Targets need realistic timelines: SEC Chairman

The Chairman of the Securities and Exchange Commission of Sri Lanka (SEC), Thilak Karunaratne says the establishment of the Central Clearing Corporation, amending the SEC Act and facilitating the Demutualisation of the CSE will only be possible before the end of the year 2016.

“I think it is time we gave serious consideration to achieve concrete outcomes on several important fronts by defining realistic timelines. I am of the belief that before the end of the year 2016 we will be able to establish the Central Clearing Corporation, amend the SEC Act and facilitate the Demutualisation of the CSE,” the Chairman said in his review of the SEC’s 2014 Annual Report released last week. Also commenting in the report, SEC Director General Vajira Wijegunawardane said that the implementation of the Central Counter Party (CCP) will enable the capital market of Sri Lanka to be compliant with international requirements from the G20 which is to migrate all capital markets to a centrally cleared environment. He also noted that CCP would provide a prerequisite for enabling products such as derivatives.

“The importance of implementing a CCP mechanism has been in the pipeline for many years to address the counterparty risk, asset commitment risk and minimising the risk of settlement failure in the present equity market. The SEC, CSE and the Central Bank of Sri Lanka (CBSL) commenced a joint initiative to set up a CCP for settlement of securities, including shares, corporate debt and Government securities thereby implementing a blueprint for a national securities central counterparty to support Sri Lanka’s growing capital market,” he said.

Meanwhile, the SEC DG said that as fund raising and investment activity is currently dominated by the banking sector, Sri Lanka’s capital market should be positioned to complement the banking sector and support the growth targets of the country. The capital market size is around 30% of Gross Domestic Product (GDP) and this presents a unique opportunity for all stakeholders.

“The deepening of capital markets has been critical for sustaining rapid economic expansion in many countries and to achieve this end, investor and public confidence as well as the integrity of markets and their participants is essential,” Wijegunawardane said.

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The Coconut Industry of Sri Lanka: Glorious Past, Dismal Present, Uncertain Future

by Dr. P.G.Punchihewa

"It’s an old and common saying, the coconut tree afford meat, drinks, and cloth; true, but far short to my own knowledge; besides I shall add, toddy, wine, vinegar, oil, milk, and honey all eatables: but besides it afford other necessaries as mats, brooms, bottles, dishes and ropes." - Robert Knox

Long before Knox, coconut had played a vital role in the lives of the people of Sri Lanka. The first coconut plantation in the island, (cocopalm garden three yojanas in length) may be even in the world, was established during the reign of Aggabodhi I, according to Mahavamsa. He ruled from 571 to 604 A.D.

But Knox’s statement was the first which spelled out the many uses of the coconut tree so vividly.

Coconut, a subsistence crop, had to await the arrival of the colonial powers to the island, particularly the British, to be made into a plantation crop. With the finding of new uses of coconut oil in the manufacture of margarine, candles and soap in Europe, the demand for coconut oil increased by leaps and bounds. Accordingly, all the major colonial powers started the cultivation of coconut in their colonies - the British in India and Sri Lanka, the Dutch, in the East Indies, the French in Africa and the Germans in the Pacific. The Foreword written by Sir W.H. Lever, the founder of Lever Brothers, to ‘Coconuts-the Consols of the East’ by Smith and Pape, speaks of the keen interest shown by the British in the cultivation of coconut.

"I know of no field of tropical agriculture, that is so promising and I do not think in the whole world there is a promise of so lucrative an investment of time and money as in this industry. The world is only just awakening to the value of coconut oil in the manufacturing of artificial butter of the highest quality and of the byproduct copra cake as a food for cattle."

Accordingly, the colonial government encouraged the cultivation of coconut, particularly in the North-West of the island. "The rapid expansion of the coconut industry had begun in the late 1850s, but the pace had been accelerated in the 1860s. The acreage went up from about 250,000 in the 1860s to 850,000 in the first decade of the 20th century. (K.M. de Silva:A History Sri Lanka page 287)

Apart from encouraging the rapid expansion of the area under coconut, the English diverted the industry to processing of coconut products as well. The establishment of a crushing plant for milling copra into oil and copra meal commenced around 1830 and there had been regular shipments of oil from Ceylon to Europe. In 1853 Sri Lanka had exported 1,033,900 gallons.(Samuel Baker: Eight Years in Ceylon: pg 158).

In 1855 soap making commenced and several kinds of soap were produced and exported. Sri Lanka was thus ahead of most of the coconut producing countries that were continuing to export only copra.

The 19th century also saw Sri Lanka taking another important step in processing of coconut products.

Following the industrial revolution, the need arose for a cheap ingredient for the ever increasing demand for candy among the working class in UK. Coconut proved to be ideal. But the practice at the time to import the whole nut was cumbersome and expensive. Experiments had been carried out in U.K to find a solution. It was discovered that grated coconut meat heated on steam tables resulted in it not becoming rancid and the result was desiccated coconut. The first desiccated coconut factory was established at Dematagoda and by 1890 Sri Lanka had exported 6,000 tons of desiccated coconut. In 1900 it had gone up to 60,000 tons. At that time, Sri Lanka was the leading exporter of desiccated coconut.

Similarly, the first fiber mill was set up in the 19th century and in 1853, 2,380 tons of coir had been exported.

But that is the past. What about the present and the future? Dismal and uncertain.

Though Sri Lanka was the first to export desiccated coconut with 60,000 tons in 1900, over the years her competitors have overtaken her. In 2013, export of desiccated coconut from major exporting countries was as follows.

Metric tons

Philippines 116,115

Indonesia 75,930

Sri Lanka 33,273

Export of coconut oil (in MT) from the same three countries was as follows,

Philippines 1.096,861

Indonesia 630,568

Sri Lanka 3,821

In 1985 Sri Lanka had exported 52,000 metric tons of desiccated coconut and 64,000 metric tons of coconut oil.

There are number of factors responsible for this huge drop in exports. While the Philippines and Indonesia have vast extents brought under coconut, running into several millions of hectares, in Sri Lanka coconut acreage is shrinking due to urbanization, pests, diseases, and drought. From a peak of 1.15 million acres in 1962 the area under coconut had decreased to 0.976 million acres in 2002. In 2006 ‘Weligama Wilt’ was reported and it was estimated that 300,000 palms at the initial stages and more in repeated cycles had to be removed. Production of coconut has remained static. Since 1980 Sri Lankan coconut production had exceeded the 3,000 million nuts mark only twice. That was in 1986 and 2000.The average yield hovers around 2,500 nuts per acre per annum.

With increasing population, exportable supply declined. In 1981 the population of the island was 14,846,000. In 2012 it had gone up to 20,277, 597. Domestic consumption is eating into exports. It had gone up from 1,784 million nuts in 1980 to 2,481 million in 2012. Shortfall in production is met with the import of more and more alternative vegetable oils. (In 2014 more than 100,000,m.t of crude palm oil, palm kernel oil, soya and sunflower oil and coconut oil have been imported to Sri Lanka.)

Efforts made to increase production and productivity had not had much effect.

Sri Lanka has introduced only three high yielding varieties since 1960.But these cannot meet the demand. The total number of seedlings issued since 1980 up to 2012 is nearly 70,000,000 according to Sri Lanka Coconut Statistics 2012.On the basis of 64 trees to an acre this should cover an area of more than 1,000,000 acres! Obviously there is something wrong with the quality of seedlings!

As it is, there is no likelihood of increasing production/productivity in the immediate future.

An opportunity Sri Lanka has missed is in the processing and exporting of coconut water which remains a waste product. Neither the government nor the private sector had made a genuine effort to penetrate this new market. In 2013, desiccated coconut production was 29,200 metric tons. To produce one ton of desiccated coconut about 8,000 nuts are needed. That is about 2.4 million nuts of which the water, at least a part, could have been used as a Ready to Drink (RTD) product.

"The total global packaged RTD coconut water market is estimated to be worth close to $600 million in 2013, with US and Brazil leading consumption growth. It is known for being a nutritious, refreshing, and rehydrating beverage and is convenient to purchase and consume. The versatility of coconut water allows for many innovations in this category. (Cocoinfo International vol. 21 no 2, 2014)

Among the main exporting countries of RTD are the Philippines, Indonesia, Thailand, Malaysia, Vietnam and India. (The production of coconut in Malaysia, Vietnam and Thailand is comparatively less than that of Sri Lanka.)Exports from the Philippines from 2009 to 2012 was as follows,

Sri Lanka was the pioneer in exporting coconut products to the world. Even in processing of coir dust she showed the way. Surprisingly, the Sri Lankan coconut industry had not shown much interest in producing a RTD product for export. The Middle East should be a market that could be tapped. Now, technology must be freely available. Already Sri Lanka is falling by the way side.

(The writer held the posts of Secretary Ministry of Coconut Industries and Executive Director, Asian and Pacific Coconut Community, Jakarta.)

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How is the Economy faring under the transitional government?

By R.M.B Senanayake

The defeat of Mahinda Rajapaksa on January 8 was hailed by democratic opinion here as well as abroad as a victory for liberal democracy and for the values of freedom over arbitrary government. But our people who are more impressed by grand displays of power rather the freedom they enjoy want to see the spending power of the government, never mind if such spending comes from borrowed money- mostly borrowed from foreigners and which have to be repaid. The days of reckoning when we have to pay back such loans have not yet come. The people seem to have grumbled about the lack of infrastructure spending by the new government. Reacting to this criticism the government has decided to allocate Rs 300 million for the construction of rural roads, displaying a correct sense of priority instead of on impressive urban infrastructure.

The government must decide how they want to raise money if they want to carry on their government instead of going for an election. Otherwise it will expose itself to similar criticism perhaps more stridently. How can he raise sufficient government revenue without introducing taxes? The taxes introduced y the Minister of Finance in the recent budget have not yet  been passed yet. The present government headed by veteran politician, Ranil Wickremesinghe, knows what should be done but he finds himself at a loss on how to proceed unless the President co-operates with him.

On the external front the current account of the balance of payments continues to run at a deficit indicating that we are paying out to foreigners more than what we receive from them. It means running down our Foreign Exchange Reserve unless such Reserve is simultaneously increased by foreign investment inflows. In this respect, the UNP has a better chance of attracting foreign investments than an SLFP Government. But politicians of the SLFP are impatient to obtain power since they form the majority in Parliament. But if it were to happen, a sudden outflow of foreign money could bring on a currency crisis. The SLFP has never shown much talent or ability in governance and particularly in the economic governance of the country. If they were to take power a currency crisis cannot be ruled out considering the continual erosion of our Foreign Exchange Reserves.

But it is said that our GDP has been maintaining the recent growth although it has slowed down in this year’s first quarter though the official figures are not yet available. The Sri Lankan economy grew by 7.7 per cent in the first half of 2014, reflecting increased domestic economic activity and rising external demand. It probably maintained a figure of 7.4% for the year.  But the sustainability of growth depends on the source of economic growth. During the Rajapaksa government the growth came mainly from government infrastructure investment using funds borrowed from China. But infrastructure investment cannot be carried out for too long when the country is small. It will also depend on our capacity for foreign borrowing. Our net external debt has been growing faster than our GDP. There is of course no immediate danger of a foreign debt crisis since our Aggregate Foreign Debt is still only 34% of our GDP. Some countries have exceeded 100% when there are danger signals. But we have not taken any action to increase our exports of goods and services and increase our debt repayment capacity. Our current account in the balance of payments continues to be in deficit although last year it reduced slightly. But we cannot run current account deficits in the balance of payments indefinitely and must take corrective action. Until then foreign funds must be attracted to fund the deficits. It is best if the foreign funds flow into direct foreign investments in the country rather than into portfolio investments like the debt and stock markets. In short we are dependent on continued attraction of foreign investment flows to maintain our living standard, particularly in paying for the imported goods we consume. Meanwhile, per capita GDP in US dollar terms also increased to US dollars 3,625 in 2014 from US dollars 3,280 in 2013 moving forward the country within the middle income per capita trajectory.

Some people point to the high borrowings of the present government and newspapers blare out headlines about the increase in government borrowings. They were however silent when MR borrowed and spent wantonly.

The economy left to itself has progressed and it shows that left to itself without too much interference by the State it could do quite well. Politicians like to believe that it is their efforts that contribute to growth. But it is not so. In fact their contribution is often more negative than positive.

But this doesn’t mean that there is no role for the government. No progress has been made with regard to the working out of devolution of power to the regions. Since we are a plural society and since politics dominate the allocation of funds to regions and electorates it is necessary to entrust more power over finances to the Provincial Councils. There is really no role for MPs to become spending units of the government. They are elected to be legislators not to look after the needs of their electorates. This erroneous conception of the MP is deeply rooted in the mindset of our people judging from the debates conducted on the Sirasa TV. This conception of the MP is the product of SLFP misrule after 1956. It is instead the role of those elected to the local authorities. This issue was debated and settled in England almost a century ago.

The MP’s role is as a member of the legislature and not to look after the parochial interests of his voters. Some MPs from the governing party (or parties) become government ministers with specific responsibilities in certain areas, such as Health or Defense. But their role is not to look after their electorate. But our public doesn’t understand this and go to their MPs to invoke their support to resolve their problems with government authorities, a pernicious practice which leads to the interference of the MPs in the administration and thereby undermining public administration.

The SLFP began the practice of allocating public funds to MPs to be spent by them in their electorates. This is not a practice suitable for a democracy. Public expenditure must be entrusted to Public Authorities not to individuals- whether MPs or otherwise. This is .a practice unheard of in the liberal democracies of the developed world. It is an open invitation to financial malpractices and the prime minister should resist the demand for such financial allocations to individuals who are not public authorities.

Devolve power to the PCs or confine them to the North and East

There is a strong case for devolution of spending power to the authorities at the grass roots level and that through the intermediate level of Provincial Councils and Pradeshiya Sabhas. It could make the central government allocation of funds to the different provinces more fair and equitable. There is a Finance Commission provided by law which is to be entrusted with this function of allocation of finances. Why is this Commission ignored in the distribution of funds? Such allocations would lead to better satisfaction among the regional and local authorities. The technical capacity of the local authorities should be expanded instead of adding to the staff and facilities of the central government agencies at the local level. A more rational allocation of funds from the Central Government would help to reduce income differences between regions and districts.

In the developed countries competition between regions and between local authorities lead to better public services as people compare their own council’s performance with that of the more efficient councils. This provides an incentive for all councils to improve their services as they get compared to other more efficient councils. Efficiency in their working should be our aim for it promotes economic growth with less usage of resources.

A local authority will also be more conscious of the environmental impacts of their policies and they being closer to the people cannot avoid the issue of environment if it adversely affects the people. When it is the Central Government that is responsible they find it more difficult to hold it responsible. The local authority level will also be able to decide more rationally between a project which is labor intensive (suitable where there is unemployment in the region) or capital intensive.

Another reform that is needed is to do away with the present case by case approvals of projects and instead to lay down a negative list disallowing any project which could fall into such list. Any project not included in such negative list will then automatically qualify and there will be no need for case by case approvals. We need to reduce bureaucratic red tape and controls and permit greater freedom for businessmen and entrepreneurs to invest their moneys. This will not only hasten the progress of new projects but it will also reduce corruption and graft.

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First Capital realizes Rs. 23 mn. capital gain selling 25% of Orient Finance

First Capital Holdings PLC has accepted an offer of Rs. 432.75 million made by Bartleet Finance PLC to purchase its 25% stake in Orient Finance PLC, First Capital said in a Stock Exchange filing on Friday.

First Capital will realize a capital gain of Rs. 23.24 million on the deal based on its carrying value as at March 31, 2015.

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Five-star hotels feel competitive bite from new properties

Cheaper three and four stars take a small slice of the cake

Cinnamon Red Hotel on Green Path launched in Sept. 2014, one of the properties competing with the five-stars. JKH owns a slice of this hotel it manages. Cinnamon Red has been ranked the best new hotel opened in South Asia last year.

The five star City Hotels are feeling the competitive bite of three and four star properties opening shop in Colombo with Asian Hotels and Properties Plc., controlling the Cinnamon Grand and Cinnamon Lakeside Hotels seeing group occupancy down to 66% from the previous year’s 70%, Asian Hotels have said in their latest annual report for the year ended March 31st, 2015.

"The room inventory within the city of Colombo witnessed substantial growth in the year under review, particularly in the three and four star category, intensifying competition and restricting growth in average room rate for the five star city hotels," Mr. Susantha Ratnayake, Chairman of Asian Hotels and Properties said.

"Whilst this increase in capacity stem from the expected growth in tourist arrivals, these new offerings at lower rates resulted in a citywide drop of two percent in the business segment of the five star city hotels."

The report revealed that the Cinnamon Grand, the biggest of the Colombo five stars with 501 luxury rooms and a full range of services including extensive dinning venues had seen occupancy levels drop marginally to 75% from 76% the previous year.

The hotel claimed it had "retained its star performance" during the period under review "despite the plethora of lower cost new entrants into the city hotel sector."

Cinnamon Lakeside, however, saw occupancy down to 51% in the year under review from 61% a year earlier, with its market share also shrinking from 18% to 15%. The Cinnamon Grand, however, had held its 32% market share.

Ratnayake said that the Asian Hotels Group had retained its leadership position among the five stars reflected by the 46% market share achieved during the year.

However, all the main financial indicators pointed to declines with group revenue down two percent to Rs. 8.08 bn., the gross profit down six per cent to Rs. 4.72 bn., net finance income down 34% to Rs. 199.77 mn., profit before tax down 23% to Rs. 2.35 bn. and profit after tax down 26% to Rs. 2.09 bn.

But the company said that it had maintained the dividend per share at Rs. 4 on par with the previous two years, despite the drop in profits.

In addition to its two five star city hotels, Asian hotels, owns the Crescat Boulevard claimed to be "the finest upmarket shopping mall in Colombo," which had maintained 99% occupancy, on par with the previous year, although the 2.07 mn. footfall was down 12% from the previous year.

Ratnayake said that tourist arrivals in 2014 had topped 1.5 million, representing a growth of 19.8% over the previous calendar year, with "the surge in arrivals led by the Chinese market which had grown 136% year-on-year and became the third largest source market behind India (up 16.3%) and the UK (up 4.9%).

JKH controls Asian Hotels, with 78.56% of the company followed by the EPF (9.84%) Sri Lanka Insurance Corporation – Life Fund (2.27%) and the Ceybank Unit Trust (2.15%). Dr. S Yaddehige (0.77%) and Mr. Merril. J. Fernando (0.46%) are among the individual large shareholders.

The Asian Hotels share which closed at Rs. 63 during the year under review, traded at a high of Rs. 75 and a low of Rs. 58 during the year. This compared to a closing price of Rs. 58.80 and a low of Rs. 57 and a high of Rs. 79 a year earlier.

The Directors of the company are Messrs S C Ratnayake (Chairman), A D Gunewardene (MD), J R F Peiris, Rohan J Karunarajah (Rohan Karr), Suresh Rajendra, Sanjiva Senanayake, Ms. Shiranee Anoja Jayasekara and C J L Pinto.

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Rising construction costs major challenge to property development

Pioneer developer says middle class salary earners can’t afford city apartments

Escalating construction cost over time has become a major challenge to the property development industry, Mr. D C R Gunawardena, Chairman of Equity One Plc., with which the Carson Cumberbatch group entered the real estate business by developing a commercial building on Dharmapala Mw., Colombo 7, over three decades ago.

Given current construction costs, he has said in the company’s annual report, their focus currently lies in maintaining the existing properties of the group to be in line with industry benchmarks while providing a superior quality service to their tenants.

"Considering our modest cash flow from current operations, coupled with the existing commitments pertaining to debt servicing and capital expenditure, we are reluctant in taking on additional borrowings for large scale development activities due to our limited ability to service such debts," he explained.

"As we have mentioned in the past we will continue patiently to maintain our position until a feasible opportunity arises to realize potential value."

In a business review, Carson’s Management Services (Pvt.) Ltd., the managers of Equity One, said that the impact of rising construction cost is a significant challenge faced by the overall property industry, given its impact on return on property development projects and on recurrent expenditure on property renovation and maintenance.

They further commented on the disproportionate growth in property prices and average income levels of people that has made it difficult for mainly salaried middle class income earners to afford residential property in the vicinity of Colombo and within the city limits.

"This is clearly visible in the residential apartment segment where based on the trend in valuations, the number of years of salary it takes to acquire an apartment from the city has increased significantly over time," they said.

The year ended March 31, 2015 saw Equity One, which owns a 0.524 ha. property at Vauxhall Lane, Colombo 2, with three buildings, in addition to the Dharmapala Mw. property, posting a group profit of Rs. 403.9 million, up from Rs. 192.7 mn. a year earlier. At company level there was a profit after tax of Rs. 244.5 mn., up from Rs. 127.4 mn. the previous year.

Much of this profit arose from the overall appreciation of investment property under the Equity One group resulting in a net unrealized gain of Rs. 300 mn. At company level, an operating profit of Rs. 58.7 mn., excluding the impact of change in fair value of investment property and gains booked on divestment of investment property.

"Compared to the same for the previous year, this was an increase of 12.8%, mainly stemming from rental revisions and letting of the Dharmapala Mw. building penthouse on a long term basis during the year under review.

Equity Two Plc., a group company, owns two buildings at Janadhipathi Mw., Colombo 1 standing on 0.072 ha. and 0.146 ha.respectively. These buildings had a market value of Rs. 363.7 mn. and Rs. 561.18 mn. while the Dharmapala Mw., property was valued at Rs. 763.4 mn. and the Vauxhall Lane property Rs. 652.3 mn.

A third group company, Equity Three (Pvt.) Ltd. owns two buildings standing on 0.208 ha. of land valued at Rs. 279.3 mn.

Gunawardena said that the much awaited re-opening of the entrance to Janadhipathi Mw. was commendable. However, access to their two properties via Janadhipathi Mw. is still restricted due to the guard fence erected between the roadway and the buildings.

"Whilst we strongly commend the initiative to open Janadhipathi Mw. – even as a thoroughfare – we would also like to make a humble plea to the authorities to remove the guard fence and permit full access to the buildings via our main entrance to the property," he said.

Gunawardena made the further point that the opening up of the roadway itself will be a likely catalyst enhancing valuations of the Equity Two buildings located in the area.

Equity One has a stated capital of Rs. 1.085 bn., a group capital reserve of Rs. 13.2 mn. and group revenue reserves of Rs. 1.14 bn. At company level, the capital reserves stood at Rs. 13.2 mn. and revenue reserves at Rs. 705.1 mn.

Total assets of Equity One stood at Rs. 2.06 bn. and total liabilities at Rs. 253.6 mn. At group level, total assets were Rs. 2.78 bn. and total liabilities Rs. 448.3 mn.

Carson Cumberbatch with 96.27% of the company is the dominant shareholder with all other shareholders owning less than one per cent individually.

The Equity One share closed at Rs. 42 on March 31st, 2015 trading between a high Rs. 56.90 and Rs. 27 during the year. This compared to a closing price of Rs. 27.60 a year earlier and a trading range of Rs. 35.70 – Rs. 25.40.

The directors of the company are Messrs. D C R Gunawardena ( Chairman), S Nagendra, K C N Fernando, E H Wijenaike, A P Weeratunge, S Mahendrarajah, and P D D Fernando.

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