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Fundamental rights action now before Supreme Court
Government and Pelwatte locks horns over guaranteed sugar price

A major dispute has broken between the Pelwatte Sugar Industries Limited, the country’s biggest sugar producer, and the Government of Sri Lanka on the unilateral termination by the government of the master agreement between the company and itself leading to a fundamental rights application being filed in the Supreme Court.

The government has 47.7% ownership of Pelwatte with local investors holding 22.3% and foreign investors nearly 30%. The foreign interests inlcude the Commonwealth Development Corporation (16.3%), Kerry Engineering (7.99%) and the world sugar giant, Booker Tate (5.54%)

Pelwatte says that government owed the company Rs.576 million at the close of the financial year ending March 31, 1999 in terms of the agreed sugar price contract. The company’s Chairman, Mr. Mahinda Senanayake, has told shareholders that the "non payment (of these dues) has imposed severe cash flow constraints on the company’’ and has been the major factor in its inability to consider a dividend despite the significant improvement in profitability.

"It is with regret that I have to advise you that despite all my efforts to secure an agreed resolution, this matter has had to be referred to the Supreme Court for a decision. Your directors are anxious not to continue this adversarial approach with government and we are seeking ways and means of restoring dialogue and mutually acceptable arrangements for the honouring of the minimum sugar price contract,’’ he said.

Under the master agreement, there is an agreed price related to cost of production at which government must buy Pelwatte sugar. But the government has taken the view that this subsidy, originally offered to encourage domestic sugar production, is "contrary to public policy.’’

Following the institution of the fundamental rights action, the Supreme Court had ordered that 15% of the Rs.576 million claim be paid within six weeks on July 2 and this payment had been made by government.

On August 24, the Supreme Court had ordered a further payment of 15% within six weeks of that date and the case has been fixed for argument on November 2. The Secretary to the Treasury has filed objections to Pelwatte’s petition.

Pelwatte has pleaded that the termination of the master agreement by letter dated May 17, 1999 by the Secretary to the Ministry of Public Administration was a total surprise and the stance taken by the government, which was that the master agreement and supplementary agreements are invalid in law as they are contrary to public policy, had not been taken earlier.

The company has urged that the unilateral termination of the agreement will lead to its collapse; the loss of employment; damage to the entire sugar industry in the country; loss of investor confidence; grievous international repercussions in respect of the company’s international obligations; and grave prejudice to the shareholders of the company.

Three offshore shareholders held nearly 30% of Pelwatte’s equity. The company which was quoted on the Colombo Stock Exchange in 1984 has Sri Lanka’s largest and most technologically advanced sugar factory with a capacity to product 60,000 tons of cane sugar per year.

The project which is located in the Moneragala District and produces sugar under rain fed conditions has achieved a maximum of 50,000 mt. in 1994/95 while production in the year under review (1998/99) had been 40,300 mt.

Pelwatte, which has commissioned a new distillery producing a high quality potable alcohol during the year under review, turnedover Rs.1.24 billion during the year, down from Rs.1.4 billion a year earlier. It posted a profit of Rs.185.7 million, up from Rs.57.3 million a year earlier.

Despite this substantial profit, the company has been unable to wipe out Rs.335.9 million of accumulated losses and was carrying forward accumulated losses of Rs.150.2 million at the close of the financial year.

Senanayake reported that the global sugar prices have declined sharply from early 1998 and continues to slide. The price of sugar currently sold in the local market reflects purchases made in April and May when the prices were around USD 200-230 per mt.

He said that the government reduced import duty on sugar from Rs.5,000 per mt. to Rs.3,500 per mt. in January 1998. These changes have resulted in a Rs.3 per kg. drop in the sugar price and had "a serious impact for the local sugar industry where local mills were forced to sell below their cost of production.’’

Senanayake said that 1988 domestic sugar production at 61,500 mt. was down 2% from the previous year. This was due to some local factories being non operative and divested in the government after an unsuccessful privatisation.

He said that the local production is sufficient to meet only 12% to 13% of annual consumption. Prior to January 1998 the government had stabilised the sugar price at around USD 500 per mt. by imposing an ad valorem duty on imported sugar.

Lower yields, lower output and labour problems in the local mills had affected the industry badly, the Pelwatte chairman said. This situation had been aggravated by the sharp drop in sugar prices in the international markets that had led to an erosion of the viability of the local industry.

Senanayake urged a duty of Rs.6.50 per kg. on imported sugar to stabilise the retail price and subsidise the now ailing local industry to bring it in line with production cost.

The directors of the company are: Messrs. Mahinda Senanayake (Chairman), G.R. Gunawardena, N.I.R. de Mel, A.A.I. Uwise, R.A. Ali, Steven Enderby and Tam Wan-Kwan.

Y2K bug fears encourage tea stockpiling

By Amal Jayasinghe
Sri Lanka’s centuries old tea industry is hoping the Y2K computer bug may be a blessing, while a global shortfall in production is also helping nicely to lift the slump-hit commodity.

Prices at the weekly Colombo auction, the world’s largest single tea sale, are on the rise and traders believe fears of transport disruptions due to Y2K-related problems are encouraging stockpiling overseas.

In the past three auctions, prices for the commodity better known by Sri Lanka’s previous name, Ceylon, have seen a considerable improvement and the trend is expected to continue till at least the end of November.

"Buyers may want to have their teas at the destination before the end of the year,’’ a broker at the Colombo tea auction said.

"They don’t want their tea trying to cross the water when the Y2K bug bites.The buying frenzy will have to continue till November to beat possible (Y2K) glitches.’’

The tea industry itself is not affected by the Y2K problem.

Tea has been Sri Lanka’s largest single foreign exchange earner for decades, but the technology employed in the manufacture of black tea has changed little since a Scotsman named James Taylor planted the first tea bush in Sri Lanka in 1849. The process has remained largely labour-intensive and some 19th century machines are still in use.

The Y2K problem refers to the potential for computer systems to mistake the new year for 1900 instead of 2000 because most older systems represent years by only their last two digits.

The problem is critical to data-driven industries like communications, aviation and banking and Sri Lanka is considered a country that is relatively safe, according to a task force set up to deal with the Y2K issue here.

Sri Lanka’s tea promotion board believes although the Y2K fears may have prompted extra buying, there are other factors that have contributed to arrest the drastic fall in prices seen since August last year.

The high prices enjoyed by tea growers in the past three weeks should hold till about March next year, said Ceylon Tea Promotion Bureau director Hasitha de Alwis.

The first seven months of this year has seen a 110 million kilogram (242 million pound) drop in global supply of tea compared to the corresponding period in 1998, de Alwis said.

Sri Lanka did not have the full benefit of the low supply this year because the demand too fell sharply with the rouble crisis in Russia, a key buyer of the commodity.

However, the Russians are now back in Colombo buying tea to stockpile ahead of the winter and there has been more buying from Gulf countries.

Even though the prices are once again becoming attractive for growers, the overall earnings from tea this year are expected to be slightly under what was achieved last year.

The current prices are better than a year ago but the annual average price is still below the 1998 figure, according to trade officials.

Sri Lanka’s tea production this year is estimated at about 285 to 290 million kilos, up from 281 million kilos last year.

The Tea Board’s de Alwis is also looking to moves by the UN food and Agriculture Organisation (FAO) to promote the consumption of black tea which, according to growing scientific evidence, offers health benefits.

"This is not something that we can expect to bring results overnight, but it will certainly help to improve demand over a period of time,’’ de Alwis said. ``If nothing else, it will certainly improve the health of the tea industry.’’

Tea prices hold but shares decline

Although tea prices held at this week’s auction on the back of lower quantities on offer, plantation shares continued to decline on the Colombo Stock Exchange up to Thursday following a mini rally beginning some days ago. But plantation counters picked up during Friday’s trading.

Forbes & Walker said in its weekly tea report that quantities on offer had declined further to 4.3 million kilograms and "there was good general demand.’’

The report said that ex-estate offerings were limited and demand was "excellent.’’ Prices often strengthened as the sale progressed. Quality from the western planting district had shown further improvement with prices for the better teas appreciating Rs.8 to Rs.12 per kilogram and more for selected invoices.

At the low grown sale, there had been good demand but at lower prices. Forbes said that these levels could still be considered "quite satisfactory’’ particularly for teas in the below best and poor categories.

"Improvement in prices for the better teas are eagerly awaited by producers,’’ the report said.

It also noted that for the first time this year, the monthly tea sale average for September recorded a gain over the corresponding period last year with high growns improving about 6% and mid growns and low growns gaining 3% and 0.1% respectively.

Share brokers attributed the downturn in plantation share prices partly due to profit taking by investors who had accumulated stock at low prices. With several plantation counters picking up some lost ground on Friday, this week’s trading will determine how these shares, in which there has been considerable local interest recently, will fare in the sort term, analysts expected.

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Minority stake in Pelwatte Distilleries up for grabs?

is considering offering a minority stake in their subsidiary producing potable alcohol as a by-product of the primary sugar manufacturing business to other investors, shareholders have been told.

The subsidiary, Pelwatte Sugar Distilleries (Pvt) Limited, has completed the erection of its new distillery and commissioned the plant during the year ending March 31, 1999, the parent company reported.

The company’s Chairman, Mr. Mahinda Senanayake, said that the alcohol produced by the distillery was of a high standard and has found widespread acceptance by users in Sri Lanka.

"In fact, I am pleased to report that the plant is often stretched in meeting consumer demands," Senanayake said.

Pelwatte Sugar’s investment, both in equity and loan capital, on the distillery had been Rs. 414 million at the end of the last financial year. The chairman said that the directors, while wishing to maintain a controlling 51% interest in the company, "will be considering equity participation from other investors as soon as a new 5-year operational and financial plan has been prepared and evaluated by the People’s Merchant Bank."

Pelwatte Sugar Distilleries had recorded a Rs. 54 million turnover and an after-tax loss of Rs. 19.7 million for the year ended March 31, 1999.

Exceptional items enable profit and dividend at LMF

An exceptional item of Rs.135.6 million resulting from a Rs.101 million claim from a packing material supplier and a waiver of Rs.34 million by Stassen Exports Limited has enabled Lanka Milk Foods (CWE) Limited (LMF), to offset a Rs.55.3 million consolidated operating loss, down from a Rs.59.5 million profit the previous year, and declare a 5% dividend to shareholders on a profit of Rs.41.5 million.

Four LMF directors - Dr. V.P. Vittachi, Messrs. D.H.S. Jayawardena, R.K. Obeyesekere and Z. Alif are also directors of Stassen Exports. The company had reported that there was "trading and other items purchased’’ worth Rs. 147.7 million from Stassen Exports during the year under review under directors interests in contracts.

LMF which suffered a long drawn debilitating strike a couple of years ago, has also reported that it had in April paid the balance of Rs.3.8 million final compensation to the strikers as agreed by the Labour Ministry.

The company’s Chairman, Dr. V.P. Vittachi, has attributed the consolidated profit of Rs.41.5 million and the company profit of Rs.89.5 million during the year ending March 31, 1999 to LMF’s long term purchasing policy at competitive prices and meticulous cost controls at all activity levels.

LMF which is revitalising its primary Lakspray brand has now introduced a box board carton for the 400 gram pack.

"The company has also taken steps to improve the morale of the staff and is actively engaged in improving consumer awareness of the excellent quality of Lakspray, which is now time tested over a long period of 30 years in the Sri Lankan market,’’ he said.

Vittachi said that their subsidiary, Lanka Dairies (Pvt) Limited continued to collect fresh milk and process it by ultra heat treatment to provide the consumer a long life fresh liquid milk pack at a reasonable price.

He admitted that this product had not yet reached the desired level of turnover. But the management was confident that the cosmopolitan domestic market will soon latch on "to this hygienically packed flavoured milk in which the nutritional value of the milk is preserved in full.’’

The Dano brand premium milk food imported by LMF from Denmark was continuing to improve its market share "slowly and steadily,’’ Vittachi said. He said that the management accepted that it will take a few more years before it reached the desired level of turnover.

The chairman said that the 5% first and final dividend recommended by the directors would give shareholders a total 95% return during the eight years after privatisation.

LMF owns 12.7% of the Distilleries Company of Sri Lanka Limited.

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

HNB contribution keeps Browns profitable

The asset rich, modestly capitalised, Brown & Company Limited has posted a consolidated after-tax profit of Rs.130.2 million for the year ending March 31, 1999, up from Rs.120 million earned the previous year largely on account of contribution of its associate, the Hatton National Bank (HNB) in which Browns have 26.4% stake.

Mr. Chrisantha Cooray, the Browns chairman has reported to shareholders that the parent, its subsidiaries and associates, "have done well this year with acquisition of new agencies and franchises and the expansion of existing ones.’’

The Browns Group posted an operational profit of Rs.41.7 million during the year under review, up from Rs.38.3 million a year earlier, before charging finance costs. This was boosted by Rs.258.2 million income from associates, up from Rs.214.2 million on this account the previous year.

After taking credit for associates’ income of which Rs.226.5 million came from HNB, Browns set off net financing cost of Rs.109.2 million (Rs.75.2 million the previous year) to arrive at a pre-tax group profit of Rs.190.7 million, up from Rs.177.3 million a year earlier.

Although Brown & Company itself had no tax liability on account of accumulated tax losses of past years of approximately Rs.400 million, the tax obligations of its subsidiaries and equity accounted associates amounted to Rs.60.4 million, up from Rs.57.2 million a year earlier.

Browns have an issued share capital of a very modest Rs.21 million although its investments in associates alone is valued at over a billion rupees. A 2 for 1 bonus share issue two years ago raised the Browns’ issued share capital to this figure from Rs.7 million.

Cooray expressed concern about increasing world prices of imported raw material and depreciating rupee and hoped that this would not affect the company’s accelerated growth pattern. He explained that their major trading activities relied on foreign principals for quality imported products as well as for imported raw material for local manufactures through subsidiaries and associates.

The company’s Managing Director, Mr. Suraj Fernando, reported that the reorganisation of the business and newly acquired core team of high calibre directors and staff at all levels had poised the company to harness two to three times the business volumes of the past few years.

He said that the performance thrust that commenced in the last quarter of the previous financial year had gathered momentum during the year under review with repeated achievements of record monthly turnover level peaking at Rs.224 million in March 1999.

"This was an unprecedented growth of over 68% over the previous year’s turnover of Rs.1,118 million. The corresponding gross profit and profit before interest figures also showed a growth of 71% and 66% respectively,’’ he said.

Fernando also reported that the 107-year old Browns has won several prestigious agencies and distributorship during the year - some of them from among the world’s biggest brand names. Also, Browns have after 26 years won back the agency for Crocodile brand mammoties and agricultural implements from Chillington of the UK.

The directors of the company are: Messrs. J. Chrisantha R. Cooray (Chairman), Suraj N. Fernando (Managing Director), M.V. Theagarajah (Deputy Chairman), S.V. Wanigasekera and Mrs. E. Cooray.

Globalization integration of financial markets

By Kanes
Global currency trading has in recent years gained a life of its own and much of it is not related to the real economy. The volume of global foreign exchange trading in 1996, for example, exceeded $280 trillion which was nearly 10 times the world GDP ($29 trillion) and over 40 times world exports of goods and services ($6.5 trillion). The volatile nature of these foreign exchange transactions is illustrated by the fact that 80 per cent of them went in and out of a country in seven days or less in 1995 and only just 0.5 per cent remained in one place for a year. Increased global capital mobility has been accompanied by an increased, frequency of currency crises, the European Monetary System remained under siege for nearly a year in 1992-1993; this was followed by the Mexican currency crisis of 1994 and the East Asian crisis of 1997-1999. With the current crisis, there is growing realization that developing countries can escape from the devastating effects of volatile short-term capital movements only by regulating and discouraging them.

East Asian Currency Crisis

The East Asian financial turmoil of 1997-1999 demonstrates the risks of financial market integration or globalization. The East Asian crisis was caused mainly by the sudden withdrawal of foreign short-term capital investments - bank loans and portfolio investments - from the East Asian countries. Net capital flows to Indonesia, South Korea, Malaysia, Philippines and Thailand increased rapidly in the 1990s and reached $93 billion in 1996. These flows reversed overnight with an outflow of $12 billion in 1997 which created a swing of $ 105 billion or 11 per cent of the pre-crisis GDPs of these five countries. This was too big for the fragile economies to bear and consequently it resulted in a depreciation of their currencies, crash of their stock markets and destruction of their economies.

All these countries liberalized their financial markets by removing restrictions on the movements of foreign capital in the hope that unrestricted entry and unrestricted exit would induce foreign investments in their countries. By liberalizing, they integrated their financial markets with the global financial market or globalized. Foreign investors were assured of the same treatment as in their home countries and therefore invested liberally in these countries - foreign direct investment, portfolio investment and bank loans. When they had some doubts about the economic policies/practices in these countries, they suddenly withdrew their short-term investments to reduce their risks. Their doubts may have been regarding overvalued exchange rates, excessive credit expansion for speculation on land and real estate, inadequate bank supervision and lack of transparency; they may have had some truth or they may have been rumours or suspicions; but then speculators act in mysterious ways - trying to guess what the others are thinking.

In July 1997, Thailand abandoned its currency peg to the dollar under massive speculative pressures and its currency promptly depreciated by 20 per cent. Within months, the currency crisis had spread through much of East Asia and in the space of one year East Asia was transformed from the world’s fastest growing into the slowest growing region. The crisis spread because speculators treated East Asia largely as one market instead of different country markets - thanks to globalization.

Financial Globalization

Liberalization, deregulation and opening their markets for trade and investment have sped the pace of globalization and deepened the interaction among countries and people. The integration of national financial markets with the global market in particular has made the developing countries vulnerable to destabilizing effects of short-term capital movements. The UN Human Development Report 1999 describes the volatility of short-term capital in globalized markets as follows:

"An analysis of the crisis spotlights two important lessons about global capital markets. The first is that financial volatility is a permanent feature of today’s globally integrated financial markets. The East Asian crisis is not an isolated accident - it is a symptom of general weakness in global capital markets. Recent UNCTAD studies show a rising frequency of financial crises with the growth in international capital flows of the 1990s. Flows can be volatile, fed by herd behaviour and inadequate information for investors around the world, with investor confidence and risk ratings tumbling overnight. Technological innovations link global financial markets in real time, allowing instantaneous decisions around the world. Markets have become increasingly sophisticated, with financial innovations - from derivatives in hedge funds. In theory, these instruments were intended to transfer and spread risk. In practice, they have become part of the volatility of today’s capital markets. A central feature of the financial crisis in East Asia was the massive new inflows of short-term capital, followed by sudden reversals... The second lesson is that extreme caution is required in opening up to foreign short-term (often speculative) capital, especially when financial market institutions are not well developed. There are increasing doubts among economists of the benefits of short-term flows. They do not have the same potential as long-term investments to contribute to development. They can even be disastrous, creating macroeconomic imbalances overvaluing the currency, reducing international competitiveness and seriously destabilizing domestic banking systems".

The UN Report "The Human Development in South Asia 1999, has explained the East Asian crisis as the result of globalization as follows:

"There are gains to globalization, but there are serious pitfalls as well. Liberalizing trade and allowing greater capital mobility can promote growth in developing countries, through increased technology and knowledge transfers. On the other hand, globalization may sometimes be a source of instability, as highlighted by the crash of the Exchange Rate Mechanism (ERM) in the United Kingdom, Italy and Spain in 1992, the sudden downfall of the Mexican markets in 1994 and the "tequila’ effects that engulfed South America; and more recently, the collapse of the East Asian economies, that spread to other parts of the globe. The reality is that the world’s industries and financial systems are today inextricably intertwined. Just as no one anticipated how swiftly the recent local panic in Thailand would bring down the entire East Asian region, no one could really understand how the collapse of the world’s biggest growth zone would ripple through the West."

This is in contrast to our Central Bank’s view that globalization did not cause the East Asian crisis. The Central Bank’s Annual Report 1997 states on page 22 "The key lesson to be learnt from the East Asian crisis is that globalization was not the root cause of the crisis....!

National and International Regulation

The Asian countries that escaped the full effects of the East Asian currency crisis were those which have not liberalized and integrated their financial markets with the global market - China and South Asian countries. China has fully centralized all her foreign exchange transactions while the South Asian countries have maintained control over all or some of their capital account transactions. It is these controls reflecting reluctance or opposition to financial liberalization which have insulated China and South Asia from the Asian currency turmoil. The crisis made at least one liberalized country - Malaysia - to reimpose capital controls despite opposition and harsh criticism by the IMF and developed countries, and overcame the crisis without going to the IMF for help as Thailand, South Korea and Indonesia did.

The financial crises of the 1990s have been systemic - with finance surging in and out of countries at a speed and volume beyond the capacity of any country on its own to control. Consequently, national measures such as selective capital control need to be complemented by international measures. It is a paradox while world trade is disciplined by the WTO, world currency transactions which amount to $1.5 trillion a day remain uncontrolled. Even George Soros, the speculator who is believed to have caused the East Asian crisis, states now that financial markets are inherently unstable and supports international control over short-term capital movements. "I am advocating greater supervision and regulation of capital markets in general. I think that obviously the totally free flow of capital is not advisable, so you need to create some mechanism for introducing stability". In spite of the demand for a new global financial architecture, the US/IMF appears to be deaf to such suggestions and prefer to maintain the free financial markets so that the speculators - virtually all being in developed countries - can make money at the expense of ruining the poor countries. The question of a new financial architecture was not even discussed at the recently concluded APEC meeting at Auckland. The world therefore would see more currency crises in the future and the poor countries face the risk of further instability and impoverishment.

The Tobin Tax

James Tobin proposed a tax on global financial transactions - called the Tobin Tax - in 1972 as a way of discouraging speculation in short-term foreign exchange dealings so as to minimize shocks from large currency movements. The idea behind it was to control volatility of the international currency markets and to preserve some autonomy in national currency policies. Tobin’s proposal was for a 0.25 per cent tax on currency transactions in order to slow down speculative short-term capital flows, as they will be taxed each time they cross the border while it will have only a marginal effect on long-term flows. The absence of taxing on-the-spot transactions when many other transactions are taxed in some form or other has acted as a strong incentive for speculators to operate in this market than in others. Tobin Tax would not interfere with genuine investment. The argument that the large volume of currency trade makes it difficult to regulate it has no validity; if the modern electronic system can enable cross-boundary flow of foreign exchange in trillions, the same technology can be used to trace and monitor these flows.

While the Tobin Tax provides a suitable mechanism to deal with issues related to the volatility and insatiability of global financial flows, it increases the autonomy of national authorities in monetary and macroeconomic policy by providing a measure of insulation from such destabilizing flows. The Tobin Tax can also be a valuable source of revenue and foreign exchange reserves, particularly at a time when official aid is declining. It could also facilitate the monitoring of international financial flows by providing a centralized database on such flows. Of course, it may be difficult to get all countries to agree on a common tax, but a start can be made with a few countries, for instance, the seven major centres of currency trading: US, UK, Japan, Singapore, Switzerland, Hong Kong and Germany where 180 per cent of all currency transactions take place. An agreement among these seven countries to levy a small tax to begin with and supervise it appears feasible.

Chile was on of the first countries to discourage short-term capital movements by taxing them. In the early 1990s, Chile experienced a surge of capital inflows that created a conflict between maintaining a tight monetary policy and spurring export competitiveness. In 1991, the Central Bank attempted to resolve this by imposing a one-year unremunerated reserve requirement on foreign loans, primarily designed to discourage short-term borrowing without affecting foreign direct investment. Between 1991 and 1997 the rate of reserve requirements was increased and its coverage extended in several steps to cover most forms of foreign financing except foreign direct investment.

Surprisingly, in March 1999, the House of Commons in Canada took a historical step by adopting a motion calling for a new tax on all international financial transactions. Various people’s movements, NGOs, citizens’ groups, trade unions, and organizations of labour, environment, academics and churches had carried on a very effective campaign for such a tax for more than a year. The deteriorating international economic situation, particularly the currency turmoil in East Asia, Russia and Latin America strengthened the campaign. The Canadian economy too was affected by the currency crisis and the Canadian dollar lost 10 cts. in 1998. Canada, by taking this step, has shown to the world that a small beginning can be made to deal with volatile short-term capital movements and contributed to the ongoing debate on restructuring of the international financial architecture. Tobin Tax appears to be the only scheme on which much work has already been done and it could therefore become an important symbol of campaigns to restructure the international financial architecture.

Why the ‘Open Economy’ has lost its steam

By Analyst
More and more businessmen are realising that the economy is slowing down. Export growth is hardly noticeable. The garment industry which played an important role in the growth of the economy, is facing stiff competition from the South East Asian nations which after large devaluations in the aftermath of the collapse in second half of 1997, are now coming up strongly.

Overall economic growth this year has come down. Money supply growth which was running at 20% is now below 10% which in itself is alright provided the economy is growing. The way in which monetary growth affects output and price level depends on how fast it is spent. - what economists call the ‘income velocity of circulation’.

Monetarists claim that the rate at which a given stock of money swirls through the economy is stable. But history in developed countries shows that it changes mysteriously as happened in the great depression of 1929. History has also shown a close relationship between money and nominal G.D.P., although causality could also run from a fall in income and output to a slow down in monetary measures rather than the other way round.

Norminal interest rates have fallen but not enough. The President has ordered the two state banks to reduce their lending rates not only on new loans but even on existing loans. This is no doubt a step in the right direction. But the government cannot regulate interest rates unless it also reduces its borrowings. But as business wobbles, the householders prefer to shift their savings out of bank deposits into government bonds.

But if the budget deficit increases, its demands for funds will increase and interest rates may have to rise. It is unlikely that whatever the good intentions professed, the government can keep the budget deficit, low, particularly with an election due next year.

Differential Inflation

Some people blame the open economy and the liberalisation process for the slowdown in the economy. They argue that the liberalisation of foreign trade has led to cheap imports which have undermined both local agriculture as well as the import substitution industries. They blame the World Bank and the IMF for insisting on opening up of the economy. But they forget that these international financial institutions also stressed macro-economic balance and recommended structural adjustment.

The government picked and chose among the recommendations and implemented only those measures that would not incur political unpopularity. Macro-economic stability is not something that any of our governments since 1956 have valued. They have preferred instead to go on spending sprees funded by inflationary sources of finance. The inevitable result has been continuous inflation at rates much above those prevailing in countries in South and South East Asia whose products compete with our exports in world markets.

The UNP caused an unprecedented level of inflation by the accelerated Mahaweli Development, reducing its term from 30 years to 6 years. To compensate for this inflation, the rupee had to be depreciated year in and year out by at least 10%. Otherwise the export industries would not have been able to compete in world markets, and this inspite of giving duty free inputs to such industries directly or indirectly through duty drawback schemes.

But the prices of non-tradable goods and services in the domestic economy rose. To compensate for the higher cost of living, the workers in the organised urban sector and in the plantations demanded and received wage increases. In this way the domestic wage and cost structures were thrown out of alignment with the rest of the world. Thus it is the failure of economic management by the government that has undermined the import substitution industries and local agriculture.

Export-led growth

Development literature abounds with models of export led growth and it is claimed that historically as well as the recent experience of the East Asian NICS, show that trade has been the engine of growth. Chenery and Strout (1966) remark that there is almost no example of a country which has for a long period sustained a growth rate substantially higher than its growth of exports.

The Pearson Commission (1969) claimed that the growth rates of individual developing countries since 1950, correlate better with their export performance than with any other single economic indicator. The theoretical reasons why this is so, is explained in economic literature, as the gains from trade. Some view trade from the stand point of the balance of payments. But the benefits from trade are not measured by the foreign exchange earned by the increase in the value of output and real income from domestic resources that trade permits.

It is foreign investment that permitted the garment industry to develop and expand and occupy the important role that it now occupies. Countries like Hongkong and Taiwan auctioned the garment quotas. This permitted maximum utilisation of quotas and rationalised the industry. Our egalitarian distribution of quotas has not promoted economic efficiency.

Nor have we succeeded in attracting any significant tax incentives. Portfolio investment to the stock market has all but gone out with the collapse of the market after the East Asian crisis.

Foreign investors have not taken any long term interest in the economy. They could hardly be expected to do so in a country with an on going civil war, with threats of economic sabotage and threats against foreign personnel.

The economy is still hamstrung by government regulations. Prices of goods are not freely determined by supply and demand. The utilities are run badly and the infra-structure is falling apart.

The labour regulations encourage indiscipline in the workplace. Managers are unable to manage. Business cannot be re-structured except at a terrible cost. The World Bank recommendation to repeal the Termination of Employment Act has been ignored by the government. The trade unions are a law unto themselves.

The general atmosphere of lawlessness with open gang warfare in the streets cannot but discourage not only foreign but even local investment.

Import substitution

What of import substitution? In the early stages of industrialisation, protection using tariffs and import quotas is undoubtedly helpful. There are different stages in import substitution. The first stage is to produce locally, goods needed for day to day use. Such as processed food, clothing, footwear, leather, plastics etc.

We gave too much protection for too long so that our import substitution industries did not move into higher stages. Instead they exploited the consumers and stacked away foreign exchange abroad. With the opening up of the economy in 1977, many such industries went to the wall. The high rates of protection bred inefficiency as there was no incentive to keep wages and costs down. The protective tariffs also acted as a tax on exports, however odd it may seem to non-economists.

It is also said that import substitution policies using protection tend to shift the distribution of income in favour of the urban sector and the higher income groups. Protection also taxes agriculture since it raises the prices of industrial goods used by farmers either for their consumption or as inputs to farming.

Disadvantages of Free Trade

This is not to say that there are no disadvantages in free trade for developing countries. There is a conflict between short term efficiency and long run economic growth. There are short term benefits in imports of cheap potatoes or onions or oranges from India. But long term growth depends on greater production which requires incentives for the produces even if it is against the consumer.

Many economists would argue for agricultural protection at least on the ground of food security. We are living in an uncertain world with wars and threats of wars. So we must protect agriculture. But we need to keep down the costs of production. Otherwise the economic costs of protection would involve a high sacrifice of welfare.

The culprit has always been the government not the farmer. The excessive budget deficits incurred year in and year out, caused inflation. So did the continuous depreciation of the rupee which raised the prices of imported inputs like fertilisers and agricultural chemicals.

We need sound financial management above everything else. Our politicians are keen to spend money, other people’s money. They spend irrespective of whether there was money in the kitty or not. Direct taxation has been reduced on the advice of the World Bank. Wealth Tax was abolished and income tax rates brought down. But the World Bank perhaps did not appreciate the enormous size of the black economy in our country where not only businessmen but almost everybody else of means including professionals and politicians resort to cash transactions only.

There is enormous wealth displayed in the luxury vehicles plying the roads, the magnificent gadgetry in homes, and the lavish styles of consumption in five star hotels. An irresponsible and corrupt government is promoting such unproductive wealth accumulation by giving duty free concessions for the import of vehicles and consumer durables.

Another disadvantage of free trade is the effect on the terms of trade. Generally this effect has been ignored by economists on the ground that movement from protection to free trade would not alter the commodity terms of trade or if it did that the gains from free trade would more than offset any unfavourable terms of trade effect. But commodity prices are declining and the terms of trade could worsen for us if manufactured goods become more expensive in world markets.

This has not happened in recent years but since commodity prices are set for a long term decline, we have to give priority to producing industrial goods, at least those required for our day to day needs. In the past we did realise the dangers of over dependency on the three commodity exports of tea, rubber and coconut. These primary products have very few linkages with other sectors and hence cannot promote development.

Further, industrialisation is required for absorbing the unemployed into productive jobs. But an economically illiterate government does not seem to understand the complexity of the issues.

One of the weaknesses of the comparative cost theory is that it is static economics. Comparative costs change over time and can be deliberately changed by concerted action countries like Taiwan, Hong Kong, Singapore, South Korea gained technical and cost advantages in the semi-conductor industry. The most famous computer companies like IBM, Intel have come to depend on the chip industry in Taiwan, and the earthquake in Taiwan has demonstrated this dependence in a dramatic way, by the rise in chip prices.

Fortunately, we are able to ignore the adverse effects of free trade on the balance of payments, owing to the inflow of foreign money from the many migrant workers who labour in the Middle East and elsewhere. So we misuse our foreign exchange reserves, which are declining, to import luxury cars, Pajeros, the best of foreign liquors, consumer durables etc.

Liberalisation

While the liberalisation of foreign trade without first achieving and maintaining macro-economic stability, can be blamed for our present economic impasse, liberalism elsewhere in the economy has been all for the good. Many bureaucratic regulations bearing on the economy have been modified or removed altogether releasing the energies and initiative of the people who have positive attitudes to economic activities.

But the vital factor markets - for land, labour and capital, have been relatively untouched. Interest rates have been deregulated but owing to the market dominance of the two state banks there is no price competition in the banking system only competition on quality of service.

The financial markets were liberalised although there is still some exchange control, control on foreign investment in certain sectors etc. Politically it was easy to liberalise financial markets. But the real goods and services are still not sufficiently liberalised. Peasant agriculture has no economic future but the market for agriculture land is not liberalised. Nor the urban commercial space market which is still governed by the Rent Restriction Laws of the late Communist leader Pieter Keuneman.

As for the labour market, it is untouched. A plethora of labour regulations and laws prevent hiring and firing as needed by economic forces. Unless the factor markets are liberalised there will be no sustainable benefits from the open economy.

This point was stressed by Dornbush in "The Open Economy". Liberalisation, he says "needs to be accompanied by appropriate macro-economic policies that take into account both the internal and external imbalance in the economy during the transition". Liberalisation of trade should come only after macro-economic stability is restored.

Liberalisation could be rapid as in Chile or long drawn out as in Israel. "The more protracted and prolonged the reform process, the more danger there is that the reform will not be credible, that the "right" investment and employment decisions will not be made and that the reform will gradually peter out."

This is what has happened to liberalisation here. Liberalisation has failed to generate sustainable growth because it did not accompany macro economic balance and it was too prolonged. The economy is heading for the doldrums unless there is a quick recover in commodity prices.

Some people think the economy is shrinking because of the failure of government investment. The shrinking in public investment is due to the lack of resources for the government. The government is spending 25% of the Budget on the war on top of burdens of social welfare. If the war cannot be stopped the government will not have funds for investment.

Foreign aid is drying up as we reach middle income status. So its a matter of government competing with the private sector for the same local savings. Should such savings go to the government? Government politicians of all parties have milked the corporations and robbed the state. They neither understand nor care for economic efficiency. Power as a trust and economic efficiency are not values indigenous to our 2500 year culture. These are alien values which will not be grafted on to our culture for many more years, if ever.

Privatisation although much of it has been done in wrong or corrupt ways, has at least released resources which could be utilised in more economically efficient ways. The scope for privatisation is large. We could privatise the railway and the utilities like power generation water supply. The Postal service, the state banks and the state insurance corporations.

Even education and health have to be overhauled allowing for free choice. Schools under free education should get money only if they attract pupils. Each child should be given a voucher paid for by the state to the school of his choice. Children from disadvantaged rural areas should have specially topped up vouchers so that schools will compete to attract them.

The present health system caters to the interests of the doctors. It may be worth examining the family doctor G.P. System under which doctors educated at state expense are paid a capitation fee. In-patient care is best dealt with under insurance. More public services should be contracted out.

Nissan sparks boom year at Associated Motorways

The Associated Motorways group of companies has reported its best performance in five years with a turnover of Rs.1.7 billion during the year ending March 31, 1999, up 1.6% from a year earlier and a pre-tax profit of Rs.169.3 million, up 31.8% from the previous year enabling the payment of a tax-free 30% dividend to shareholders.

The company’s motor car business had done very well clocking over a billion rupees in vehicle sales, spares and repairs. In terms of turnover, the tyre retreading, compounding and other related services had also contributed a substantial Rs.376.9 million in turnover, though lower than the Rs.416.2 million earned the previous year.

The company’s chairman Mr. Ajita de Zoysa, said that AMW which holds the Nissan agency had an excellent year almost doubling the number of new cars sold. This was mainly due to a big order from the travel trade for duty free vehicles. Nissan remains market leader for new Japanese cars sold in Sri Lanka, de Zoysa reported.

He said that the tyre retreading business did not fully benefit from the sharp decline in rubber prices as much of the gain had been offset by the increase in imported raw material prices, utilities, salaries and wages.

They were also having a problem collecting overdues from the peoplised transport services. However, de Zoysa hoped that the debts would be cleared with funds allocated in next year’s budget.

AMW expects to benefit from the global strategic alliance resulting from the purchase of 36% of Nissan’s equity by Renault of France making this alliance the fourth largest auto makers in the world.

"As a result, we are in a stronger position as the benefits that will accrue from this strategic alliance will be substantial,’’ de Zoysa said.

AMW has also decided to purchase land and build a new showroom and outlet for spares and sales as their Union Place workshop is getting crowded particularly on car repairs. The chairman said that this was a necessary investment to provide their customers an excellent after sales service in the new millennium.

The company’s business of importing and selling reconditioned vehicles had gathered momentum with a Rs.67 million turnover. AMW also expects growth in the sale of diesel driven three wheelers following the joint venture between their principals, Greaves Limited, with Piaggio of Italy to manufacture these vehicles. A completely newly designed diesel three wheeler already launched in India will be introduced to the local market later this year, de Zoysa said.

He also announced that they have been appointed the sole agents in Sri Lanka by British Petroleum for the sale of industrial and automotive lubricants. They were awaiting licensing by the authorities to begin imports and distribution.

The company has also signed a letter of intent for a joint venture with the US based Universal Polymer and Rubber Limited to manufacture and export rubber based products. De Zoysa said that they would seek BOI approval for this joint venture.

The directors of the company are: Messrs. Ajita de Zoysa (Chairman), Tilak de Zoysa (Deputy Chairman/Managing Director), K.M. Wickremasinghe, N.D. Rajapakse, N.E.M. Wickramasinghe (MD Factories, resigned w.e.f. 10.8.98) A.R. Pieris (nominee director NDB), U. Hulugalle (Executive Director), J.B.L. de Silva, G.B.R. de Silva (Director/GM Nissan) H.S.A.K. Caldera (Director/ GM Factories), E. Abeysiriwardane (Finance Director) and A.J. de A. Abraham.

Losses wiped out, occupancy up, debt repayment on schedule
Stafford returns to profit in outstanding year

Stafford Hotels Limited, owners of the Club Hotel Dolphin and member of the Serendib Group, has achieved a 15% gain on room occupancy, up to 63% for the year ending March 31, 1999, and also better than doubled profitability to Rs.19.2 million from Rs.9.5 million a year earlier.

The long troubled company has wiped out all its accumulated losses during the year under review and is now carrying forward a retained profit of Rs.7 million on its books. The company has reported to shareholders that all long term loan instalments and interest are now up to date.

Serendib Hotels Limited which had up to December 31, 1998 held 32.8% of the company had increased their shareholding to a controlling 56.5% by August 31, 1999. Serendib also made a mandatory offer to other shareholders on March 20, 1999, under the Securities and Exchange Commission’s Mergers and Takeovers Code. The five rupee price at which the controlling stake was acquired was offered to the minority.

The company’s Chairman, Mr. Asker S. Moosajee, and Managing Director, Mr. Abbas N. Esufally, have in a joint report to shareholders said that the year under review had seen considerable refurbishing of the hotel property. The central airconditioning is being replaced and rooms have been equipped with new beds. A new disco and sound and light equipment had been installed.

Additional kitchen and sports equipment and computers have been purchased and urgent structural work undertaken. Rs.10.9 million had been spent under the government’s duty free scheme for the upgrading of the property, they said.

The hotel owners are also investing Rs.5.5 million to protect the property from sea erosion. They are also hopeful that an ongoing ADB funded coast conservation project along the Waikkal coast where they are located will by 2001 give back the Dolphin the beach it lost to erosion.

The joint review complimented the hotel’s management and staff and the efforts of the managing agents, Serendib Leisure Management, for enabling a remarkable improvement in performance.

"Improved market conditions together with sustained marketing effort and improved product are the reasons for the better result,’’ Moosajee and Esufally said.

Employees have also benefited from increased turnover by the group (up to Rs.104.1 million from Rs.77.3 million) as this has impacted significantly on their service charge share, they said.

They said that future prospects are good with 1999 showing record occupancies and encouraging winter bookings for 1999/2000.

The joint report urged that a continuing program of consumer advertising in the main generating markets was necessary to erase the image of Sri Lanka being a cheap tourist destination with inferior product.

It also said that liability of the hotel industry to GST from April 2000 will have a negative effect as foreign tour operators are looking for newer and more competitive destinations. They urged that at least room rates paid in foreign exchange should be exempted from GST.

In addition to Serendib Hotels the DFCC Bank with 21.3 % and Hemtours (Pvt) Limited with 5.4% are the other major shareholders of Stafford Hotels Ltd.

The directors of the company are: Messrs. Asker S. Moosajee (Chairman - Alternate Ms. Tasneem Moosajee), C. Wijenaike (Deputy Chairman w.e.f. 27.04.99), R.M.S. Fernando, E.J. de Soysa, A.N. Esufally, B. Sarada M. de Silva, C. Ramachandran (Alternate Mrs. V.R. Jayewardene), O.R. Kreltsheim, T. Wijemanne, Mrs. A.R. Gamage (Alternate Dr. Lalith Gamage) and Mrs. M.S. Fonseka (w.e.f. 27.04.99).

Five-star resorts compete fiercely for upmarket clients

The chairman of a new five star resort hotel has complained that despite increased visitor arrivals to Sri Lanka, the up-market clientele sought by the deluxe properties are still too few resulting in cut-throat competition to maintain occupancy.

This was the message Prof. M.T.A. Furkhan, Chairman of Eden Hotel Lanka Limited had for his shareholders in the just published annual report of his company.

He dismissed as a "misconception" the belief in certain quarters that hoteliers and travel agents are not doing enough to attract up-market clients here and therefore the country continued to receive low prices for its products.

"The truth of the matter is that an up-market client who has a larger purchasing power is invariably an individual who comes from the upper income brackets of the tourism generating markets such as Germany, United kingdom, France, Switzerland, Italy, etc. A foreign tourist who can afford to pay a high price for his holiday is offered a variety of destinations competing at reduced prices on account of the global crises that took place recently. South East Asia, Africa, and the Caribbean resort hotels have all reduced prices," he said.

Furkhan said that up-market visitors want to avoid risky destinations and other resorts free of violence, bombs, beach boy menaces, etc. attracts such business.

Destinations like Bali, Kenya and even Jamaica at one time lost top tier traffic the moment violence broke out. Even a wealthy Lankan tourist would hesitate to visit resorts such as Bali in Indonesia or Kenya or Yugoslavia right now.

That was the reality of the ground situation. The trade here had tried hard to get the high spending tourists here and critics must understand that as long as the ethnic conflict persists and there is continuing sporadic violence in the country, it would be virtually impossible to attract the upper-end clients the country’s tourism industry would under normal circumstances justifiably deserve.

Furkhan complained that despite strong representations on the proposed 12.5% GST levy made to the President and government, there has been no decision yet to exempt foreign exchange earnings from tourism from GST.

"Only last week, an attempt by the tourist industry in Phukut in Thailand to increase their prices somewhat radically resulted in a 30% cancellation of room bookings," he said.

He conceded that the government too had a revenue problem but said that this GST levy "could have an enormous backlash" on hard currency earnings from tourism. That will affect not only the budget deficit but the foreign exchange budget and the economic development of the country.

"I do hope therefore that some element of wisdom and caution will prevail amongst the decision makers so that one does not have to be sorry at a later date for not being far-sighted at the right time. Should we kill the golden goose or not is a million dollar (literally) question," he said.

Furkhan said that turnover at the Eden at Rs.232.1 million during the year ended March 31, 1999 remained almost the same as Rs.233.8 million the previous year. But the pre-tax profit had dropped to Rs.3.3 million from Rs.13.7 million a year earlier.

He said that there are several reasons for the drop in profits and one of the biggest factors was increased overhead costs, specially electricity charges and the new burden of the cost of unrecovered GST payments.

Interest cost during the year under review had gone up to Rs.39.7 million from Rs.33.9 million the previous year. Furkhan said that they had received some interest rebates the previous year and the current year’s interest had virtually wiped out the profits earned after a depreciation charge of Rs.41.7 million.

"The figures no doubt indicate to the shareholders that whilst Eden Hotel is making reasonable profits from unreasonably low prices in its operations, the exercise is a clear illustration of the statement that the company is working for the bank - a tragic situation that cannot be rectified unless fresh equity capital is injected to reduce or wipe out the indebtedness to the bank. With the capital market as it is, the prospects of raising fresh equity capital are virtually nil," he said.

He also said that staff at the Eden had received an average service charge of Rs.8,246 per month per employee during the 12 months under review. This was on top of their salaries and other perks.

Furkhan said that the hotels managers were working hard to retain market share, both foreign and local, and at least maintain prices to maximise negative impact on the bottom line.

"Right now they have an unenviable task to persuade foreign operators to accept as a minimum the 12.5% price increase on account of GST. The implications of trying to jump that major hurdle are yet to be seen," he said.

The directors of the company are: Prof. M.T.A. Furkhan (Chairman), Messrs. A.S.T. Furkhan, A.N. Esufally, S.S. Miththapala, A. Wimaladharma, M.I. Raji, N.S. Jabir (Alternate M.M. Jabir), D.E. de Mel, W. Hedderich, A.S. Lokuhetty ( w.e.f. 15.12.98), W.M. Mendis (w.e.f. 15.12.98) and F.H.Ansar (w.e.f. 24.8.99).

Strong competition and rising yen hurts profits
Sathosa Motors drum-up estate vehicle sales

Sathosa Motors Limited, agents for the Isuzu and Opel range of vehicles, has closed the financial year ended March 31, 1999 with a turnover of Rs.954.5 million, up from Rs.745.6 million a year earlier, but seen its after-tax profit decline to Rs.38.5 million from the previous year’s Rs.49.3 million.

The company’s Chairman, Mr. Sumal Perera, has reported to shareholders that the company had been able to achieve its turnover target. He attributed reduced profitability to strong competition in the vehicle market, sharp escalation of the Japanese yen together with increased duty and the decline in the sale of spares.

Perera said that the company had concentrated on the sale of new commercial vehicles, marketing 568 Isuzu units and maintaining its high market share in the commercial vehicle segment.

They have done particularly well in the plantation sector boosting their sales of light lorries and double cab pick-ups to 75% of the total requirement of the estates. These purchases have been funded with ADB assistance.

But the escalation of the Japanese yen and the increase in both customs and excise duty and the national security levy had unfavourably affected margins on vehicle sales. Customs and excise duty had been doubled from 15% to 30% for double cabs and the national security levy had been raised one percentage point from 4.5% to 5.5%.

Perera said that the sale of spares had dropped as tea plantation companies had postponed purchases other than for urgent repairs due to their own liquidity problems due to the fall of tea prices. Most government institutions too had limited their purchasing due to financial restrictions.

Reporting that Rs.81 million revenue had been earned on repairs and services, Perera said that Isuzu Motors was helping them to improve workshop efficiency. An engineer from their principals had also participated in a service clinic during the year under review.

They were improving their Peliyagoda workshop and had also invested in their employees by making an incentive payment of one month’s salary in addition to a three months bonus. The previous year, the company had increased salaries of non-executive staff by Rs.500 a month and also continued the payment of a special Rs.250 allowance for a further year.

Perera said that their employees’ meal allowance had been increased from Rs.20 to Rs.25 per day from April 1998 and the attendance incentive raised from Rs.25 to Rs.30 per day from October 1998. Salary increments had been granted on the basis of a performance evaluation scheme.

Sathosa Motors had obtained agency rights for Malaysia’s Hicom trucks during the current financial year, the chairman announced.

The directors have recommended a first and final dividend of 30%. Sathosa has also announced a 1 for 1 bonus share issue to shareholders.

The Itochu Corporation of Japan is the major shareholder of Sathosa Motors with a 60% stake in the company. Other major shareholders include the Ceybank Unit Trust, Thurston Investments and Central Finance.

The directors of the company are: Messrs. S.J.S. Perera (Chairman), T. Sugaya (Managing Director), T. Muroga, S.P. Jayasuriya, H. Shibayama, T. Kakuta and Y. Ichimura (Alternate H. Shibayama).

Dispute on preference dividends with NDB
Royal Palms ups profits 136% despite new girls on the beach

Royal Palms Beach Hotels Limited, one of the newest five star hotels on the southern coast, has seen substantial turnover growth and a 136% increase in its after-tax profits which grew to Rs.39.1 million from the Rs.16.6 million a year earlier during the financial year ending March 31, 1999.

The Chairman of the company, Mr. George Ondaatjie, attributed this "noteworthy increase" to increased turnover (up to Rs.166 million from the previous year’s Rs.143 million) together with substantial interest savings due to lower gearing of the company.

"I am specially, proud of our performance in view of the fact that several competitors have recently opened for business in our neighbourhood," he said.

The year under review saw Royal Palms successfully floating a public issue with the funds raised being used to redeem Rs.100 million bridging finance obtained from the NDB.

Ondaatjie said that this was in line with the policy of reducing the company’s gearing ratio.

The chairman said that the company’s management had always aspired to combining good sense and foresight as a part of its policy. They had therefore put substantial effort into preventive maintenance and regular upgrading. This way, they expected to avoid comprehensive refurbishment that would affect profitability in future years.

"On-going improvements include a range of new attractions for our guests, much emphasis on suggestive selling and provision of duty meals to all hotel staff," the chairman said.

Looking at the industry, Ondaatjie said that the threat posed by cheap holiday packages offered in international markets by countries like Thailand and Indonesia had not seriously impacted on Sri Lanka tourism. He said that the unique combination of scenic beauty, high eco-tourism potential and the ancient cultural heritage continued to place the country at a distinctive comparative advantage.

Royal Palms has an issued capital of Rs.550 million and long term loans of Rs.23.7 million. Additionally the company also has Rs.150 million worth of ten rupee redeemable preference shares.

The 15% preference shares have been issued to the NDB in August 1995 and carry the right of preference dividend of 15% per annum. They are redeemable at par in five equal Rs.30 million instalments commencing from January 1, 2001.

A dispute between the company which commenced commercial operations on October 4, 1996 and the NDB claiming that the preference dividends should be accumulated effectively from the date of issue remains unresolved. The NDB has claimed Rs.25.8 million for the period August 11, 1995 to October 3, 1996. Royal Palms had contested this claim stating that no dividend payment is due for this period.

According to the company’s accounts, Royal Palms had a total of Rs.59.7 million available for appropriation as at March 31, 1999. Of this Rs.11.3 million had been paid by way of preference dividends while no dividend had been paid on ordinary shares.

The retained profits at the end of the year under review were Rs.48.4 million while accumulated preference dividends for the period April 1, 1997 to March 31, 1999 is Rs.45. million.

The accounts said that at the time any preference dividends are declared, the existing retained earnings may be used solely to make such distribution, before any dividend can be declared to ordinary shareholders.

The directors of the company are: Messrs George Ondaatjie (Chairman), N.D. Rajapakse (Managing Director), L.V. Perera, Gerard Ondaatjie, V. Balasubramaniam, A.R. Peiris (Resigned 16.9.99), S. Adhihetty, J.P.Van Twest, G.V. Divitotawela, M. Keerthiratne, R.S. Weerawardane, A.N. Esufally, T.J. Ondaatjie, M.U. Manikku (Alternate M.M. Didi), Merrill J. Fernando (Alternate D.C. Fernando) and Ms. Angeline Ondaatjie.

Ceylon Brewery looks at exports to absorb excess capacity

The Ceylon Brewery group recently exported its first consignment of Lion beer to the UK and Australia and an inaugural order of draft beer has also been shipped to the Maldives, the company said.

Although Ceylon Brewery had previously done small export volumes, these have tailed off during recent years when the supply of beer for the local market could not keep pace with demand following the sharp reduction in beer excise. However, with the government reverting to a high duty policy, the company has an unutilized production capacity which it is trying use by pushing exports.

The Brewery’s Exports Consultant, Raj Sriskantha, said that if the international marketing effort continues to be successful, the group will initially export around 10 containers a month and increase this to 30 to 40 containers later.

The UK export was consigned to a leading supermarket chain, Asda, which was voted Britain’s Supermarket of the Year in 1998. Asda was recently acquired by Wal-Mart with around 229 stores in Britain.

Sriskantha claimed the initial orders to be a "big breakthrough" that resulted from an aggressive international marketing effort by the group which includes the Lion Brewery with a Carlsberg tie-up.

"We are also looking at export potential in the US, French and Middle Eastern markets," Sriskantha said. But a limiting factor was the very high freight charges to the US.

Lion will initially export their beer in bottles but would look at investing in a canning capacity if firm, legally binding export orders that would justify the heavy investment are obtained, Sriskantha said.

Both the Ceylon Brewery and its subsidiary, Lion Brewery, have suffered a sharp decrease in profitability during the current financial year due to depressed sales following the increase in the beer excise duty. The companies which hoped to make volume gains in the teeth of the price deterrent by absorbing part of the tax themselves have now reverted to passing on the entirety of the tax to the consumer.

Canned toddy from Madampe factory

A BOI company located at Madampe is canning toddy for both the local and export markets with initial exports to Singapore and Malaysia planned, the company announced.

Eagle Breweries (Pvt.) Limited will also be exporting a king coconut based ‘sports’ drink comprising a mixture of king coconut water, fresh lime juice and glucose and a health drink manufactured with the natural extract of ginger, fresh lime and glucose.

While toddy has been bottled before, canning this product has not been previously attempted.

Eagle Industries, which has been expanded and developed into Eagle Breweries, pioneered the bottling of toddy in 1960s and distributed it countrywide. Exports were also undertaken in the 1980s.

Mr. Upali Padmasiri Herath, chairman of the company, said that theirs was a 100% local investment of Rs. 30 million with BOI privileges.

Herath said that the king coconut and ginger drinks are currently packed in 250 ml. foil sachets but will be packaged in easy to open cans by November. He described the company’s coconut toddy branded Golden Eagle as free of artificial colouring and preservatives. It was a natural and healthy mix of proteins, vitamins and minerals with a 6.8% alcohol content.

"The thermal preservation process that is followed in the manufacture of the canned toddy ensures its freshness and retains natural flavour and strength for a 10-month shelf life," the company said.

The toddy will be marketed in 330 ml. imported cans and priced at around Rs. 47 per can.

Herath said that his factory had a daily production capacity of 10,000 cans of toddy and 10,000 sachets of sports and health drinks.

Herath thanked the Coconut Research Board, the Department of Agriculture and the EDB for helping his industry to take off. He had developed his products over ten years to reach the present standards, he said.

Herath said that Golden Eagle products will be first distributed in the western province.

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