Tourism Earnings Over Rs. 2.2 Billion

The occupancy and earnings in Sri Lanka’s tourism sector are increasing and from around US$ 500,000 earnings in foreign exchange in 2010, it has today risen to over US$ 2.2 billion.

According to veterans in the industry, today it has climbed to the No. 3 spot, preceded only by the Apparel industry and Worker Remittances. Unfortunately there are negative aspects where Sri Lankan woman employed in the Middle East are concerned, but the Sri Lanka tourism attracts this much needed forex directly at the point of consumption in the country, with a very high value added component.

Tourism as an industry came into the limelight in early 1960s. Thereafter, all governments places emphasis on the tourism industry. However, till recently, there had been no proper steady development and follow up. According to the veterans in the industry, a stable government is of utmost importance for the development of the industry and it is in existence today.

Tourism is the world’s largest and fastest growing industry, with the year 2014 recording over 1 billion tourists, generating US$ 1.2 trillion revenue and accounting for almost 10% of the global GDP.

Also one in 11 jobs worldwide is tourism related. Despite certain setbacks and disasters, tourism has continued to grow at about 4-5% year on year, with Asia growing the fastest at around 6%.

Sri Lanka, of course, could not maintain such rates on a regular basis due to the almost three-decade long conflict which ended a few years ago. It should also be stressed that despite the major setback, Sri Lanka tourism managed to keep the arrival figures at or over 450,000, displaying the resilience and determination of the country’s tourism industry professionals.

For centuries, the Emerald Isle, Ceylon or Sri Lanka, has been well known for its hospitality, and the island nation is also reputed for its natural wonders both in land and sea. It’s the only country in the world were the largest animal and mammals exist. Within hours of watching Elephants in the wilds, it takes only one or two hours to see blue whales, the largest mammals on earth in the ocean.

According to the veterans, the real development that has actually taken place in the tourism industry has been spearheaded by the private sector. (RS)
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FCID Commences Probe On Krrish Deal

By Mandana Ismail Abeywickrema

The police Financial Crimes Investigations Department (FCID) has commenced an investigation into the controversial Krrish Transworks Colombo (Pvt) Limited project that was initiated during the former Mahinda Rajapaksa regime. Several VVIPs of the former regime are hence expected to be interrogated by the FCID in the next few weeks.

The US$ 650 million Krrish square mixed development project in Colombo was aimed at constructing four high-rise buildings containing a luxury hotel, apartments, malls and office space covering a land space of 4.3-acres on a 99-year lease from the Urban Development Authority (UDA).

However, the Krrish project was marred with controversy and allegations made of secret payoffs to several prominent figures of the former regime including a few VVIPs in order to expedite the relevant approvals. The issue of the alleged payoff resulted in a controversy over the final installment the Krrish Group was due to pay the UDA to complete the land lease transaction. The project has been stalled since March 2013.

It was reported at the time that Krrish had deposited the amount equivalent to the final installment for the Krrish Transworks Colombo (Pvt) Limited project in a private bank in Singapore as a payoff to a VVIP. The final installment that was due to the UDA by Krrish amounted to around Rs. 450 million.

The names of several powerful members of the former regime were highlighted in the controversial Krrish project while drafting of the agreement was undertaken by a legal firm that was owned by the son of a VVIP of the former regime.

The Sunday Leader learns that the relevant files have gone missing from the respective legal firm.

Krrish has so far made a payment of Rs 4.4 billion while the total due to the UDA is Rs 4.995 billion. The final payment is yet be made to close the land lease deal.

Be that as it may, officials from India’s Krrish Group visited the country early this year to discuss the possibility of resuming the stalled project under the new government.

Accordingly, a discussion was held between the Krrish officials and the Chairman of the Board of Investment (BoI), Upul Jayasuriya. The BoI during the discussion had requested Krrish to pay the dues and continue with the project. The Krrish Group however is yet to respond positively to the request.

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Port City will add green area nine times as big as Galle Face to the city

New Environmental Impact Assessment outlines details

The Colombo Port City will add a new green area of approximately 45 ha, nine times the size of the Galle Face Green which is five ha. in extent, Chin Harbour Engineering Co. Ltd., the developer said last week.

CHEC said this green area which will be accessible to the general public will comprise "a hierarchy of public and private landscape typologies offering habitat provision, urban cooling and helping Colombo to proactively prepare for climate change."

The developer explained that the project’s park strategy is to provide different types of parks and places for recreations for people living in Port city and visitors. The Central Park works as a community park with a wide range of recreation facilities, such as areas for sport, an informal lawn area, play area, ornamental garden, woodland and naturalistic area for relaxation and study.

"There will be close proximity to water via jetties as well as raised views over the park from adjacent bridges and the organically formed boardwalks that transverse the water for the public to enjoy."

It assured that the Project Company will take required action to maintain good visual appearance of the undeveloped land portion till such time developments commence upon the land plots being sold/leased to third party developers.

The new Environmental Impact Assessment (EIA) plan presented by the Government for the Colombo Port City shows an increased public area, the developer revealed last week.

"The area allocated for public usage according their originally negotiated position of September 2014 was 63ha but now it has been increased to 96ha, which has moved the public land area from 27% of the total land extent to 36%,"a CHEC news release said.

"The public areas will follow an open space concept consisting of a network of public parks and open water, large scale and small?scale streets, public squares and small plazas. Open space provision is based on land use, demographics and maximum walking distances to various facilities creating a hierarchy of open spaces that has the benefits of enhancing the physical character of an area; improving physical and social inclusion, including accessibility; and providing connected routes between places for walking and cycling, and safer routes to schools."

According to the Supplementary Environmental Impact Assessment (SEIA) Report of the Colombo Port City (CPC) Development Project, the Presidential Secretariat will command the most prominent views of the CPC. The front of the Secretariat building will have an uninterrupted view of the Grand Ceremonial Boulevard of Colombo Port City, the developer said.

The sketches of the Master Plan also indicate that the view of the sea from the Galle Face Green will not be obstructed. The plan indicates that the Presidential Secretariat building will be enhanced with an extended public green space (North of the lotus sculpture) and uninterrupted views of the Marina and water to the South. The Presidential Secretariat (and its immediate vicinity) will therefore become an aesthetic center?piece of the Colombo Business District (CBD) and a focal point where the old city meets the new seamlessly, they said.

Colombo Port City’s Master Plan is made up of five distinctive urban areas, namely the Marina District, Port City CBD, International District, Park Living District, and the Living Island. Each of these urban areas is unique, yet complementary and integral part of the overall Master Plan, and all have public spaces incorporated into their design.The local parks provided in the linear parks and other green areas should offer a wide range of facilities for play and relaxation, while pocket parks are provided on private lands, the release explained.

The Marina is a leisure destination for both office workers in CBD and residents from the whole of Colombo. Restaurants, entertainment and shopping are located in small?scale low? rise buildings on the pier, it explained.

The breakwater for the reclamation and the marina, which is visible from Galle Face, has been designed keeping in mind safety and aesthetics. With the offshore island breakwater approach, a pool of relative calm water of around 300m length will be formed between the breakwater and the beach area of the landfill, which would facilitate swimming and water sports activities currently not possible in the Colombo area, the release said.

Port City CBD is a natural extension of the already-existing CBD in the old city neighbouring the site. The park and the layout with pavilions and many pedestrian connections help integrate the old city and the new Port City. In order to preserve the aesthetic appeal, the master plan indicates that taller buildings will be located along the Boulevards and decrease in height towards the water areas of the Port City. Therefore, the report, says no development will block significant views to the waterfront and Presidential Secretariat, it explained.

International District will include the public places much needed by neighbouring office and university areas, such as small parks and squares. Along the edge towards the existing wall a buffer park will be created. As office area, this district will become a start?up incubator.

The Park Living area is a residential area concentrated around "The Central Park" of 22 ha and the northern part of a Linear Park. The housing volumes may stretch out into the parks to enhance the feeling of living in a green open space, and not merely beside one.

The Living Island District is an urban residential area with close proximity to the sea, beach, canal and central park. Although with a quiet character, the main boulevard offers close by shops, restaurants and services for the residents.

The park strategy is to provide different types of parks and places for recreations for people living in Port city and visitors. The Central Park works as a community park with a wide range of recreation facilities, such as areas for sport, an informal lawn area, play area, ornamental garden, woodland and naturalistic area for relaxation and study. There will be close proximity to water via jetties as well as raised views over the park from adjacent bridges and the organically formed boardwalks that transverse the water for the public to enjoy.

The Project Company will take required action to maintain good visual appearance of the undeveloped land portion till such time developments commence upon the land plots being sold/leased to third party developers.

Upon completion of the reclamation and ground improvement of the bare land, all roads (including main ring roads), landscaping, the Central Park and other green areas and utilities required for the initial stage of marketing will be completed.

There will be Development Control Regulations established collaboratively with the UDA for all investors who intend to undertake developments within CPC. This would include guidelines on maintenance of undeveloped?land pending the commencement of development. Also, pending construction, the undeveloped areas of Port City may be maintained as green belts with landscaping, trees, green walls, hoarding or temporary structures and facilities appropriately in order to maintain visual aesthetic, public appeal and adaptability.
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Capital Alliance Finance PLC now Colombo Trust Finance PLC

Capital Alliance Finance PLC has changed its name to Colombo Trust Finance PLC with all necessary regulatory approvals obtained, the company announced in a stock exchange filing last week.

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New oil price formula soon; revision every three months

Minister says petrol price will not be reduced

Despite tumbling world oil prices and a tax of Rs. 65 a litre on petrol, the Government has decided not to reduce the local selling price of petrol. Instead, plans are afoot to bring in a new fuel pricing formula where prices will adjust in line with world market trends.

The new pricing mechanism is expected to be presented to Cabinet on January 6 by Petroleum Minister Chandima Weerakkody. The minister did not elaborate on the details of how the new pricing mechanism is to work.

World oil prices this week fell to a record low of US$ 37 per barrel from $85 in October 2014. Local prices have been unchanged since January this year, though India has lowered fuel prices.

In the President’s election manifesto he had promised a “suitable pricing formula” where the people “will get the benefit when world oil and coal prices fall”. Asked why local prices have not been reduced to reflect crumbling world prices, the minister told the Sunday Times by phone while on an overseas visit, that there was no reason to do so as fuel prices were reduced sharply on January 21, this year.

Other officials say that even though the CPC is making profits on the sale of petrol and diesel (nearly Rs. 30 per litre), its accumulated losses have risen to Rs. 244 billion now from Rs. 238 billion at the end of 2014, compelling the state fuel importer to retain current prices.

They said the CPC is also not getting the full benefit of reduced crude oil prices as only refined fuel is being imported since the Sapugaskanda refinery is not operating due to a long breakdown. “Yes there is a benefit from reduced refined oil imports but not as much as raw crude imports,” one official said.

According to Treasury data, the CPC sells a litre of petrol at Rs. 117 while it costs the corporation Rs. 113.39 inclusive of a tax of Rs. 64.40 a litre. Diesel costs the corporation Rs. 79.88 a litre (inclusive of a tax of Rs. 28.02 a litre) while the selling price is Rs. 95 a litre. In both cases, there is a small profit in addition to the tax revenue to the Government.Officials conceded that the Government instead of reducing prices and passing on the benefits to consumers, sees this as an opportunity to collect more tax revenue from fuel sales and recoup past losses.

Crude prices have been mixed in the past year. It was $85 per barrel in October 2014, $75 (November 2014), $59 (December), then further slumped to $44 (January 2015) but rose to $54 (February), $62 (May) and then began easing to $45 (October).

The minister said the new formula has been devised following extensive discussions with the CPC, Lanka Indian Oil Company (LIOC) and other stakeholders, including the Finance Ministry.

“The transparent fuel pricing formula will be a regulated state-run type of system that would benefit both the consumer and the utility. It would change prices every three months based on global prices,” Mr. Weerakkody disclosed.

He noted that the outstanding debt from state institutions and power plants to the CPC was running up to billions of rupees and it has affected the profitability of the corporation.

“By the end of May this year, the public sector owed CPC Rs. 30.4 billion,” he said adding that the corporation was being maintained at breakeven due to cost cutting. With the formula, consumers would be privy to a breakdown of various cost components such as the cost of product in the international market, freight and insurance costs, government taxes and marketing margin, he pointed out.

Welcoming the Government’s move, LIOC Managing Director Shyam Bohra noted that “the formula should be such that it provides reasonable margins to the oil companies to invest in energy-related infrastructure, including storage and efficient distribution of petroleum products.”

He said that even though fuel prices had dropped sharply, the LIOC is losing Rs. 15 to Rs.16 a litre of petrol by selling it at the current fixed price of the Government, since it was selling stocks that were purchased at higher-than-current-prices.

“It would help everyone if the Government could evolve a long-term pricing formula which will provide for adjustment of duties and levies and revision in prices from time to time based on the world market prices, with provisions to protect consumers wherever required,” he said.

Each year, Sri Lanka imports nearly 30 million barrels of oil at a cost of some $2.2 billion.

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Import duty cut doesn’t affect RCL – report

Royal Ceramics Lanka PLC (RCL) posted a 37.5 per cent year on year (YoY) growth in Q2 FY 16 bottom line, resulting in a recurring Earnings Per Share (EPS) of Rs. 6, a Bartleet Religare report said. “The growth in tiles, sanitary ware and aluminum sector volumes, coupled with the group’s cost saving initiatives, aided in a 2 per cent increase in earnings before interest, taxes, depreciation, and amortization (EBIT) margin to 19 per cent and 6 per ent increase in Gross Profit Margin to 37.6 per cent. Its topline grew 8.2 per cent YoY to Rs. 5.91 billion.”

According to the report, RCL’s Market Price of the Share (MPS) has dropped 9 per cent post-budget on panic selling as concerns over a reduction in import duty and removal of tile and sanitary ware from the BOI negative list was signaled. “The total import duty has risen by 5 per cent and the removal from the negative list would barely affect RCL volumes. The reduction in corporate tax from 28 per cent to 15 per cent would boost RCL’s net earnings from FY 2017E onwards.”

The company is also geared to supply to the mid to long term demand in the local construction industry, with several capacity expansions taking place. The company has already signed up for several construction projects (Hotels and condominiums) in the pipeline. RCL entered into a joint venture this month with Pakistan’s leading premium brands retailer SFnZ & Co. Ltd to expand into Pakistan “This move would also create a market for RCL’s excess stock, during times of a slowdown in domestic demand,” the report said.

“The proposed reduction in corporate tax from 28 per cent to 15 per cent would bode well for RCL and we estimate a saving of Rs. 4000 million to FY 2017E bottom line.” The industry continued to be protected by the government with total import duty increasing further by 5 per cent to 85 per cent. The import cess remained at 35 per cent while general duty, NBT and PAL in-creased further by 2 per cent each and 2.5 per cent respectively, the report said. According to industry sources, the local tile market has seen a commendable growth of 10 per cent so far this year, so Lanka Floor tiles PLC, also under the some group may shed some market share due to competition, it added.

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SEC’s recent actions praised by good governance activist

Good governance activist and stockmarket investor K.C.Vignarajah has praised the Securities and Exchange Commission (SEC) for taking steps to create investor interest and confidence, once again, in Colombo’s stock market.In a letter to SEC Chairman Tilak Karunaratne, he said the criticism that the wrongdoers and the mafia had got around the powers that be, to use unethical and unlawful, escape routes from adhering to public policy for public good, created by the earlier corrupt regime is now muted.

“Appreciation of the SEC has begun on a broad scale,” he said, praising Mr. Karunaratne and other officials.Mr. Vignarajah, who has been a strong campaigner for accountability and transparency in the market and considered a ‘pain’ by many conglomerates where he has sizable shares and persistently raises issues at AGM’s and board-level meetings, said it was clear that inspite of many obstacles and insufficient supporting staff, (with the necessary motivation and capacity), the SEC has succeeded in taking firm action in many areas of stock market reform.

“The collection of evidence and channeling them to the relevant authorities to investigate and apprehend those who caused much loss to shareholders and harm to the country’s image is most commendable. The Financial Crimes Investigation Division (FCID) taking action against former SEC top officials has restored faith, that funds of investors and the public are being carefully monitored,” the letter said.He said investors were also pleased that steps have been taken to strengthen the rules and regulations to prevent wrongdoing to, and oppression of, Independent Minority shareholders(IMS); to expedite the process of compensation of victims while recovering the loot from the errant Controlling Interest and Related Parties (CI&RP) and punishing the wrongdoers administratively/civil action/criminal prosecution process.

“These actions are most commendable considering political compulsions as a detraction. However, we believe the leadership of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe will support you fully as they have the will to lead a good team to usher in justice, fairplay, prosperity peace and harmony for all in our country,” he told Mr. Karunaratne in the letter.”This determination will certainly help you in your brave efforts to bring in protection for ‘witnesses and whistleblowers’ who do their duty to safeguard the interests of honest investors and the economy of our country.”Referring to the de-listing regulations, he said strong representations have been made against de-listing. He said independent shareholders should have rights to nominate independent directors, auditors and to good governance, transparency and accountability.

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November cautious month for trader

The month of November saw the UNP-led coalition government announcing its maiden budget for the year 2016 with market activities remaining low during the first half of the month as investors were seen adopting a cautious approach prior to the budget, anaysts said, analysing events in the market in the past month. Despite the budget having some sound proposals to enhance investor confidence, the capital market did not react as expected, according to a Bartleet Religare report. “This resulted in the Colombo bourse closing at a near seven and a half month low by the end of November. The benchmark ASPI lost a staggering 132.91 points month on month (MoM) to close at 6,909.15 points while S&P SL20 followed suit to depreciate 145.31 points MoM to close at 3,657.69 points.” Banking sector stocks were the most hit during the month. Investors were seen moving away from banking sector counter following the unpleasant treatment received from the 2016 budget proposal, the report added.

In the healthcare sector counter, Lanka Hospitals (which is controlled by state-owned Sri Lanka Insurance) saw reduced interest during the month due to a government decision to divest from non-strategic investments in the CSE.”Activity was limited during the month with total volumes contracting by 24 per cent MoM to 491 million. Retail and institutional participation remained relatively low throughout the month.” The market posted a turnover of Rs. 13 billion, 35 per cent lower MoM with the highest contribution coming from JKH with a contribution of 25 per cent. The stock closed Rs. 5.30 higher MoM at Rs. 179.90.The report added that foreign investors aligned on to the selling side for the second consecutive month amid an expectation of a Federal Reserve rate hike in December. The cumulative net foreign outflow for the month was recorded at Rs. 71 million.

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Sri Lanka’s motor tax policies seriously questioned

The vehicle registration momentum continued into November due to the pre-November 20 budget surge and relaxation of loan-to-value (LTV) rule, a JB Stockbrokers research report said. “Total motor cars registrations recorded 10,054 units in November slightly down from 10,349 units in October, but significantly higher than 2,419 units recorded 12 months ago,” it said, adding that brand new car registrations recorded 6,682 units in November which is the second highest number on record slightly higher than 6,225 units recorded in October, but lower than the all-time record set in September of 9,427 units.

Running up to the budget, the Customs changed the basis of valuation on which duties would be charged, for example for a Nissan Leaf it is now around Rs. 4.35 million whilst previously the declared value was around Rs. 3.2 million which was due to a combination of under invoicing and lower values since they are pre-owned vehicles, it said. “How would you optimally tax vehicles? For the last 50 years no government has figured out how to optimally tax imported vehicles. The policy has yo-yoed depending on whether the country was facing a balance of payment crisis or the Treasury has a revenue shortfall or reacting to excess traffic on the road. Due to policy unpredictability the market places has seen idiosyncratic and discretionary behaviour,” it said, adding that when duties are reduced there is a surge of demand since consumers believe it will be short-lived; thus they don’t want to miss out.

“This invariably creates a spike in government revenues but places a strain on the balance of payments,” the report said, noting that periodically the permits with restrictions are issued to various interest groups – these in turn are flipped in the market defeating the rationale of issuing permits. Since permits come with restrictions, the supply side clamours to procure models that come within the defined threshold – the winners are invariably the ones who can genuinely match a suitable model to fall within the stated criteria or more likely the players who game the system by mastering the art of under invoicing, it pointed out.

Rationale
The report said that the “rate of duty is set depending on the size of the engine – one does not understand the rationale why it should be the criteria”. If the thought process is that larger engines equate to large size vehicles that doesn’t always hold for a BMW 520 and Mercedes Benz E200 as both engines are below 2L and attract the same duty level as a Toyota Corolla that has an engine size of 1.5, the report said. “Further, why should the rate of duty be different between a car with an engine size of 2L and 2.2L? Perhaps a progressive methodology should be used. There is a wide range of duties – one is not sure on what basis they have been decided.”

Personal vehicles serve a functional need to allow people to be economically active – go to work, trade, generate income by running a taxi service, etc, the report said, adding that the best evidence of its utility value is that people are willing to lease vehicles even though they are paying an interest rate of 24-28 per cent for two wheelers, 18-22 per cent for three wheelers, 14-16 per cent for used cars, etc. If vehicles become unaffordable economic activity will be affected. For the burgeoning middle class owning a personal vehicle has high aspirational value – it’s nice to have a Maruti Alto at home that is infrequently used, it also signals to the neighbours that the household is prosperous, the report said.

At the premium end of the market there is a snobbish value to owning a prestige brand. Thus there is a level of inelasticity for cars – the challenge is to set the taxes at a level that maintains demand – if set too high demand will slump due to unaffordability or customers buying an alternative with an equal utility – e.g. option for a duty free speed boat or yacht instead of a Mercedes Benz, it said.The research report said that congestion on the road should (not) be addressed via higher taxes on vehicles. Congestion is primarily an urban phenomenon and more pronounced at specific times of the day – thus congestion pricing has to be implemented in the cities to dissuade users from using their cars especially during peak times. “Penalising a car owner in Hambantota a town that has eight lane roads due to congestion in Colombo does not seem to be fair. We could be a pioneer by implementing dynamic congestion pricing using the mobile phone ecosystem – triangulate a vehicle’s location and price accordingly,” it emphasised.

It added that the level of duty should be based on value of the vehicle (not) on engine size or fuel type and it must be applied in progressive slab. “Offering permits to public servants as a remedy for below market wages is not tenable. Thus the recent budget announcement to pay a cash bonus in lieu of the permit was the right policy.”The report said that the cost of ownership of a vehicle has gone up considerably (rupee has depreciated by 7 per cent over the last three months, interest rates on leases are edging up) and the rate of duty has gone up by 10 per cent for the most popular hybrid vehicles and the customs valuations have been significantly revised upwards. “Its most likely that demand will drop dramatically due to lower affordability emanating from the depreciation of the currency, higher interest rates, lower LTVs and higher duties – tax revenues would also drop significantly requiring the Treasury to rethink its strategy,” the report added.

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Listing SOEs will be a game changer next year

By Duruthu Edirimuni Chandrasekera

CSE signals confusing 2016

The signals for Sri Lanka’s stock market for the next quarter in 2016 range from confusing to hopeful, according to industry analysts.

They say that while the famous capital market investor George Soros, slated to be in Sri Lanka in early January, and the setting up of the Megapolis in two months will augur well for the capital market, the possible currency devaluation along with foreign / High Net Worth Individuals (HNWI) boycotting the Colombo Stock Exchange (CSE) will spell negativity.

The exchange rate is under pressure due to a strong dollar and capital outflows and the Central Bank (CB) is likely to prop the rates up, which will see outflows from the CSE, according to stockbrokers. However, according to some, the ‘real game changer’ will be listing the State Owned Enterprises (SOEs) as promised in the recent budget. It was announced that the government is keen to streamline its portfolio of investments and will therefore exit partially or fully from those non-strategic investments in Lanka Hospitals, Hotel Developers PLC (Colombo Hilton), Hyatt Residencies, Waters Edge, Grand Oriental Hotel, Ceylinco Hospital and Mobitel by listing such investments in the CSE during 2016.

There will be a paradigm shift if the SOEs are listed,” an analyst said, noting that it will be like what Dialog did to the Colombo Stock Exchange (CSE), 10 years ago. The Colombo bourse’s largest initial public offering (IPO) at the time, Dialog Telekom was pursued by over 40 leading investment banks and fund managers from around the world.The analyst added that SOEs will do a similar thing to the CSE. “The volumes will be low without foreign participation but if the sentiment is right, I think the market can really move up from domestic activity alone with SOEs coming in.

He said that early next year the CSE will slump before it goes up, which is to be expected with the current trend. If SOEs are listed, it will certainly be a boost to the market.Another analyst pointed out that the HNWI like the EPF have stopped buying and the latter has in fact sold over the past two months, which has dropped the indices. “Over the past two months the EPF has sold some 5 million John Keells Holdings (JKH) shares. For a long term (outlook) pension fund this isn’t so good.”He said that if this is stopped or at least curtailed, traders will start eyeing the CSE more positively.

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