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Blowing hot and cold

Understandably, the interests that invested a massive Rs. 1.8 million on a state-of- the-art brewery in Sri Lanka under a Board of Investment approved flagship project are cheesed off by what happened to them soon after they started production. The rationale for the project which has generated desperately needed jobs and introduced new technology to the beer industry here which goes back over a hundred years was the 70 percent reduction of excise duty on beer by the 1996 budget presented to parliament in November 1995.

The signal that went out was that the government favoured making `soft’ alcohol cheaper in its effort to wean drinkers away from illicit liquor which has for too long been freely available in every nook and cranny in the country. It was also suggested that the government wanted to make even the legally produced but still pricey local liquor less attractive by offering beer at an affordable price.

The brewers cheered lustily as thirsty tipplers swilling cheap beer created a demand that the two breweries of the day could not supply. Added capacity seemed logical and the Ceylon Brewery, the oldest player in the industry now under the control of the Carson Cumberbatch conglomerate which also had a tie-up with the Danish beer giant, Carlsberg, decided to make a huge investment in a modern new brewery. A new player also entered the field and offered the public a high alcohol beer which took a lot of wind out of the `soft’ alcohol sails.

We report in our business and finance pages today that Carsons Management Services (Pvt.) Ltd., who manage both the Ceylon Brewery and the Lion Brewery which was commissioned last year have told shareholders that given the experience they have had, ``it is unlikely that we will contemplate major investments in industries where policy consistency is not assured.’’ Small wonder. The two breweries, like the arecanut caught between the blades of the proverbial giraya (cutter), have taken twin blows from the sharp hike in excise duties.

Realising that with a 69% excise duty increase on low alcohol beers, rising to 182% on brews with a high spirits content, those who fancied a glass would find the price a formidable deterrent, the companies decided to absorb about half the duty hike themselves to keep the price of a bottle of beer as low as they could. That of course meant that their costs would rise significantly but they hoped that what was lost on the roundabouts could be caught up on the swings. Despite the effort to keep the beer price as low as possible, they suffered a 28% loss in volumes, Carsons have said. With the duty plus production cost rising and volumes down, profits have shrunk sharply. Hence the lament to shareholders: ``Your company’s fortunes have seen a dramatic reversal.’’

No wonder then that the brewers are complaining. They have not lost money even under the current duty structure, as our business page story reveals. But a Rs. 1.8 billion investment is not funded in a small country like ours even by a rich group like Carsons with cash out of their pockets. They’ve had to borrow very heavily to fund the new brewery and the pay back period will obviously be extended as a result of margins that have shrunk and simultaneously reduced volumes.

The trouble is that the government is ambivalent about its alcohol and tobacco policy. Nobody with an ounce of sense in his head will dispute the logic that cigarettes particularly, and liquor are addictive substances that need to be severely discouraged. As it is, Lankans drink and smoke far more than is good for them. It is not good for their pockets and it is not good for their health. The tragedy is that those who hurt themselves most by drinking and smoking are those who can least afford it.

Nevertheless, government coffers are hugely enriched by the very high excise duty that is charged on both alcohol and tobacco as both industries never tire of telling us. Successive administrations have also found these two industries to be a cash cow that help reduce the deficit at budget time. Hence the price increases that are imposed with monotonous regularity. Government makes great play on its intention of limiting advertising of both liquor and tobacco, but reality also remains a consideration. Hence the slow action.

But policy consistency, as both the Ceylon Brewery and the Lion Brewery Ceylon have said, is essential if the country is to attract the investment it desperately needs. The volte face on beer duty is only one example. Another is the policy on a private medical school for which BOI permission was given and then withdrawn. The promoters went to court and the authorities did another about turn. Vacillation like this will be fatal and the sooner those in authority realised that truth, the better for the country.

The brewers and interests setting up the private medical school are hard nosed businessmen whose main interest is making money. But government policy favours such money making provided there are commensurate benefits to the country, especially in the sphere of job creation and economic development. If that is so, policies must be pragmatic and there can be no blowing hot and cold as the administration is sadly prone to do.

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