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Streamlining Sri Lanka's state-owned plantation management.

Nobody can fault the Government's argument that Sri Lanka has learned a bitter lesson after two decades of state management of plantations. Enterprise and motivation have been totally lacking. While competing producers in India and East Africa forged ahead, planting their land with high-yielding clones and manufacturing the CTC (cut, tear and curl) teas the market demanded, Sri Lanka lagged behind with state-owned plantations often selling below the cost of production.

Sri Lanka's average production today runs at around 1,100 kg per hectare. The Indian average is over 1,700 kilos, while in East Africa, which attracted a great deal of both planting and manufacturing expertise from Sri Lanka, the average yield exceeds 2,000 kilos per hectare. Much of Sri Lanka's land is still under old seedling. Where Sri Lanka re-planted with high-yielding vegetatively propagated (VP) clones, the plantations remain profitable even at currently depressed prices.

Obviously a poor record. Estates have to produce what the market demands, and they must ensure that the yields per hectare are maximized to ensure that even when the market dips, the crop remains profitable. Low yields make Sri Lanka vulnerable to the slightest price declines in volatile international markets.

From 1990 to date, the Sri Lanka, State Plantations Corporation earned profits only in five years. The JEDB made profits only in tow. The cumulative loss in the two corporations from 1980 to 1991 was Rs.2,283 million. According to provisional estimates, the JEDB lost about Rs. l,O00 million last year, while SLSPC losses ran at around half that figure. If the present low prices prevail, losses by the two corporations this year can hit Rs. 3,000 million.

The privatization of the management of the estates will not instantly change this picture. A lot of hard work will have to be done by all those working for the industry. Planters cannot run their estates from Colombo. Poor standards of manufacture must not be tolerated. If privately-owned estates are making profits even at current prices and conditions of poor rainfall, there is no reason for the state owned plantations to require subsidies running up to Rs. 400 million a month.

The Ministry of Industries of Sri Lanka released a statement explaining the need and the rationale behind the restructuring of state owned plantations. The following points were made:

Prior to the state take over, the plantations were run efficiently and profitably by the private sector. They were significant contributors to the economy and to the government by way of taxes. In contrast, during nearly two decades of state ownership and management, the performance of the plantations has been disappointing. In fact, small holdings and estates in the private sector and those in competitor countries have recorded better performance.

In financial terms, the JEDB and the SLSPC have been a huge burden on the government. Subsidies of over Rs. 5,000 million have been provided to the two corporations in the past few years, In spite of these subsidies the current financial position of the JEDB and the SLSPC is perilous. In fact the two corporations are technically insolvent today. Right now, the JEDB and the SLSPC have operating deficits of over Rs. 400 million per month. They are met by the banks on the basis of Treasury guarantees.

The JEDB and the SLSPC owe the Bank of Ceylon and the People's Bank a sum of over Rs. 3,500 million. There is no way the JEDB and the SLSPC could repay these loans. This means that the Treasury has to find the money to settle these huge debts to the banks.

Where does the Treasury get its money? The bulk of the money comes from various indirect taxes which are included in the prices of rice, flour, sugar, kerosene, clothing etc. It is the poor consumer who has to make good these colossal losses. If their dependence on Treasury subsidies can be eliminated, more money will be available to the government for social welfare measures and infrastructure development work. This will reduce the burdens that are being heaped on the poor people. The cost of living will also come down.

The government and the people cannot afford to continue subsiding the state plantation sector. On the contrary, the plantations sector can and must generate profits which can be used by the government for the benefit of the people. This is why a change is necessary in the system of management of the state owned plantations.

Today, the JEDB and the SLSPC between them, manage 502 estates. About 449 of these estates will be regrouped and formed into 22 independent regional management enterprises, each consisting of 15-25 estates. Accordingly, the regional boards of the JEDB and the SLSPC will also be regrouped and amalgamated.

Apart from the full state ownership of the estates, the 22 regional management enterprises will also be 100% owned by the government. Twenty-two private sector companies with a proven track record of sound management have been chosen on the basis of competitive bids to manage these enterprises on behalf of the government. The government will be the sole shareholder of these regional management enterprises.

The 53 estates not falling within the 22 regional management enterprises will continue to be managed by the JEDB and the SLSPC as is being done now. These estates were left out of the present restructuring exercise because they require substantial rehabilitation and diversification before they can be given for management. Detailed plans for the effective utilization of these estates are being developed at present.

The estate lands will not be vested in the new regional management enterprises. The state will continue to own the estates. The land will be given on long-term lease to the new regional management enterprises. All existing commitments made by the government relating to land alienation will be honored. The estate lands are only being given on lease to regional management enterprises. There will be no change in the future availability of land for community and other purpose.

The day-to-day management will be entrusted to Sri Lankan management contractors. Engaging the services of management contractors has been tried successfully in the state owned textile mills such as Veyangoda, Mattegama, Thulhiriya and Pugoda.

These textile mills, which were making huge losses, were a burden on the Treasury. The management of these mills was entrusted to management contractors some time ago. The management contractors succeeded in transferring them into viable and profit making ventures without much investment.

The 22 private sector management contractors selected to mange the 22 Regional Management Enterprises are: Aitken Spence & Company Ltds., B.C. Computers (Bartleet Group); Carson Cumberbatch and Company Ltd., Ceyexxe Ltd., Chemical Industries (Colombo) Ltd., Forbes Ceylon Ltd., Finlays Chemicals and Dyes (Pvt.) Ltd., Free Lanka Trading Company Ltd., George Steuart & Company Ltd., Hayleys Group; Lake House Printers and Publishers Ltd., Lankan Ceylon Ltd., Mackwoods Ltd., Magpek Exports Ltd., Metropolitan Agencies (Pvt.) Ltd., Pickle Packers (Private Ltd.); Richard Pieris and Company Ltd., S.A. Silva and Son Lanks (Pvt.) Ltd., Stassen Exports Ltd.

The management contractors were selected on the basis of competitive bids on the following lines:

Applications for pre-qualification to bid on management contracts were called for in November 1991. On the basis of detailed evaluation of the applications received, 46 companies were prequalified to bid for management contracts. Prequalified bidders interested in participating in the tender were each made eligible to bid up to three regional management enterprises.

Each bid was evaluated on the following criteria: management proposal and personnel to be fielded; specialized technical services to be provided; management skills and ability and management fees to be levied on profit sharing basis.

The highest bidder for each regional management enterprises was selected as the winning bidder for that enterprise, subject to the condition that any one bidder would only be eligible to manage a single enterprise.

All staff and labor working in the states and the regional office involved in the restructuring will become employees of the regional management enterprises. They will not become of the private sector management contractors. No employee will be retrenched as a result of the restructuring. The new management contractors will be required to ensure that the terms and conditions of employment of all employees are maintained as the are today under the JEDB and the SLSPC.

Ownership of line rooms, labor cottages and worker line gardens will be given to estates housing trusts which are to be set up in each estate. They will be controlled by the workers. The new management contractors will be required to continue with the provision of state level social welfare facilities such as creches, estate medical facilities etc.

A national level Social Welfare and Housing Trust with a head office and regional offices will be established to channel such assistance and funds available from the government for such activities. The trust will also provide technical support to the estate level housing trusts and social welfare activities. The trusts will be managed by the regional management enterprises. Their operational costs will also be met by these enterprises.

The new management contractors will be requested to immediately start looking into the present operation of the estates and to develop plans for their management. The formal take over by the management contractors will take place on a staggered basis.

Successful bodies are required to form new companies specifically for the purpose of undertaking the management. The management contracts will be signed between these newly formed management companies and the regional management enterprises. Overall policy guidelines for management will be given by the government appointed boards of directors of the new regional management enterprises. All responsibilities for day-to-day management of the enterprises, and the powers necessary for such management, will be given to the management contractors.

Find Funding

The management contractors will be required to find funding sources for the working capital and investment needs of the regional management enterprises. Recruitment and dismissal policies will be set by the regional management enterprises which are fully Government owned and controlled. Management contractors will be paid to a particular management contractor will be based on the amount quoted in the winning bid. On average, winning bidders have requested around 25% of actual profits that will be realized as management fees.

In such a case the management contractors will not receive any income. However, in practice this situation is unlikely to occur. Profit projections for the new enterprises indicate that, while some enterprises may make small losses in the first year, all the regional management enterprises, without exception, will be profitable in the long term.

By agreeing to mange for a share of profits, the private sector companies bidding for management contracts have shown that they too believe that the new regional management enterprises can be run profitably.

The initial period of the management contracts will be from mid1992 up to the end of 1997, around five-and-a-half years. Automatic future extensions of the contracts for up to three further five-year periods are envisage, in the event of satisfactory performance by the management contractors.

The board of the regional management enterprises will be government appointees. These boards must approve the annual budgets and development plans of the management contractors. The board will also receive quarterly reports from the management contractors showing actual performance against budgeted levels.

The most important monitoring mechanism will be biannual inspection/advisory reports prepared by independent companies hired by the boards. These assessments would review agricultural condition of the property, as well as the financial aspects of operations such as purchases, sales, and so on. This monitoring will ensure that the management contractors will not indulge in negative activities such as asset stripping and transfer pricing. No foreign companies be allowed to participate in the management. The government will enter into management contracts only with Sri Lankan owned companies.

The Sir Lankan tea industry has been called upon to take the necessary examples from the life of a Scotsman who came here as a 17-year-old and established an industry that was once know to produce 'green gold.' The special alchemy of wind, rain and sunshine still impacts the most subtle flavors to the tea that grow under different climactic conditions in Sri Lanka. It is now up to the new managers to make the industry work for the economy and the two and a half million people dependent on it for their livelihood.

by Vijay Dudeja Indian Correspondent.
COPYRIGHT 1992 Lockwood Trade Journal Co., Inc.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Sri Lanka State Plantations Corp. and JEDB undergoing privatization
Author:Dudeja, Vijay
Publication:Tea & Coffee Trade Journal
Date:Oct 1, 1992
Previous Article:Mauritius is home to a rejuvenating tea industry.
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