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Sequel to takeover of U.S. company by a Singapore operator
Will Intercontinental (USA) also sell out?

There is a possibility that Intercontinental Hotels Corporation, recently taken over by a Singapore company, Bass Hotels and Resorts, may decide to divest their holding of Hotel Services (Ceylon) Ltd., the owning company of the Hotel Ceylon Intercontinental of which the dominant controlling interest was recently acquired by Mr. Uma Kumar Sharma, an Indian businessman long resident here.

Sharma has already acquired 88.5% of Hotel Services. The majority of the balance shares (7.07%) is owned by the Intercontinental Hotels Corporation of the USA which has been managing the hotel since 1967. Intercontinental had earlier indicated that they would retain their shares in Hotel services and also continue to manage the Colombo property.

Subsequently, Bass Hotels and Resorts had taken over Intercontinental. Sharma has informed Hotel Services shareholders that Bass had told him that they were "in the process of reviewing the terms of the mandatory offer’’ he has made to the minority shareholders of the company in order to decide whether they should continue to retain their Hotel Services shares.

Sharma has also declared that if Intercontinental Hotels Corp., now taken over by Bass Hotels, decides to sell their interest, he is willing to purchase the entire shareholding of 1.24 million ordinary shares.

Meanwhile B. R. de Silva and Co., Chartered Accountants, commissioned to offer and independent opinion to the shareholders of Hotel Services on whether they should accept Sharma’s mandatory offer of Rs. 26 per share, the price at which he acquired his controlling interest, has placed an estimated value of Rs. 21.40 on a Hotel Services share.

Based on their analysis and given the current market and economic conditions they have concluded that the 4.4% minority shareholders "may accept’’ Sharma’s offer. But they have said that it must be borne in mind that the value of a share to Sharma "would be quite different’’ as he has already acquired a controlling interest as well as a majority shareholding. The value of a share held by Intercontinental (of the USA) "would also be different since they have entered into a lease agreement to manage the company."

Hotel Services have not made two agreements requested by B. R. de Silva available to them for the purposes of the independent opinion. These were the lease agreement with Intercontinental of the USA, except for certain clauses related to the calculation of the profit share; and the lease agreement with the Ceylon Tourist Board (which owns the ground on which the hotel has been built) and the correspondence or agreements with regard to the rescheduling of ground rent payable. Such rent has been sharply increased in recent years.

$ 43 mn. project ready for take off
Carson’s Malaysian firms in mega Indonesian oil palm project

The Carson’s group of companies has received all necessary government approvals for investing in a 10,000 hectare oil palm plantation in Indonesia through its Colombo incorporated associates/subsidiaries owning plantations in Malaysia, a company spokesman announced.

This project which has long been in the pipeline involves an estimated maximum project cost of USD 43 million of which the equity component is estimated at USD 15 million, he said.

The project has already obtained leasehold rights of a total of 16,750 ha. in Central Kalminatan from the Indonesian authorities. It is intended to have a oil palm plantation of a minimum of 10,000 ha., a crude oil processing mill to handle its produce, an oil bulking station and related infrastructure.

The Carson’s companies that will invest in this project are the Shalimar (Malay) Estates Co. Ltd., Indo Malay Estates Co. Ltd., Selinsing Co. Ltd., Good Hope Co. Ltd. and Bukit Darah Co. Ltd. all of which are quoted on the Colombo Stock Exchange. All these highly profitable companies are into oil palm cultivation.

Palm oil is now considered an edible oil for which global demand is only second to that of soybean oil. In recent years, demand from major consumer markets like China, India, Pakistan and the European Union has grown and many experts believe that the product will in the future become the world’s most consumed edible oil.

"In terms of productivity, better output per hectare and lower cost of production has made palm oil a competitive commodity in the world edible oil market," Carson’s said.

Ideal agricultural conditions for growing oil palm is found in Asia with Malaysia now producing and exporting the largest share. But the rising cost of land and labour in Malaysia is expected to change the picture with oil palm cultivation picking up in Indonesia which is expected to be the biggest grower within the next decade.

Carson’s said that their project will be covered by investment and appropriation guarantees offered by the East Asian Growth Area (EAGA) nations and all necessary approvals have been obtained from the Sri Lankan, Malaysian and Indonesian authorities. Shareholder approval (of equity holders of the five companies with estates in Malaysia) is now being sought for getting on with the loan funding and related undertakings.

"This expansion of its oil palm plantation activity into Indonesia is a further step in our strategy of entering into regional operating environments and strengthening our core businesses," Carson’s said.

While awaiting the necessary approval, preliminary work including setting up nurseries and procuring planting material from Papua New Guinea is already on stream.

Local sales better than makes good export lag
Lanka Tiles reports record profit; set to do better

Lanka Tiles Limited has posted a net profit of Rs. 62.8 million for the year ended March 31, 1999, up 50% from Rs. 41.9 million earned a year earlier and the highest profit on record since the company was established 15 years ago.

Reporting to shareholders, the company’s Chairman, Mr. Baku Mahadeva, expressed confidence that the group will perform even better during the current financial year. He made this projection on the basis of an after-tax profit of approximately Rs. 28 million made in the first 4 four months of the current financial period. "If this trend continues, I expect that the current year’s after-tax profit will be over Rs. 70 million," Mahadeva said.

The chairman said that shareholders may recall that the group made a loss of over Rs. 4 million in 1996/97. This was converted into a profit of Rs. 41 million the following year and increased to a record Rs. 62.8 million during the year under review. "(This) is an achievement in which we can take legitimate pride," Mahadeva said.

Lanka Tiles is a subsidiary of Lanka Walltile Limited, which owns a controlling 51% interest in the company. As Lanka Ceramics owns 55.5% of Lanka Walltile, it is the ultimate holding company of Lanka Tiles.

The directors of the company have recommended a 8% dividend on the basis of the profit during the year under review. Since the company recently made a bonus issue, the dividend is equivalent to 9.6% of the issued capital before the bonus.

Mahadeva said that the East and South East Asian crisis which broke in the latter part of 1997 had not seriously affected their exports in the financial year 1997/98, "probably because building constructions which had already commenced when the crisis first erupted were continued and completed in the following months."

But this position reversed during the year under review with construction work declining, the demand for floor tiles falling and the price offered for tiles in the world market dropping sharply.

Competing Asian tile manufacturers like Thailand, Malaysia and Indonesia, whose currencies had fallen sharply against the US dollar in 1997, were able to offer their tiles on the world market at prices considerably lower than Lanka Tiles, Mahadeva said.

The result was that total exports had fallen by 13% from Rs. 164 million in 1997/98 to Rs. 142 million the following year. But local sales that had grown 27% to Rs. 482 million during the year under review had more than caught up the lag.

Mahadeva said that during the current financial year, local sales had been even better with the local sales turnover in the 4 months from April to July 1999 growing to Rs. 193 million against Rs. 131 million during the corresponding period the previous year.

He attributed the increase in local sales to many factors including vigorous advertising, a strengthened dealer network and a new showroom centrally located in Kandy.

Local sales had also been helped by the company withdrawing from the BOI scheme which had placed restrictions on the local sale of tiles produced in one of their factories established as a BOI project.

The directors of the company are: Messrs. B. Mahadeva (Chairman), J. A. P. M. Jayasekera, P. L. Amerasinghe, A. R. Peiris, J. B. Wimalasekere (resigned 24.8.99), M. Perera, J. C. P. Jayasinghe (resigned 22.7.99) and Ms. R. S. Jayasekera.

b2
Foreign investors to help revive KKS Cement Factory?

Lanka Cement Limited, owners of the Kankesanthurai Cement Factory which has been inoperative for the past several years, has told shareholders that it "looks forward to initiatives of the Ministry of Industrial Development and the Public Enterprise Reform Commission (PERC) to secure foreign investor participation to rehabilitate the factory and enable it to recommence operations."

The company’s Acting Chairman, Mr. C. H. de Tissera said that several foreign investors have shown interest in rehabilitating the plant and this is being pursued by the Ministry of Industrial Development through PERC.

Lanka Cement incurred a loss of Rs. 35.1 million during the year ended December 31, 1998, up from a loss of Rs. 21.1 million a year earlier in the face of unprecedented competition in the trading of imported cement.

Tissera said that the company had sustained an operational loss of Rs. 6.7 million during the year under review before paying interest. This compared to an operational profit the previous year of Rs. 7.3 million.

He said that the decline in the operational profit was due to their being compelled to sell a consignment of cement received in January last year below cost. There was intense competition and a price war in the world cement market and the volume of sales was low during the year, the acting chairman said.

Sales volume had dropped to 31,151 mt. from 57,173 mt. the previous year due to unprecedented cement imports by the cement manufacturers in the country as well as by new importers. The year saw three new foreign companies setting up packing plants here for marketing imported cement, Tissera said.

He attributed the entry of new importers to Sri Lanka to be the result of the South East Asian economic crisis that had contributed to a drop in cement demand in the region. Also, Lanka Cement had to cope with the problem of a default by a supplier who had failed to honour a supply contract of 13,500 mt. of cement in April 1998.

Tissera said that the company was now mainly concentrating on the sale of cement in the Jaffna district. They have shipped six consignments to Jaffna during the first half of the current year and hoped to market 1,200 mt. of cement monthly in the district generating a net surplus of Rs. 750,000 a month.

He also said that they have taken steps to carry out preventive maintenance work at the Kankesanthurai Factory to arrest further deterioration of the plant. Work had commenced in September last year with 28 employees and was continuing satisfactorily with funding from the Resettlement and Rehabilitation Authority of the North.

Employees of the factory are on lay-by and continue to be paid 50% of their salaries with a Treasury grant. The total work force at the end of the year under review was 506.

Despite its 1997 operational profit, Lanka Cement continues to pay heavy interest - Rs. 28.4 million both in 1997 and 1998 and its accumulated losses are now running at Rs. 1.2 billion as at December 31, 1998.

The auditors of the company have pointed out that its total liability exceed its total assets by Rs. 820.5 million (excluding the inter-site accounts). They have said that this raises a doubt that the company will be able to continue as a going concern.

Lanka Cement has an issued capital of Rs. 1.56 billion. Its ten-rupee shares were last traded on the Colombo Stock Exchange at Rs. 3 on September 16.

The directors of the company are: Messrs. C. H. de Tissera (Actg. Chairman w.e.f. 15.7.99), M. A. G. D. Hemachandra (Resigned 20.5.99), K. T. Shanmugam, B. A. C. Fernando (w.e.f. 2.7.99), A. J. Obeysekara, W. N. Y. Peiris, B. K. D. Wickremasinghe and Mrs. G. N. M. Alles (Resigned 25.12.98).

Losing Galadari waiting for rehabilitation funds

Galadari Hotels (Lanka) Limited has posted a gross operating loss of Rs. 49 million for the year ending December 31, 1998 - after remaining in operational up to April of that year and then resorting to a phased opening with 181 rooms available for sale by the end of the year.

The company’s Chairman, Mr. Abdul Latif E. Galadari, said that the hotel which had turned in an operational profit of Rs. 49.8 million the previous year had only one restaurant and the coffee shop functional since May last year. Subsequently, in October 1998, the roof top restaurant had become operational. But the ballroom, one of the main revenue centres, had been completely inoperational during the year under review.

The chairman said that even in these difficult circumstances, the hotel was opened for business at the request of the government. This was done on account of certain security considerations and to continue to re-establish the goodwill the hotel enjoyed prior to the bombing in October 1997 which forced its closure. Hence the loss situation.

Galadari described the year under review as predominantly a re-construction year for the hotel with work continued in all areas. The government loan of Rs. 350 million for the re-construction was obtained in two instalments from the Strikes, Riots and Civil Commotion Fund.

The balance Rs. 150 million of the Rs. 500 million originally approved had still not been released by the government, Galadari said. All efforts are being made to obtain the release of these funds without which the completion of repairs, mainly to the high revenue generating ballroom, cannot be completed.

He said that the progress of the rehabilitation encountered unexpected delays due to security enforced in and around the hotel which hampered vehicular movements. Despite repairs being incomplete, they have been able to secure some vital business which presently includes three airline crews.

The need to avoid customer complaints of noise, dust, etc. while having to continue the re-construction at an optimum level necessarily caused delays in construction, the chairman said.

He said that the high security environment in which they were located had affected business adversely. Patrons had access difficulties to the premises. Despite all the difficulties, the staff led by General Manager Chandra Mohotti were doing an excellent job.

As in previous years, the company’s operating loss was increased by very high interest expenses (Rs. 135.1 million), depreciation (Rs. 104.5 million) and exchange losses (Rs. 209.5 million). The pre-tax loss for the year was Rs. 473.5 million.

Although there was no tax liability, the company’s losses have now mounted to Rs. 3.8 billion as at December 31, 1998 - over twice its issued capital of Rs. 1.8 billion.

The directors of the company are: Messrs. Abdul Latif E. Galadari (Chairman - Alternate Syed M. S. Khalil), M. A. R. Galadari (Alternate E. B. Quinlan), P. H. Darbari (Alternate Neelan Tiruchelvam), A. M. M. Sahabdeen, J. B. Wimalasekera, N. W. Samarasinghe, A. Dinakar (Alternate Neelan Tiruchelvam), Q. M. Y. A. Bastaki (w.e.f. 21.1.99) and G. Jinadasa (w.e.f. 21.1.99).

No problems here, assures local Singer chief

Singer (Sri Lanka) Limited Chairman Hemaka Amarasuriya last week assured that developments in the USA involving its parent, The Singer Company N.V., will in no way affect their business here.

"It won’t affect us. We are completely independent and there is no connection," Amarasuriya said.

The local Singer operations have been profitable and have given good returns to all stareholders over a long period of time. Singer (Sri Lanka) itself which has two subsidiaries, Singer Industries and Regnis, have been constantly maintaining a 35% dividend record for the last five years and has just paid shareholders a 22% interim dividend for fiscal 1999.

Amarasuriya said that their parent’s action filed under Chapter 11 bankruptcy protection was intended to facilitate restructuring its debt and operations. Most Singer operations will not be affected by the filing, he said.

In a statement to the Stock Exchange, Amarasuriya said "this filing will in no way affect the local subsidiaries of the Singer Company NV operating in Sri Lanka who will continue to operate their business without any change."

Eighty-one percent of the Sri Lanka operation is owned by the Singer Company NV. The Singer operation here includes the assembly of sewing machines, televisions, audio equipment, home appliances and the manufacture of wooden furniture, etc.

Singer (Sri Lanka) got a quotation on the Colombo Stock Exchange in 1982 and offered part of its equity to Lankan shareholders. Since its listing, seven bonus share issues and two rights issues have been floated.

Singer has indicated that the U.S. filing was precipitated primarily by a lack of liquidity resulting from the company’s Dec. 1997 acquisition of the German sewing machine giant, Pfaff and the need to financially support that subsidiary in the face of an industrial sewing machine decline. Pfaff subsequently went bankrupt and Singer guarantees on a portion of the Pfaff debt may be called up.

Singer Sri Lanka shares lost three rupees on the Colombo Stock Exchange, moving down from Rs. 48 to Rs. 45 after the first news of developments in the U.S. broke here but has since held the Rs. 45 price.

No dividend as company builds reserve for uncertain future
Cargo Boat Development profitable despite two bomb blows

The Cargo Boat Development Company Limited, owners of an office building in the Colombo Fort, has completed what its chairman described as a "somewhat stable year" ended March 31, 1999 with an after-tax profit of Rs. 11.5 million, down from Rs. 15.7 million earned a year earlier.

The Company’s Chairman, Mr. R. B. Thambiayah, said that during the previous two financial years the company had to suffer substantial bomb damage to its building. During the year under review it had engaged itself in normal letting activities and was fortunate that the whole building was rented out.

But the unsettled conditions prevailing in the vicinity of the Central Bank headquarters due to the closure of Janadhipathi Mawatha to traffic and intense renovation work in neighbouring buildings depressed the rents that could be claimed. This contributed to reduced profitability, Thambiayah said.

He said that the Central Bank which is one of the major lessees of their building was now constructing their own building opposite Cargo Boat and was renovating their own damaged building. Some of the departments presently housed in the Cargo Boat building will be moving into their own premises about next February.

"If that happens, there would be rentable space arising in our building. Your board of directors will therefore be making every effort to attract new clients for the areas which may be vacated by the Central Bank by early next year," he said.

Discussing profitability, Thambiayah said that on a turnover of Rs. 17.9 million they had earned an operating profit of Rs. 9.5 million. Interest and non operating profit of Rs. 5.1 million had given them a pre-tax profit of Rs. 13 million, down from Rs. 16.2 million earned a year earlier.

The chairman said that the directors did not consider it prudent to recommend a dividend for the year under review as instalments on the bank loan obtained for rehabilitating the building is now repayable monthly. With the current tenancy agreement for eight floors occupied by the Central Bank ending on January 31, 2000, there was a need to build up reserves for the company to face an uncertain future with a greater degree of confidence. Hence the non-declaration of a dividend for the year.

Cargo Board Development had continued to expand its investment portfolio in outside enterprises and the cost of investments had been increased during the year from Rs. 23.1 million to Rs. 25.5 million. Although the share market was depressed, the market value of their investment is only 6% below cost as at 31.3.99, Thambiayah said.

No provision for the Rs. 1.4 million depreciation in the cost of investments had been made as the directors regarded the diminution in the value of such investment to be temporary due to prevailing market conditions. The investment income during the year was a "healthy" Rs. 2.3 million, Thambiayah said.

The directors of the company are: Messrs. R. B. Thambiayah (Chairman/MD), N. A. L. Cabraal, Merril J. Fernando, Daya Perera and Mrs. I. R. Rajiyah and Mrs. N. A. Thambiayah.

Globalization 6
Globalization and Sri Lanka

By Kanes
The economy of Sri Lanka has been liberalized gradually over the last 20 years. Tariffs, trade restrictions and taxes have been reduced, prices have been decontrolled, business has been deregulated, state sector has been emasculated and a plethora of incentives and concessions have been offered to foreign capital mainly under the guidance of the IMF. The enabling environment for private investment, in particular, foreign investment was thereby created. The government further announced in no uncertain terms that the private sector would be the engine of growth and doors would be wide open for foreign capital to flow into the country. The underlying objective of the government was to integrate the country with the global market in order to reap the much-advertised benefits of trade and investment. Has the country reaped these benefits?

Low Economic Growth

The best index of prosperity is the rate of economic growth, and it appears that Sri Lanka has experienced only a moderate rate of growth in the years of liberalization. The average economic growth in the entire period of 19 years of the open economy from 1980 to 1998 was only 4.7 per cent and this was at a time when the world economy was growing and world trade was expanding rapidly. Actually, average growth was 4.2 per cent in the 10 years 1980- 1989 and rose to 5.2 per cent only in the last nine years 1990-1998. By contrast, South Korea, Taiwan, Hong Kong and Singapore -the Asian Tigers - had sustained growth of around 9 per cent a year for about 37 years 1960-1996 and South East Asian countries 8 per cent.

The major cause of this moderate growth was the low level of investment, particularly foreign investment. Sir Lanka’s average domestic investment in the last five years was around 25 per cent of GDP whereas it was 35 to 40 per cent of GDP in East and South East Asian countries. The average annual inflow of foreign direct investment in the last five years 1994-1998 was $105 million or about 3 per cent of the total domestic investment and 0.75 per cent of GDP. By contrast, average annual foreign direct investment in Malaysia in the five years 1991-1995 (before the crisis) was as high as $4870 million or 46 times the amount received by Sri Lanka. In 1996 for instance, foreign direct investment inflow to Sri Lanka was $80 million which was equal to 0.6 per cent of GDP while in Malaysia it was $4500 million or 4.5 per cent of GDP. Thus, Sri Lanka has not attracted much foreign investment as it expected from liberalization.

The little foreign investment that flowed into the country appears to have gone mainly into the garments export industry, partly because of low wages and partly because of the country’s unutilized garments export quotas in US. Thus, the country’s industrial exports rose from 19 per cent of the total exports to 75 per cent in the last 15 years; it is significant that 62 per cent of the industrial exports consisted of garments and 7 per cent textiles. Industrial exports (mainly garments) did well as they rose by eight times in the last ten years. Globalization may have thus helped to expand the textile and garments industry but, it failed to develop other industries to diversify the export base. Garments and textile exports which formed 62 per cent of the country’s industrial exports in 1988 increased to 69 per cent in 1998 making Sri Lanka excessively dependent on one industry. In the Philippines, by contrast, electronic and electrical products rose from 21 per cent of total exports to 58 per cent between 1988 and 1998 while the share of garments fell from 19 per cent to 8 per cent.

The excessive dependence on one export - garments - was brought home in 1998 and in the first half of 1999. Sri Lanka’s textile and garments exports had risen in value by 20 per cent in 1997 but increased by only 8 per cent in 1998. The situation deteriorated further in the first half of 1999 when the value of textile and garments exports was 4.1 less than in the first half of 1998. This contributed to the decline in total of overall economic growth in the first half of 1999.

Poor Performance of Commodity Exports

If globalization helped to expand the garments industry, it has clearly failed to stimulate agricultural exports. While industrial exports rose in value by eight times, agricultural exports have increased by only three times in the last ten years. The modest increase in agriculture exports was mainly due to one export’ crop - tea. While the production of tea increased by 35 per cent in the last ten years, that of coconuts rose marginally by 3 per cent and that of rubber actually declined by 14 per cent. The picture is a little different if we take the last five years 1994-1998; tea production increased by 16 per cent but coconut production fell by 3 per cent and rubber production fell by 9 per cent. The volume of exports of several minor agricultural crops too declined in the last five years: vegetables by 53 per cent, fruits 38 per cent, coffee 64 per cent cinnamon 15 per cent, cardamom 38 per cent, betel leaves 28 per cent, manufactured tobacco by 26 per cent and other minor agricultural products by 68 per cent. The overall picture in the last five years is that industrial exports rose in volume by 32 per cent while agricultural exports increased by only 10 per cent.

Domestic Agriculture

The last five years have witnessed a deterioration of domestic agriculture, mainly as a result of globalization and free trade. The liberalization of imports by reduction or removal of tariffs and non-tariff restrictions has resulted in a flood of imports, which has undermined domestic agriculture. Production of the major food crops has either fallen or stagnated as shown in the table. The staple food crop paddy has virtually stagnated in the last five years, production in 1998 of 2,692 million metric tons being almost the same as in 1994. Sugar production has fallen by 15 per cent in the same period - to 61,549 metric tons; it met only 10-12 per cent of domestic consumption. The biggest fall in production was in subsidiary food crops which had to face competition from liberalized imports. Production fell by more than half in Big onions, Red onions, Potatoes, Chillies, Groundnuts and Soyabeans; it fell almost by half in maize and significantly in black gram, cowpea, green gram and kurakkan.

Production of Food Crops 1994-1998 (MT’ 000)

Sri Lanka has the potential to be self-sufficient in all these food crops provided the "enabling environment" is created to stimulate the farming population. The policy of trade liberalization to integrate with the global market or to globalize however prevents the creation of this enabling environment. The liberalized imports in accordance with this policy may keep the consumer happy but is disrupting domestic food production, and impoverishing the rural production with frightening social consequences. The rural farmers are unable to produce these goods at prices competitive with imports without protection. Free imports are adversely affecting other food items too: recently tomato producers blamed the free import of tomato juice for the unremunerative prices they receive and poultry and egg producers protested against the policy of importing these products and depressing their prices. Unrestricted imports of fruits - apples, oranges, mandarins and grapes - and fruit juices - apple juice, orange juice and grape juice - are threatening the country’s horticultural and fruit processing activities; already, the influx of cheap oranges has virtually driven out the local green oranges from the market.

Domestic Industry

Import liberalization has also undermined several domestic industries such as handloom textiles, electrical appliances, fabricated metal products, chemicals, bicycle tyres, spectacle frames, printing paper and dairy products. The recent abolition of the 35 per cent tariff on textiles dealt a crushing blow to the local textile industry which if protected and upgraded could save Rs. 82 billion spent annually on textile imports to the garments industry. The depreciating rupee has given some protection to local industries but not to those dependent on imported inputs which have increased in price with depreciation. The unrestricted imports of electrical appliances such as refrigerators, has led to the closure of one local refrigerator maker; the import of wooden and cane furniture has adversely affected the sale of high-class local furniture; bathroom fittings, water taps, sanitary ware, hardware are hardly produced locally now on account of cheap imports; tea machinery which was made here and exported to Kenya and Indonesia is now being imported from India. Coconut oil mills are being closed on account of the free import of palm oil whose tariff has been reduced from 35 per cent to 5 per cent. Several small-scale manufacturers have found it more profitable to import and sell goods than to manufacture them locally. Instead of encouraging and supporting both export- oriented development and import-substitution the authorities appear to have overemphasized export growth and neglected import substitution.

External Effects

The integration with the global economy has increased Sri Lanka’s exposure to the world market forces and made its economy more vulnerable. The export-led growth has suffered a setback from the economic recession caused by the East Asian currency crisis. The country’s exports as mentioned earlier are falling in value partly owning to reduced external demand arising out of the recession and partly owing to the increased competition from South East and East Asian countries with depreciated currencies. The most seriously affected are the garment exports, which contributed to high export growth in recent years. Economic growth in most countries in 1999 will be lower than in 1998 and this includes the developed countries. Sri Lanka’s principal export market is USA whose lower growth is expected to reduce the demand for Sri Lanka’s exports such as garments while the recession in Japan has already reduced the demand for Sri Lanka’s exports such as diamonds. The depreciated currencies of East and South East Asian countries in addition have made their exports more competitive and this has affected the competitiveness of Sri Lanka’s exports such as garments, rubber and coconuts. Consequently, the value of total exports which had increased by 13.3 per cent in 1997 rose by only 2.1 per cent in 1998 and export volume which increased by 11 per cent in 1997 rose marginally by only 0.1 per cent in 1998. The prospects have become even more unfavourable with the exports in the first half of 1999 being 9 per cent lower than those in the first half of 1998. The country’s external assets, reflecting the fall in exports, have declined by 7.6 per cent in the first six months of 1999.

The integration of financial markets, by liberalizing exchange restrictions, transmitted through the contagion effect, the Asian financial crisis to other countries and regions. Sri Lanka was also affected but not much because of the limited role foreign funds play in the share market and commercial lending. Portfolio investment of foreigners which had risen by Rs 356 million in 1996 and Rs. 749 million in 1997 reversed in 1998 and was withdrawn to the extent of Rs. 1521 million. This appears to have been the main cause of the fall in the CSE all share price index from 782 in April 1998 to 597 in December 1998; it fell further in 1999 to 563 in the third week of August. The Director General of the Colombo Stock Exchange himself has stated in the newspaper that the fall in share prices is due to the withdrawal of foreign funds on account of Sri Lanka’s poor economic fundamentals. It should be noted that foreign investors are free to invest in the Colombo Share Market and free to repatriate their capital gains and dividends; there is no restriction as such only that such transactions have to be channelled through special accounts called "Share Investment External Rupee Accounts".

Pruning Capital Investment

The strategy of economic development which globalization demands appears to have failed to make Sri Lanka another "Asian Tiger". We have shown the relatively low economic growth in the last five years, the poor response of foreign capital to our inducements, the poor performance of agricultural exports, the decline in domestic food production, the undermining of import-substitution industries, the slowing down of export growth and the fall in stock market prices in the last twelve months as evidence of the limited benefits and negative results of globalization. The development strategy of making the private sector the engine of economic growth resulted in the emasculation of the public or state sector, but the private sector’s poor response meant a stagnation in overall investment and slow economic growth. The government reduced its investment expecting the private sector to more than make it up but as private investments showed only limited response, the economy fell between two stools.

The government weakened itself in this process by deliberately reducing the financial resources that were available to it through lowering taxes. Total revenue from declined 19.0 per cent of GDP in 1994 and 20.4 per cent in 1995 to 17.3 per cent in 1998: tax revenue fell from 17.2 per cent of GDP in 1994 and 17.8 per cent in 1995 to 14.5 per cent in 1998; income tax revenue declined from 2.6 per cent of GDP in 1994/1995 to 2.0 per cent in 1998; revenue from sales and turnover taxes fell from 5.6 per cent of GDP in 1994 to 3.9 per cent in 1998 and revenue from import duties declined from 3.9 per cent to 2.8 per cent of GDP. These reductions in taxes were designed to stimulate private investment and to provide relief to taxpayers. As shown above it provided little incentive to private investment. Relief to taxpayers was unwarranted as the war against terrorism demanded not a reduction but an increase in taxes which the taxpayers would have borne as a necessary contribution to the war effort. It should also be ruled that in the free market economy of USA, tax revenue was 28.5 per cent of GDP in 1996 and the current corporate tax rate is 40 per cent.

By making unnecessary tax cuts, the government denied itself the opportunity of raising new revenue to finance increasing defence expenditures, and the rising defence expenditure was largely met not by new taxes but by cutting essential economic and social development: government’s capital expenditure fell from 7.5 per cent of GDP in 1994 and 7.4 per cent in 1995 to 5.7 per cent in 1997 and 6.8 per cent in 1998. Capital expenditure on economic services as a proportion of GDP fell from 5.1 per cent in 1994 and 5.4 per cent in 1995 to 4.4 per cent in 1998; that on agriculture and irrigation declined from 0.9 per cent in 1994 to 0.6 per cent in 1998 that on transport from 2.5 per cent of GDP to 1.9 per cent and that on energy from 1.0 per cent of GDP to 0.9 per cent. Actually, the expenditure on agriculture and irrigation in 1998 was less than that in 1995 in absolute terms. Thus, capital investment on essential agriculture and irrigation, transport and energy has not been made in the last four or five years because of the wrong policy of reducing taxation when the situation demanded the opposite.

Investment in social services on the other hand, seems to have stagnated in the four years 1994 to 1997 and risen slightly only in 1998. It remained almost constant at 1.3 per cent of GDP in 1994 to 1997 and rose to 1.5 per cent in 1998: investment in education remained virtually constant at 0.5 per cent of GDP and on health almost constant at 0.3 per cent of GDP. Investment in social services would have been much larger and the number of new hospitals and schools much higher, if the government had not denied itself funds by lower taxation.

In addition to a relative reduction in capital investment in economic and social development, there has also been a relative reduction in current expenditure on the maintenance of existing economic and social services of the country. Thus, current expenditure on social services fell from 8.6 per cent of GDP in 1995 to 6.3 per cent in 1998; that on schools declined from 2.4 per cent to 2.0 per cent and on health from 1.3 per cent to 1.0 per cent. Current expenditure on economic services fell from 1.21 per cent of GDP in 1995 to 1.0 per cent in 1998: expenditure on agriculture and irrigation fell from 0.57 per cent to 0.54 per cent, on transport from 0.30 per cent to 0.29 per cent and on energy from 0.15 to 0.07 per cent. Thus, maintenance of social and economic services too has suffered from the financial constraint caused by lower taxation.

Passive State

The state cannot entrust the important task of economic development to the free market and wait patiently for the magic wand of private enterprise to deliver the goods as globalization demands. In a developing economy like Sri Lanka, where private enterprise is still inadequately developed, the state has a responsibility to shoulder directly-a good part of the burden of economic development. By following a policy of laissez faire, we are missing the opportunities of creating projects and programmes for rapid economic growth and employment creation. Public investment in developing countries complements rather than displaces or crowds out private investment. In a growing economy, there is ample room for both to co-exist. The crucial role a dirigiste state can play in economic development is illustrated by France which was highlighted by The Economist of June 5th 1999 as follows:

"To most Frenchmen, the dirigiste model remains a source of pride not resentment. This owes much to the part the state played in the 30 years of spectacular economic growth after the Second World War, which propelled a heavily rural economy into the modern industrial age. It turned France into the world’s fourth largest industrial power after America, Japan and Germany, and its fourth biggest exporter. In terms of income per head, France overtook Britain in 1969, and has retained that lead to this day. Despite the heavy state, private enterprise has flourished. France is home to a host of profitable world class firms...".

Lack of social capital - a drawback for the Economy

By Analyst
Economists tend to view economic life and economic activity in isolation - they assume that economic man goes about trying to maximize satisfaction which boils down to his selfish interests. But although rational maximizing of individual satisfaction is valid for most of the time, say 80% of the time, there are many instances of altruistic behaviour even in economic activity, which cannot be explained only in terms of this assumption of maximizing satisfaction of his wants unless a very wide interpretation is given to the word "wants".

Social dimension

Economic activity cannot be looked upon as merely an effort by individuals who come together to achieve economic goals. When people come together in the work-place they interact socially and through the work-place they connect with the rest of the social world. Just as people are individualistic and selfish, they also have a desire to connect with other people and obtain a certain satisfaction from such connections.

Man is a social animal. There is a fundamental human desire for recognition by others - he or she wants to be treated with dignity by other human beings to be recognised as a worthwhile human being. In past ages men who desired such recognition tried to prove their physical prowess and kings displayed their military might. Now the desire for recognition and importance has shifted to the economic realm.

So people engage in economic activity, not only to satisfy their basic needs but also they want to be recognised for their status in society. Status depends on wealth and occupation. So people tend to accumulate wealth and to display their wealth in ostentatious consumption. They spend lavishly to impress others. They tend to buy modern equipment which they may hardly use in order to impress others. Women tend to copy the latest fashions in clothing.

These desires, upto a point, promote economic activity, provided they seek to satisfy their desires by hard and honest work, by saving out of their earned incomes. This type of recognition for the individual must come from society. So society must give recognition only to those who have earned their wealth honestly. Society must not give recognition to those who have cheated and have acquired ill-gotten wealth, by theft, robbery and deceit.

Cheating does not mean only the cheating of other members of society, but must include cheating the government as well. Society should boycott and ostracise such individuals who engage in drug trafficking, illicit liquor manufacture etc.

The Puritan ethic preached by Protestant reformers like John Calvin, shape the culture of capitalist enterprise in the west. We have still to develop a moral ethic which recognises and respects only hard earned wealth and despises ill-gotten incomes. But politicians hob nob with such scum as bootleggers, smugglers, drug traffickers and professional killers.

Since economic activity is carried on within the wider social background, it is knit together by norms, rules, moral obligations and other habits that together shape society. Our society does not look down on the idler nor give respect to the honest man who earns by the sweat of his brow. Those who engage in manual work, so necessary for the economy, are not given adequate respect and recognition while those who use the intellect to earn income are looked upon with favour although they may be social parasites such as many lawyers and even some doctors and accountants are.

These professionals exploit their monopolistic power to extract from the economy much more than their contribution to the economy is worth. Some of their activities are positively harmful like lawyers postponing case. while charging their fee for the appearance. The University students at Moratuwa want to saddle the economy with more engineers (who are already in surplus) and deprive it of much needed diploma holders.

The local engineer unlike his counterpart in other countries who uses the skill of his hands as well as his intellect, prefers not to soil his hands and confines his work to his desk. So roads are badly maintained, bridges fall down and water runs to waste. The Industrial Revolution was created not by qualified engineers but by technicians and artisans like James Walt, George Stephenson, Thomas Edison who worked with their hands.

Trust

A nation’s economic well-being including its ability to compete depends, says Francis Fukuyama of ‘End of history’ fame, on one single cultural characteristic - The level of trust in that society.

We are a society with a very low degree of trust. Consider our distrust of any foreign mediation. We don’t trust the U.N. or any other foreign power to mediate in the ethnic question. Surely, isn’t there any foreign organisation we can trust? The Americans and Europeans are much more committed to the Jews than to the Muslim Palestinians. Yet Arafat and the Palestinians accepted Norwegian good offices which led to the Oslo Accord.

The intelligentsia who champion the Sinhala Buddhist cause, believe that the whole world is in a conspiracy against them. Psychologists have analysed the frame of mind which leads to belief in conspiracy theories. It all stems from a negative attitude to the world and to life.

The world to some is a hostile place and life is unsatisfactory, full of suffering. But life is not all that unsatisfactory. There is joy and laughter as well as sorrow and sadness. It was Confucius, the Chinese sage who said it is better to light a candle than to curse the darkness.

The attitude of mind of many of our people is negative. It is not as if they don’t desire the ‘good life.’ But few people think they can achieve it by their own efforts. Its easy to put the blame on the wickedness of the world or one’s past karma.

Positive attitudes of mind are essential not only for economic development but even for spiritual progress, whatever it implies. The widespread belief in auspicious times and superstitious practices show the lack of confidence in one’s efforts. People who don’t trust each other can’t co-operate in economic or social activity. Economic development is not individualistic. It requires co-operation and support for each other.

The members of the Japanese Keiretsu, a business network, buy from one another rather than from a foreign company that might offer better price or quality. During the oil crisis of the 1970’s Mazda and Daimler-Benz were both in serious financial trouble with looming bankruptcy. But they were both bailed out by a coalition of companies that did business with them, spearheaded by Sumitomo Bank in the case of the former and Deutsche Bank in the latter.

This is of course not to argue that all failing companies should be rescued. Of course not. Many such companies should be allowed to fail. But large flagship companies suffering from a temporary decline in sales expected to reverse itself, are another matter. The alternative to rescue would have been a cheap take-over by foreign investors.

We are perhaps the only country in the world which discriminates against its own national investors, by providing tax holidays and duty free concessions only to foreign enterprises under the BOI. By cheapening local assets unduly by prolonged depreciation of the rupee, we encourage foreigners to buy our assets on the cheap.

Why the lack of trust

Why don’t people trust each other? Trust is based on people’s habits, customs and above all ethics. Is there something wrong with our ethical values? Are they too individualistic? Is there too much stress in the individual’s moral life on oneself and on isolation from society? Is individual spiritual liberation to be achieved within society or by withdrawal from society?

Contrary to what Economists assume, individuals are not motivated entirely by self interest. They can be altruistic and generous to others. They can and do sometimes forego profit maximization to help the poor. They may not raise prices in a situation of unusual scarcity caused by a natural disaster. Individuals sometimes do consider the interests of the community in their economic behaviour.

There must be enough members of a community who will participate in communal or collective activities. This ability for people to work together in groups and organisations depends on their ability to subordinate their self-interests to the interests of the larger community. Societies which are group oriented like USA, Japan, Germany are high trust societies, and they are developed.

Traditional values

The traditional cultural values transmitted over two thousand years from one generation to another, have to be modified. This traditional culture has never been pure Buddhism but an amalgam of Buddhism, Hinduism and Animism.

Traditionally the community sense was confined to the village society. But today we have created cities and towns and the people who live in them have little or no sense of community. Neighbours mind their own business and there is little civic or social responsibility.

A modern society requires a high degree of social discipline to hold it together. Such social discipline in developed countries was learnt over a long time. But Singapore has by social engineering inculcated civic values in the people over a short-time. Those who littered the streets or indulged in spitting were fined to teach them that such behaviour is not acceptable.

We talk endlessly about noise pollution, about the dumping of garbage in the streets but laws are not enforced. In 1956 the old respect for authority and the prevailing social discipline was destroyed by appealing to populist sentiments. The people were taught to act freely but responsibility was not stressed. The malignancy has worsened since.

The state today is unable to maintain law and order and as Benjamin Franklin pointed out, the use of extra legal force makes rulers no different from a band of brigands. Society itself, is slowly disintegrating.

Capacity to govern

What does one do? Obviously we need a strong state that is capable of governing. Much depends on the chief executive of any organisation, be it a company or the state. It’s primarily a management job.

A good manager is seldom born but acquires the capacity to govern by proper training and experience in organising and running an enterprise, particularly a large one. Mere years as a politician does not make one a good manager. Experience must be gained by rational decision-making in this public interest or the interest of the organisation one heads, not by taking decisions to feather one’s nests or merely to remain in power or to come back to power.

So the exercise of political patronage, nepotism and corruption will not give valid management experience. Such leaders spell disaster to the organisation. Does the President have what it takes to govern the country?

Charismatic leaders are not the stuff of democracies. They are more suitable for the feudal age. We need leadership that subordinates personal and political party interests to the interests of the people.

What is in the long term interests of the people is action that brings about a sustainable increase in prosperity not mere doling out of state funds. The Chinese have a saying that it is better to teach. A man to fish than to feed him fish.

It is equally necessary to modify cultural values. It is not an accident that the Industrial, and Scientific Revolutions occurred in Europe where religions gave hope and projected positive attitudes to life. The great scientific discoveries were made by people who believed there was order in the universe and that the physical world was governed by a benign force (god) - Kepler, Galileo, Newton, Leibniz.

As Francis Fukuyama says "if the institutions of democracy and capitalism are to work properly, they must co-exist with certain pre-modern cultural habits that ensure their proper functioning - like moral obligation, duty towards community and trust, which are based in habit rather than rational calculation."

Keeping one’s word is an important value which underlies contract. This is not a value that is high in our scheme of moral values. Breaking one’s word of honour is acceptable practice and individuals who do so have no qualms. People keep other people waiting for meetings and appointments and promises made during elections are to broken.

De Toe queville deploring the vice of selfishness said individualism disposes each member off the community to sever himself from the mass of his fellows and to draw apart with his family and his friends, so that after he has thus formed a little circle of his own, he willingly leaves society at large to itself".

Isn’t this what most of the educated professionals and the well-off do in our society? Such attitudes are destructive of democracy and adverse to economic development while the ethnic minorities accuse the Buddhist majority of being race conscious, the latter have been race conscious enough to stick together. They do not buy from each other as other ethnic minorities do. There is little trust and solidarity among the Sinhalese Buddhists themselves. The lack of social trust is evident in the high rate of crime as well as the large amount of litigation.

The causes of the growth of individualism at the expense of the community are numerous. A primary one is capitalism itself. Old forms of social solidarity are destroyed without new forms being created. Lack of trust prevents new forms of socialisation.

According to the Secretary of the National Joint Committee, empowerment of the people through the devolution of power, seeks to undermine the unity of the Sinhalese and is a threat to Buddhism. Doesn’t this show the utter lack of trust and confidence in the integrity of the Sinhalese by the Sinhalese intellectuals? Surely empowerment of the people is the only way to make democracy work without leaving the people at the mercy of the politicians. And, won’t competition among the regions promote superior standards of service in general since people tend to emulate what is good? Ours is a culture that does not inculcate reciprocal trust and obligations.

SC grants Asia Siyaka Commodities leave to proceed

The Supreme Court on 24th September 1999 issued its order granting Asia Siyaka Commodities (Pvt.) Ltd., leave to proceed in the Special Leave application made against the order of the Court of Appeal quashing its Licence to function as a Produce Broker for tea for the year 1998.

The bench comprised Justice Mark Fernando, Justice D. P. S. Gunasekera and Justice Wijetunge.

The Special Leave Application was consequent to the Court of Appeal quashing the Licence of Asia Siyaka Commodities (Pvt.) Ltd to function as a produce broker for tea for 1998, on an application for same made by Forbes & Walker Tea Brokers (Pvt.) Ltd.

Asia Siyaka Commodities (Pvt.) Ltd. appealed against the order to Supreme Court for Special Leave to Appeal on the ground that a substantial question of law was involved and that the judgement of the Court of Appeal was arrived at an erroneous construction of the Regulations governing the granting of Produce Brokers Licences.

Counsel for Forbes & Walker Tea Brokers (Pvt.) Ltd., objected to the said Special Leave application on the grounds that Asia Siyaka Commodities (Pvt.) Ltd. was able to obtain a fresh licence and that therefore the dispute had become academic.

After submission of Counsel the Supreme Court reserved its order on 21st July 1999.

Mr. K. N. Choksy PC with Mrs. Kissan Wijetunga instructed by D. L. and F. de Saram, appeared for the respondent.

Mr. H. L. de Silva PC with R. D. S. Wijesinghe PC, Mr. Gomin Dayasiri, Mr. Kushan de Alwis, Mr. Dilan de Silva and Mr. Prasanna Obeysekera instructed by Paul Ratnayake Associates, appeared for the petitioner.

b
Chairman complains of 5-stars’ "depressed rates"
Renuka City clocks 95% occupancy in 1998/99

Renuka City Hotels Limited has completed its fourth full year of operations ending March 31, 1999 with a 95% average occupancy, well above the average for Colombo city hotels, the company’s shareholders have been told.

The directors of the company which has an issued capital of Rs. 50 million have recommended a first and final dividend of 20%, maintaining the previous year’s dividend payment level on a profit after-tax of Rs. 51.5 million, up from Rs. 38.9 million the previous year.

The company’s Chairman, Mr. R. B. Thambiayah, said that turnover had grown 20% during the year under review thanks to increased occupancy (up 1%) and food and beverage sales.

The operating profit for the year at Rs. 32.9 million was up from Rs. 25.3 million the previous year while other income of Rs. 18.5 million, up from Rs. 13.6 million a year earlier boosted the bottom line to Rs. 51.5 million.

"These results could be considered very satisfactory when taking into consideration the depressed rates prevailing in the South East Asian region and also, as mentioned in our previous annual reports, the depressed rates that continue to be charged by the 5-staff hotels in Colombo leading to low hotel rates," Thambiayah said.

He said he was happy to say that their achievement was mainly due to the untiring efforts of the management and staff who have at all times ensured that the quality of the hotel’s service was maintained at a very high level.

"As in previous years, the hotel continued to come in for praise from all sections of its wide clientele for its elegance, friendly atmosphere and services which offered true value for money," he said.

Renuka Hotels Limited owns a controlling 50.32% of the Renuka City Hotels Limited whose new hotel was built on a property adjoining the original Hotel Renuka with the two hotels linked by an overhead bridge.

The directors of the company are: Messrs. R. B. Thambiayah (Chairman/MD), N. A. L. Cabraal, A. N. Esufally, F. H. Puvimanasinghe, R. Sivaratnam, J. B. Wimalasekera and Mrs. N. A. Thambiayah.

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