stimulating investment and making the burdens of debt ridden companies lighter. Working capital levels are high and interest is a significant component of costs in all Sri Lankan business.

Excessive real wages for organised labour in highly unionised industries have been exacerbated by the tendency of the government to tax the employment of labour and subsidise capital for investment. The tax concessions for capital investments in particular industries is a mistake because it encourages employees to substitute capital for labour particularly as there are payroll taxes like EPF and ETF contributions which add to the cost of labour inputs.

If we want to encourage job creating investment real labour costs must fall and profits rise. Indexing wages to inflation or accepting demands for wage increases on the basis of inflation is economically perilous. On the other hand if such demands are resisted, real wages will fall and this will act as a stimulus to job creation.

Employment in the state corporations and in the organised private sector have no fear of making exorbitant wage demands and striking for them because they have job security. When their strikes or industrial action succeeds, they will push up wages above the inflation rate for the sake of the unemployed in the economy, it is important to beat these strikes not by engaging thugs to assault strikers but by repealing the over-protective laws, particularly the Termination of Employees. Act introduced by the leftists in the 1970’

Then the employer will have a level playing field in tackling labour. The alternative is to expose state corporations to competition and the threat of closure.

When costs vary widely in the country, pay scales which set uniform wages for public sector workers like doctors, nurses, teachers etc. only produce a surfeit of such workers, whereas the economy needs highly skilled craftsmen and technical workers.

The timorous bank employers who for decades have given in to their employees, should tell their employees who resort to illegal restrictive work practices like the collective lunch interval, that they will be sacked. If this leaders are sacked that unions will be forced to strike rather than continue with illegal restrictive practices.

Employees who have cosy, protected markets do not threaten to sack their employees. Margaret Thatcher took on the trade unions and beat them into submission, doing a lasting service to the British economy curing the ‘’British disease" for good. Since then the British economy has grown in productivity, improving the lot for every-one.

Many employees look upon their jobs as if paying rent. They put in "face time" from nine to give and see no direct link between their performance and that of the economy Performance measurement is confined to seminars. Employees should be put on short term contract and their contracts renewed only if their work is upto scratch. Our labour laws should provide for such employment contracts.

Flexible contracts

Three kinds of flexibility are required by employers according to studies conducted by the Institute of Manpower studies of Sussex University some time ago. Functional flexibility enables people to be redeployed within a company. Numerical flexibility means the number can be varied so that they can employ people to cope with short term changes in demand. Financial flexibility enables an employer to take on and lay off labour as cheaply as possible.

What is required is to have a core group of permanent workers supplemented by temporary, casual and part-time workers to cope with sudden increases in demand. This is the system practised in Japan, where the core group are expected to be flexible, to switch from one job to another or to move from one plant to another in return for job security. But even they are not guaranteed careers as the banks here guarantee careers for clerks and supervisors.

The government must accept that job security for employees is not something that it must protect. This is a relic of the socialist ideology which has been consigned to the dust heap in country after country. If we are to make economic progress and attract foreign investment, we have to reform our labour laws which are outdated in the context of globalisation.

In UK, after the Thatcher government (labour has not reversed such legislation) it is virtually impossible for Unions to call a strike over a political dispute (G.M.O.A. take note), a strike in sympathy with other workers or any form of secondary action. Any strike must be approved by the Union members in a secret ballot.

The bank employees strike was declared illegal by our courts, but the Union goes ahead unofficially. Employers should be able to sue the organisers of such illegal actions, for damages incurred during such unofficial industrial action and Union leaders made personally liable for their illegal actions.

Meanwhile the government should also take into account the criticism of the Union that too much of the cake goes to executives. Instead of going ahead with the Labour Charter the Labour Minister should get down to study modern trade union legislation in democratic countries like UK and Europe at least, not to talk of South Korea. Britain has no minimum wage and no wage councils, all abolished by Margaret Thatcher, which the labour government has refused to reverse.

A National wages policy is necessary instead of allowing wage increases purely as a result of trade union agitation. Its time to set up a National Wages Board which will have the power to limit wage increases in general and fix wages for particular industries and state corporations.

We have already undermined the plantation industry by giving into the C.W.C. At a time when the world economy is heading for a recession if not a depression, we must not destroy our export industry. Nor should the government allow state corporation trade unions to undermine the budgetary policy and create more inflation, larger current account deficits in the balance of payments and higher interest rates bogging down the economy.

Major local producer gripes about discrimination
Chicken and eggs hit by "flood of imports"

Ceylon Grain Elevators Limited (CGE), the country’s leading feedmiller and a key player in the poultry industry, has reported that the poultry and livestock sector had experienced "a hostile and difficult trading period" during the first quarter of the year ending March 31, 1999.

The company which had a successful year ended December 31, 1998 said that the demand for chicken products and eggs slackened due to a general economic downturn and the poultry sector in particular was badly affected by a flood of imported chicken meat and eggs.

CGE complained that both chicken meat and eggs are not liable for GST. But local farmers have to pay this tax on manufactured animal feed which constitute 60% and 80% respectively of the total cost of production of broilers and eggs.

"The current trade policy of the government does not create a level playing field vis-a-vis imports and actually discriminates (against) the local farmers. In the long run, the poultry and livestock sector will be the loser under the present policy," the company said in a provisional financial statement incorporating the unaudited first quarter results.

Total group turnover during the quarter under review at Rs.783.8 million was down 35% from a year earlier while group profits after-tax and minority interest at Rs.84.7 million was down 7%, the statement said.

Interest on borrowings during this period had increased 153% to Rs.10.7 million, but a portion of this has been capitalised into the cost of a silo/warehouse project in line with Sri Lanka Accounting Standards No.20, it said.

Despite this downturn, the net asset value per share of the company at Rs.37.87 as at March 31, 1999 was up 10% over the comparative figure a year earlier.

Ceylon Grain Elevators has an issued share capital of Rs.600 million and a share premium of Rs.626.3 million.

Earnings per share for the period under review at Rs.1.41 was down from Rs.1.52 a year earlier. Assets employed by the company per share as at March 31, 1999, was Rs.37.87, up from Rs.34.47 a year earlier.

Previous year’s gains not sustained in `98
Korea Ceylon takes new blow from Asian crisis

The troubled Korea Ceylon Footwear Manufacturing Company Limited had been unable to sustain the previous year’s improved financial performance during the 9 months ending December 31, 1998, shareholders have been told.

This was due to what the company’s chairman called "the serious erosion of competitiveness" of its products in traditional markets resulting from a steep de-valuation in South East Asia and a demand slow down.

"This situation adversely affected the continued viability of the company’s operations. The company was compelled to formulate and implement a business recovery plan to ensure its survival as a going concern," the chairman, Mr. A.G.L. Perera, said.

Korea Ceylon has decided to change its accounting year to the calendar year 1998 and as a result, accounts for a 9-month period ended December 31, 1998 are being placed before shareholders at an annual general meeting scheduled for May 28. The next financial period will be the year ending December 31, 1999, the company said.

The 9 months under review saw turnover dip 59% to Rs.302.8 million from Rs.742.7 million for the 12 months ended March 31, 1998. The operating profit and loss figures were disastrous - the company losing Rs.93.2 million in 9 months against a modest Rs.7.5 million profit in the previous full year.

Although interest charges dropped 15% to Rs.39.3 million during the 9 months under review from Rs.46.7 million during the preceding year, these costs boosted the loss for the period under review to Rs.132.3 million. This compared with a loss of Rs.38.6 million during the preceding 12 months.

Perera reported that production and sales volume during the period under review were approximately 52% of those achieved during the corresponding period the previous year. Overall capacity utilisation had been much lower than previously anticipated.

The company has implemented a business recovery plan in an effort to become viable and has also entered into a supplementary agreement with the Board of Investment (BOI) to expand its product range to all types of footwear and moulded rubber products from the previous line of canvas footwear.

The new agreement allows Korea Ceylon to borrow in Sri Lankan rupees and will also give tax relief for losses incurred after April 1, 1994 against future profits.

BOI has permitted the company a concessional 10% tax rate for a limited period of 20 years from April 1, 1994 in place of the previously applicable tax regime which exempted it from income tax from April 1, 1994 to March 31, 2002 with a 2% income tax rate thereafter on net sales revenue.

The company has got a fresh capital infusion via C.W. Mackie & Company Limited, its largest shareholder, by way of a subordinated convertible loan of Rs.130 million. Rs.103.9 million of these funds had been utilised to settle long term overdues and short term loans while the balance has been utilised for working capital.

C.W. Mackie got a concessional equity and loan funds from its Danish principals and a Danish fund for concessional loans to developing countries to enable it to throw a life belt to Korea Ceylon.

The C.W. Mackie Group of Companies owns 34.1% of Korea Ceylon while the Ceylon Trading Company Limited, its associate, owns 27.2%. The Korean investment in the company’s equity by Doosan Corporation and HS Corporation stand at 5.32% each.

The directors of the company are: Messrs. A.G.L. Perera (Chairman), P.B. Rasmussen (Deputy Chairman), S.S. Senaratne (Managing Director), M.A. Abeynaike, D.A.T. Ranasinghe, S.H. Amarasekera and B. Norholm.

The Lighthouse profitable in second year

The Lighthouse Hotels Limited has in its second year of operation succeeded in strongly boosting turnover and achieving 64% occupancy enabling a tax-free net profit of Rs.16.2 million in the year ended March 31, 1999, up from a Rs.1.8 million loss the previous year.

The company’s Chairman, Mr. N.G.H.Cooray, attributed these "heartening" results to highly focused marketing which enabled turnover growth of over 60%. The company continues to market the hotel to what it calls "the high spending discerning leisure travel" both at home and abroad.

The hotel which is a joint venture between Hayleys and Jetwing Group of Companies has been selected to be part of the "Small Luxury Hotel" network, an exclusive group of hotels worldwide patronised by the type of client Lighthouse seeks. Cooray expressed confidence that membership of this group will improve the hotel’s overall profile and give it a marketing boost.

He said that his board has not yet taken a firm decision about adding further rooms as a second phase expansion because optimal funding methods were of concern in the existing financial climate. Lighthouse has intended to add rooms in this second phase to maximise the potential of existing public areas of the hotel located on a seafront site just outside Galle municipal limits.

The company has declared a 3% tax-free first and final dividend during the year under review. It enjoys a 10-year tax holiday with effect from the year under review and profits thereafter will be taxed either on 2% of turnover or on the prevalent tax rate at that time at the option of the company.

Cooray explained that GST which replaced the turnover tax from April 1998 was exempt on accommodation income earned by certain categories up to March 2000. Unless the hotels won export industry status it was now seeking, they would become liable to this tax thereafter.

"Unless this status is granted on or before March 2000 or there is an extension of the current exemption, the additional GST that will have to be paid from April 2000 will have a significant affect on the profitability of the hotel," he said.

Discussing prospects, he said that the period from September 1998 to March 1999 had seen tourist arrival growth compared to the previous year. If conditions in the country remained relatively stable, they expected this trend to continue to the next financial year enabling a much improved year for the tourist industry from which Lighthouse will benefit.

Carbotels Limited, a Haycarb subsidiary, is the biggest single shareholder of the Lighthouse Hotel with a 22% equity share followed by the NDB (18.4%), Jetwing Hotel Management (13.17%), Sampath Bank (9.57%), the Cooray family, DFCC Bank (7.97%), Chemanex (6.15%), Richard Pieris (2.17%) and Merril J. Fernando & Sons (2.17%).

The directors of the company are : Messrs. N.G.H. Cooray (Chairman), Sunil Mendis, N.J.H.M. Cooray, R. Yatawara, S.N.A. Tennakoon, R.A.E. Samarasinghe and Ms. N.T.M.S. Cooray.

Egg producers lose at below Rs. 3 an egg

Many egg producers have been unable to recoup their cost of production when the wholesale price of eggs fell below Rs.3 each, Three Acre Farms Limited (TAFL), the Ceylon Grain Elevators subsidiary has said in a provisional financial statement for the quarter ending March 31, 1999.

Reporting that the demand for chicken products and eggs had slackened due to a general economic downturn, the company said that the poultry sector in particular was badly affected by a flood of imported chicken meat and eggs.

Despite these adverse conditions, the company had boosted its turnover to Rs.137.4 million, up 4.6% over the comparative period last year and also marketed its quality day-old chicks at an average price slightly above last year’s.

The statement said that the after-tax profits had better than doubled to Rs.19.3 million from Rs.9.3 million a year earlier and net assets per share at the end of the quarter under review at Rs.28.56 was 3% above those at the end of the first quarter 1998.

Three Acre Farms has an issued capital of Rs.231 million and a share premium of Rs.372.6 million. The company was also carrying Rs.56.1 million in its profit and loss account.

TAFL had earned a profit of 84 cents per share during the quarter under review, up 40 cents per share a year earlier while assets employed per share at Rs.28.56 during the period under review was up from Rs.27.81 a year earlier.

Hayleys Electronics honours dealers

Hayleys Electronics Limited, the sole agents in Sri Lanka for Philips, Daytron, Usha and Daewoo consumer electronics, ended the 1998-99 financial year on a record-breaking note when it sold over 6,000 television sets in the month of March.

Announcing this achievement at the company’s Annual Convention. Hayleys Electronics’ Managing Director Sujiva Dewaraja said the company also emerged as Sri Lanka’s market leader in TV sales for the year with their three brands - Philips, Daewoo and Daytron, and was making substantial in-roads into the refrigerator market.

He said 1998-99 was the most successful- year in the company’s 16-year history in terms of turnover and profit. Daytron and Daewoo made particularly strong contributions to the year’s results. "Our success is the result of the hard work of our partners, from dealers, authorised service agents, showroom franchisees, company staff to foreign principals." Mr. Dewaraja said.

The presence of all these partners had necessitated a change in the name of the annual dealer convention to "Annual Convention", and next year the event should be called a "Partners Forum", Mr. Dewaraja added.

Hayleys Electronics’ Deputy General Manager Keshini Ediriwira said the company’s staff had grown ten-fold since its inception. The company had the largest dealer network in the electronics sector, and had maintained a strong presence in the market place for 15 years.

During this period it had stayed ahead of the many changes in the market place and penetrated many sectors, including most recently, mobile phones, she said.

Special presentations were made on the progress achieved in sales and marketing of Philips, Daytron, Usha and Daewoo products.

The highlight of the convention was the presentation of awards to dealers, service agents, sales representatives and showroom personnel for their performance in promoting the four brands represented by the company. The guest of honour at the event was Mr. Ashok Dheri, General Manger Exports of Usha Shriram, India.

The top 10 dealers who received handsome trophies in recognition of their contributions to the growth of Hayleys Electronics were: Nelson Trading Company of Colombo, New Heladiva Trade Centre of Tambuttegama, Shantha Stores of Kuliyapitiya, Fancy Mahal of Nawalapitiya, Premaratna Brothers of Kottawa, Sampath Trade Centre of Ja-Ela, Reimoo Sons of Colombo, Shanthi Stores of Kandana, Dinapala Electronics of Kandy and Parakrama Trading Company of Gampaha.

Mac Aviation appointed GSA for Continental Cargo

Mac Aviation Services has been appointed general sales agents (GSA) for Continental Airlines Cargo.

Connected to their hub in Dubai through Air Lanka, Gulf Air and Emirates, Mac Aviation provides immediate services to all major European cities - London. Paris, Rome, Amsterdam and Frankfurt which are Continental Airline’s on line points, a spokesman for Mac Aviation said.

It also provides cargo services to the east coast and mid region of United States and Canada through their links in Houston and New York, the spokesman added.

Continental’s number one priority over the next five years is pan-Europe expansion. "Our cargo product is exponentially important, contributing some US 270 million to total revenue, and we realise the true worth of our load space," the spokesman said.

He said the airline’s European expansion plan encompasses the strategic appointment of additional cargo GSAs "where it makes sense to do so" and a long-haul fleet upgrade programme.

Singer first quarter profit up despite higher interest

Singer (Sri Lanka) Limited has boosted both turnover and profitability but had seen a sharp rise in interest payable and a slight reduction in the share of associate companies profits during the first quarter of the current financial year.

The result was that the pre-tax profit at Rs.91.7 million for the period under review was down from Rs.99.1 million a year earlier. But after providing for tax at Rs.25.2 million, down from Rs.36 million the previous year, the company had a post tax profit of Rs.66.5 million, up marginally from the Rs.63.1 million earned a year earlier.

Gross turnover during the quarter under review at Rs.1.03 billion was up from Rs.942.5 million in the comparative period last year while the operating profit with other income was Rs.131.9 million, up from Rs.126.4 million a year earlier.

Interest charges had grown to Rs.43.1 million from Rs.30.7 million while the share of associate companies profit before-tax at Rs.2.9 million was down from the previous year’s Rs.3.4 million.

Singer which made a scrip issue last year has an issued share capital of Rs.267.1 million, up from Rs.209.9 million the previous year. Additionally, it has Rs.16.4 million in its share premium account and Rs.691.7 million in general reserves and retained profits.

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