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Useful lessons on host of socio-economic issues from
most diversified Lankan multinational
The
2004/5 Annual Report of Hayleys Ltd., by far the most
diversified and manufacturing and agriculture rich blue
chip, is a 'must read' for the Government, trade unions,
corporate sector as well as civil society.With its core
businesses effectively mirroring key economic sectors of
the country, frank observations and constructive
criticism from Hayleys certainly warrant objective and
serious consideration from all concerned.
Hayleys is one of the largest multinationals accounting
for 3.2% of export income, 1% of the GDP and 2.4% of
domestic value addition. In 2004/5, Hayleys Group
invested Rs. 2.6 billion in new businesses and
expansion. The Group has 36,000 employees on its
payroll, especially in rural areas whilst indirectly
employing many more. In 2004/5, Hayleys net profit was
Rs. 774.3 million from Rs. 659.3 million in the previous
year. Pre-tax profit was Rs. 1.9 billion as opposed to
Rs. 1.4 billion while gross turnover was Rs. 19.4
billion up from Rs. 15.5 billion in 2003/4.
Its
Chairman Rajan Yatawara's review in the Annual Report
serves as useful lessons for politicians and other
stakeholders on fiscal and government policy such as
exchange rate, tariffs, especially on promotion of
exports, labour reforms and productivity, manufacturing,
value added agriculture, ports and shipping,
infrastructure, private sector as well as corporate
social responsibility.
Perhaps putting Hayleys philosophy and comments in the
right context and spirit, the blue chip says that
"business is primarily about making profit - without it,
stakeholders' interests cannot be served. Profit without
compromise on integrity and ethics is the 'quintessence
of business'." Quite understandably Hayleys 2004/5
Annual Report is titled "Quintessence."
Fiscal policy, Exchange Rate, Productivity and Exports
Mr.
Yatawara said that he and his predecessor (Sunil Mendis,
who is now the Central Bank Governor), always laboured
the point that self sufficiency in food through
contemporary technology in more productive agriculture
and competitively high value adding export industry are
vital for building a sound economy. "Towards this end
some economists have opined even a devalued 'export
favouring' Rupee or an incentive in lieu is justifiable.
Many countries adopting such policies pass WTO muster,"
he added.
Hayleys chief lamented that this has not happened in Sri
Lanka for the past ten years. 'Worse, for long periods
the rupee is held almost static for fear of exacerbating
inflation," he said.
It
was pointed out that trader exporters are hardly exposed
to inflation or pass down the increasing costs to
suppliers. The highest value adding producers, whether
for export or import substitution, have had to absorb
most of the inflation in costs daily, until a belated
correction is made. The losses incurred are
irrecoverable and costs have shot past the differential,
Mr. Yatawara opined. He said that most collective
agreements and salaries are revised every two years
notwithstanding the wages themselves being indexed to
consumer prices. "How does a value adding exporter
survive with fixed rupee income?," Hayleys chief queries
in his review . "It matters not what currency one's
export sales are in, if competition is priced lower that
is where the business goes," he said adding more
importantly that "productivity improvements have
limits."
It
was also opined that exchange rates, inflation and
interest rates have to move in sympathy with one another
all the time.
Noting that it was a universal practice that all
production for exports exempt from or rebated on upfront
taxes on inputs, Mr. Yatawara criticized that this
principle was violated by the recent classification of
sales of tea by plantations as VAT-exempt making set-off
on input VAT impossible. "As exports account for 95% of
production and tea is the lowest cost input into a cup
of tea, protection of the domestic tea drinker cannot be
adduced as the reason," he said.
High
tariffs on consumer durables
With
regard to restoration of high tariffs on import of
consumer durables in 2004 Mr. Yatawara said that such a
move at a time when the economy and currency were deemed
to be weak, has marginalized those entities that bring
white goods in the "white" or the right way. "Thus there
is protection for domestic assemblers of these goods
providing employment for only a few, whilst also
promoting smuggling," he added.
Penal
duties on raw material export
Hayleys chief also said that exporters of significant
value-added goods compete on equal footing for limited
Sri Lankan raw material, with converters to finished
goods in the importing countries who benefit from
captive domestic markets supported by indirect tariff
barriers. "There should be penal duties on export of raw
materials if there is surplus capacity for conversion to
finished goods in Sri Lanka," he suggested.
Obstructive politicians, bureaucracy and Agriculture
In
his review, Hayleys Chairman has also said that the
Company's quest to upgrade agro technology through
collaborative research work with Indian and Australian
laboratories sometimes meets with obstructive
bureaucracy at this end. "Consistency in policy on the
private sector's role in agricultural input activity
must be established, as productive time is lost
grappling with mixed signals from different quarters of
the one government - in particular the inequity of
allocating quotas for fertilizer imports based on
historical figures and a subsidy not indexed to exchange
rates and world prices," pointed out Mr. Yatawara.
Despite privatization of plantations and the companies
investing their own capital to restore a collapsed
industry to profitability, continuing interference by
local authorities and politicians in labour issues and
disputes, imposing wage hikes or re-possession of lands,
is causing frustration amongst management. There is an
exodus of experienced managers as a result, he added.
Labour reforms
The
terminal compensation for employees at any level,
recently announced and the attempt to mandate salary
increases to all notwithstanding increments given
already or collective agreements in force, will surely
frighten away prospective investors. Not all can operate
exclusively on an 'outsourcing' basis. Banks will balk
if compensation is afforded priority in use of proceeds
when assets are liquidated. Neighbouring countries with
more liberal market-oriented laws will benefit. If
political considerations must also be taken into
account, it is prudent to count the votes likely lost
due to the absence of such legislation, versus those
possibly gained in a vibrantly growing economy, with a
abundance of employment opportunities for a far greater
number, created by an investor friendly policy. In any
even like fiscal levies, it is the larger organisations
and responsible private sector that will comply,
creating an unequal playing field, weighted in favour of
businesses that don't. The need to improve productivity
amongst white collar employees was also stressed.
Ports
and Shipping
The
national importance of developing the port of Colombo
for both economic and strategic reasons was also
highlighted. "As with electricity and oil enough has
been written on these subjects that I need not expand,"
Mr. Yatawara said adding that Hayleys has probably the
second largest export volume from Sri Lanka at around
7,000 TEUs per year. "Ironically the volume to value
ratios are high by the very nature of most products. The
freight cost in some of these equals the value of the
product in the container. The downstream employment
created from metropolis to hinterland is significant,"
he added.
He
said that the competitive freight rates and space
availability that have prevailed so far, enabling
exports to be sustained are based on huge volumes of
transshipment cargo to and from India via Colombo. If
this is in any way adversely affected, many of our
products would be uncompetitive on account of freight,
and these industries would only be of historical
interest, as markets would permanently shift to
alternative products," Hayleys chief said adding that
shipping lines cannot easily be enticed to return once
they stop calling in Colombo.
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