Plantation agriculture needs consistency in growth
The plantation sector comprising Tea, Rubber, Coconut and Oil palm, a vital factor in the economy of Sri Lanka, is known to be influenced by many extraneous factors such as global economy, weather, demand/supply, key players, workforce agitation, cost of inputs, crude oil price etc over most of which the plantation management has very little control. Yet, the industry continued it expansion in 2006 though inconsistently, with positive growth rates in rubber, coconut and palm oil (see box 1). Fluctuating weather pattern had been a major contributory factor for the inconsistency in 2006. Water, whether too little or too much, is a constraint to crop production.
Tea, known to be very sensitive to moisture stress recorded a marginal decline in production by around 1.4 percent to reach 164.5 mn kg in the first half of 2006, and by the end of the year, a decline of 2.0 percent achieving a total production of 310.8 mn kg, which is a three year low and marginally below the record level of 317 Mn kg achieved in 2005.
Tea industry, however enjoyed its best ever year in terms of record export earnings and volume, being the largest exporter in 2006 though crop production was down marginally. Exports amounting to 327.3 million kilos in 2006 was the highest ever and reflect a 6% or 18.7 million kilos increase over 2005 level. Export earnings too were a record with Rs. 91.6 billion, up by over Rs. 10 billion from Rs. 81.4 billion in 2005.
Tea prices also increased significantly due to a shortfall in global supply with drop in production reported by key players, Kenya and India. The average FOB value of exports was up by Rs. 22.35 pe kilo to Rs. 279.92, which showed a further gain of Rs. 40.40 per kg or 14.7% fetching Rs. 314.24 per kg in January 2007.
Although tea production is projected to increase by around 2.2 percent to 322 million kilos in 2007, tea exports and production started with a negative performance, exports in January 2007 down by 3.4 million kilos and tea production down by about 14.4 percent.
However, one of the challenges the industry presently faces is the slow rate of recovery after the plantation workers trade union agitation, which commenced in November last year with a “go slow”. Tea being a perennial tree crop with long recovery period, disruption of harvesting has had its adverse effects on the physiological performance of the plants and it will be sometime before normalcy returns and the tea industry stabilizes. Closely connected with the problem of poor recovery is the increasing concern over frequent droughts especially in the low and mid elevations and Uva. This is of particular relevance to young fields where the economic damage could be devastating. Despite being a perennial field problem, very little has been done to alleviate this. Several avenues are open for exploration notably, Development of, drought resistant clones, field technologies to minimize moisture loss from soil/plants, low-cost sprinklers, sub-soil and drip irrigation systems, technologies for enhanced recovery after drought etc.
The current short fall in volumes available for sale therefore tends to create an exaggerated market boom which is very volatile. The impact of El-Nino phenomenon which is on, although mild, is expected to continue until mid 2007 is also of concern. The “boom and bust” cycles and the “over supply and under supply” cycles in plantation crop market will also continue. Also, the COP in Sri Lanka continues to be higher than its competitors with the value of around Rs. 195 /- per kilo as against Rs. 60/- per kilo in Vietnam. Is not the industry concerned about this ?
Worker out-migration, another challenge, is continuing to cause a serious man power crisis in plantations, which could be threatening the very existence of the plantation sector. Gone are the days of smooth influx of one generation automatically moving to fill vacancies to take over job functions from elders in a close-shop context of self containment. Plantations experience about 10% to 20% reduction in the work force, annually.A further catastrophe: planters leaving the profession. With out-migration of labour and departing planters, the plantation industry will continue to be in crisis. This, therefore, deserves urgent and careful attention before it attains a point of no-return.
The world bank in a recent report has identified some deficiencies in the present plantation system in Sri Lanka, although the industry does not fully endorse the WB’s views. The Regional Plantation Companies ( RPC) manage around 30 to 35% of the tea extent and the balance area, 65 to 70% are with tea smallholders who it is believed are equally affected by some of the deficiencies identified in such studies.
Although it is not the intention of this article to get into a dispute over this, poverty is multidimensional in nature and is a national issue and therefore poverty in plantations should not be taken in isolation. Nevertheless, income-poverty in plantations may have been overestimated as the sample survey by questionnaire has its’ flaws notably when seeking information on gross income from plantation workers who are normally suspicious of such surveys, The state ( GOSL) has its obligation and should therefore provide support to alleviate at least some of the identified deficiencies which may be beyond the scope of plantation management. The private sector is always motivated by higher margins of profit and if this is not forthcoming they tend to lose interest in such subjects. The evils of the present plantation system has its origin in the colonial initiatives. Mainstreaming the sector would therefore be the long term solution.
NR production, encouraged by the continuous high prices of NR and favourable weather continues to show spectacular growth. It grew by around 12 percent in the first quarter and by 7.9 percent in the first half of 2006.
But, eventually achieved an annual growth of 4.6 percent, recording a total production of 109 mn kg and maintaining its 9th position in global rubber production. The drop in production seen in the second half of the year is attributable to unfavourable weather experienced in the last quarter of the year, despite the use of rain guarding devices by some growers. The effectiveness of such currently available devices is therefore still debatable. Loss in crop during the peak production period due to fluctuating weather pattern seems to be the major contributory factor for domestic rubber market volatility, besides work force agitation, global market / economy etc.
Domestic rubber market continued to be volatile following the same trend seen in the global scenario, although it continued to achieve spectacular growth over the last few years ( see box 02). Crepe rubber also showed similar trend, with prices remaining around Rs. 250/- .
Domestic NR output is forecasted to increase by 5.5 percent to reach a total production of 115 mn kg in 2007, which portably will elevate Sri Lanka to the 8th position in Global rubber production. NR prices are also expected to remain in the region of Rs. 225/- to 275/- and COP in the region of Rs. 85/- to 95/- per kilo with profits continuing surge to dizzy highs. .
There is therefore every reason to believe that the domestic rubber industry’s spectacular growth will continue in 2007 and beyond, although both global and domestic NR markets will also continue to remain volatile. Disruption of harvesting due to adverse weather conditions and the shortage of skilled rubber tappers will continue to remain a major problem.
Coconut production which is strongly influenced by weather (moisture) and material input notably fertilizers, increased by 9.6 percent to 1,287.3 million nuts in the first half of 2006. Lagged effect of favourable weather in 2005, and continued use of fetilizers in the region of 33,000 metric tonnes by the entire coconut industry may have been the major some contributory factors. Coconut mite infestation which had been a set-back for the growth of this industry, continues to be of concern. Production increased by around 10 percent to reach 2,770 million nuts by end of 2006 and it is forecasted to increase by a further 8.3 percent to reach around 3,000 million nuts in 2007.
Oil palm, a perennial tree crop that is native to Africa continues to be dominated by Indonesia, Malaysia and Nigeria, with their out put accounting for more than 80% of global production. Exports too continue to follow this pattern with buoyant demand in Asia, notably, India and China that is linked to growing economy and population.
A second palm oil processing plant has started operation in Sri Lanka as a joint venture between three Regional Plantation Companies. With new players entering into oil palm business, additionally more than 3000 hectares of land in the South-Western region of the country are in oil palm, now. This is expected to boost total production to over 10 million kilos per year initially, with Watawala which has been enjoying the pre-eminent position of operating the only palm oil processing facility in Sri Lanka, continuing to exploit their “leadership status” through experience in this area. Influenced by price variations in world markets, the trend in several countries had been to diversify to production of more profitable and stable crops which is believed to be a sound national plantation agricultural policy.
ADB’s support for the setting-up of the second palm oil processing plant is believed to be based on its policy of promoting diversification of Sri Lanka’s plantation agriculture which had been known to be inconsistent in it’s performance.
The plantation industry has its own cycle which is crop and sector-specific. Strategies adopted by producers depend mainly on the natural resource endowments, size of the domestic market and holding, status of technology employed and the extent and nature of institutional support mechanism implemented over time. Nevertheless, despite the many differences among the crop sectors, the common feature had been to capitalize on available opportunities for minimizing cost of production and exploring potential outlets for increasing the net income per unit area. This should therefore continue to receive the highest priority in development planning with equal emphasis on environmental and social considerations now popularly referred to as “ Green Growth” .
Sectors dependent on export oriented production and confronted with perennial market uncertainty should attempt either to retain or evolve integrated farming systems to maximize income per unit area whereas the sectors with a reasonable domestic markets should resort to expansion of area under cultivation to minimize dependence on imports. Domestic value added sub-sectors would also benefit by increased monocultural crop production.
R and D PRIORITIES
The R and D is the basis for technology innovation. Its priorities in the past had been crop production related issues followed by processing technologies and value addition as well as limited export promotion strategies. But now the issues of defining challenges and priorities in the context of growing market uncertainty and violent fluctuations require rethinking based on detailed crop and sector based analysis. Recasting of R and D challenges and priorities should consider;
(a) Whether emphasis should be on, Maximization of yield per unit area or Maximization of net income per unit area.
(b) Relative shock absorbing capacity to withstand frequent price fluctuation
Despite growing awareness in the past, it has been the value added sectors which lagged behind in terms of R and D initiatives and this needs strengthening. R and D approaches promoting less capital and energy intensive systems for crop processing assume a pivotal role in future so as to ensure higher farm gate price realization and sustainable systems of processing by small holders.
Efforts to harness inherent strengths in terms of financial, human and physical resources of individual crop research institutions through collaborative R and D initiatives under the auspices of a Plantation Crop Research and Development committee ( PCRDC) comprising of relevant stake holders are the need of the hour as this would strengthen the research out put capabilities of public sector institutions financed by private sector through a research cess.
Micro finance for poverty alleviation: Why run after alien models?
VEHICLE OF POVERTY ALLEVIATION: Micro Finance has come to be regarded as an accepted vehicle of poverty alleviation though the topic is not without debate notably in respect of its contribution to a rapid boosting of a national economy. Who provides micro-finance? When you look at Sri Lanka, there is a plethora of micro-finance providers.
There are the international organisers who pressurize the Government to be active in the provision of micro-finance to the poor so that they are pushed over the poverty line. There are countries which bilaterally encourage the provision of micro-finance.
Then, there are the International Non-Governmental Organisations (INGOs) as well as the local NGOs in the fray of providing micro-finance to the poor. The former either does it directly or through the local NGOs of their choice.
The international organization and those bilaterally supporting countries channel micro-finance with Government's contributions through the Finance Ministry and the Central Bank via the recognized micro-finance institutions namely the Development Banks. State Commercial Banks and the willing Private Banks. To reach the grass-roots, some of them use the financial intermediaries operating at national, regional and local levels.
The National Development Trust Fund (Former Janasaviya Trust Fund) also an important disburser of micro-finance through its partner organizations (POs). In addition, there are micro-finance components in many development projects under various ministries and departments. So we have a jumble of micro-finance providers.
All of their roads, they say, lead to poverty alleviation. But has the poverty really decreased over the year. The urban poverty is being contained at 8%, However, 25% of the rural population is poor, Estate poverty has increased to 30%. On the whole, a minimum of 23% of the population outside North and East remain poor.
According to the Department of Census and Statistics (DCS), no significant dent has been made in poverty alleviation over the past decade or so. As a matter of fact, DCS expresses its doubt about the possible attainment of the poverty alleviation targets envisaged in the Millennium Development Goals (MDG), that is, reducing the overall poverty to 13% set for the year 2015.
Most of the other MDG 2015 goals have been already achieved or achievable by that year. But perhaps not poverty that continue to haunt us severely despite many development strategies launched and that many micro-finance windows are said to be in active operation.
Micro-finance has gone down the pipe-line admirably well from the national level to the regional level and from the regional level even to the local levels with less vigour during the past decade or two. But the local level has micro-finance gone to the deserving and for the intended purposes? Of the deserving too, has it gone to the poor at the bottom layers? This remains the grey area in the path of micro-finance flow.
Arm-chair micro-finance theoreticians at the national level in particular appear to be fond of adducing many reasons for this clogging of micro-finance near the door-steps of the deserving borrowers, having moved it so far from the national level through the regional level and even to the periphery of the local level.
The reason or reasons may vary from location to location, types of intended activities for which micro-finances are made available, supply-driven nature of the micro-finance provision, interest rate structures, not meeting adequately the credit pluses so vividly spoken of but not provided or inadequately provided, consumer preference and consumer tastes unfavourable to what are being produced in income generating activities of the poor supported with micro-finance, micro-finance beneficiaries using their income generating activities as marginally supplementing the traditional family income source which is something else (e.g. farming), the poor with many worry-beads around their necks in a perpetual struggle to get rid of them being compelled to divert their resources and micro-finance received or receivable less for the intended income generating activities which are often time-specified, resource-specified, produce-specified activities that the beneficiaries are unable to comply with and many other reasons not clearly known to the micro-finance wizards at national and even at regional levels. Hence, the grey area referred to earlier continue to remain not cleared.
So we have two problems in hand. One is that at the national level we have no effective pivotal point which very effectively look for who provides micro-finance in what amounts, to whom for what, when, where, under what terms and conditions etc.
These may be well expressed on paper backed with statistical tables but what is expressed on paper and what is on the ground are often found to be not the same. This pivotal point be it under the Ministry of Finance (with National Development Trust Fund as its Secretariat) or the Central Bank (with the Regional Development Department as its Secretariat) or any other organ deemed fit enough should be empowered to look into the workings of all the micro-finance providers who should be made responsible to report to it.
It should also be empowered as a clearing house where information should be called for, collected, collated, processed and disseminated to micro-finance providers and other relevant agencies so that there is a high degree of transparency and information exchange facility among the numerous stakeholders.
There has to be an open understanding. The micro-finance providers are so many, who knows that for the same purposes beneficiaries have taken loans from different sources? Some have taken loans to repay loan installments of previous loans! So the information at the beneficiary levels should be accurately collected and stored.
R&D investment – key to economic growth
Whilst the world is congratulating Sri Lanka for outstanding economic growth, we cannot sustain this growth if we do not increase the R&D investment from the current 0.16% of GDP when countries like South Korea are investing 2% of GDP for R&D, says Rohantha Athukorala
Sri Lanka received many accolades from all over the world early this year for the 7 per cent plus economic growth in the year 2006,
Unemployment declined to 6 per cent. Exports grew at 8 per cent and little Sri Lanka attracts over US $ 2 bn in foreign remittances placing the country fourth in the select band of developing countries in that category.
The FDI flow exceeded 500 million dollars with a record level of use of donor funds at US $ 1 bn. Whilst the country is focused on mega infrastructural projects, the challenge is how are we to make the existing industries competitive. This can only be achieved if we take the global learning of successful economies– strategic investment on Research & Development.
The strong agricultural performance and the continued tsunami reconstruction activities with a robust service sector performance helped mitigate the impact from the sky high oil prices that we experienced in the year. However, inflationary pressures are building with January registering a 20 percent plus inflation due to the fast credit growth, increased wages and pension payments and passing down of oil prices.
A greater degree of tightening monetary and financial policies to stabilize the economy is the need of the hour, but this requires striking a balance between the short-term realities and long-term objectives the country has set. Another way forward is to channel investment on technology to drive productivity up and thereby pass the benefits to the consumer. This can only be done with strategic investment on Research and Development (R&D).
Whilst the country is driving on infrastructural growth with projects like Upper Kotmale hydro power plant, the Puttalam and Trincomalee coal power projects, the Kerawalapitiya power plant, Colombo South port, Galle port, the new international airport, Hambantota international convention centre and national road projects like the Southern Highway and the Northern Expressway, we need to also invest in Research and Development on the existing engines of growth so that we keep Sri Lanka abreast with the changing global arena. Some may call this the knowledge- based economy.
Whatever the term used, the end result is making a particular industry more competitive globally. This can be done with a marketing-oriented approach. If we take one of the key industries of Sri Lanka – tea – we will be left behind if we do not invest on R&D and develop new clones that give a better yield. If a balance is not struck between infrastructural growth and making current industries competitive with R&D investment, Sri Lanka will not be able to maintain its current rate of economic growth.
The current spending on R&D in Sri Lanka is 0.16 per cent of GDP down from the 0.30 spent, way back in 1996. This is even below the investment by countries like Bangladesh. South Korea, which experienced phenomenal growth in the last two decades, has increased spending from 0.2 percent to a fantastic 2.8 percent of the GDP value, which explains the strategic thinking to make a country ride the industrial revolution.
Scandinavian countries spend nearly 4 per cent of GDP on R&D, whilst India has increased the investment to 1 per cent of the gigantic economy. Indian Prime Minister Man Mohan Singh once remarked that R&D investment is the only way to make a country compete with the Western world.
Sri Lanka’s long-term economic growth and stability depends heavily on the future of the country’s exports. The expansion and diversification of the export sector is of paramount importance in order to have a healthy balance of payments in the near future and sustain higher economic growth.
The government set up an economic growth target of 8 per cent in the medium- term with the objective of resolving the economic issues of poverty alleviation, but if we look at the hard reality, the unit labour costs in industry appear to be increasing and profitability decreasing. Productivity growth in 2005 declined by 5.6 per cent which, together with increases in a firm’s costs arising from higher domestic interest rates, oil prices and wages, is sure going to attack the bottom line of corporate Sri Lanka in the near future. The solution is to drive technology up and increase productivity.
SMEs and role of IT
On the estimated 694 billion rupee export earnings in 2006, the SME sector will account for a sizable chunk with a growth of over 18 per cent. It is estimated that the small enterprises will double its business turnover in the next two years, and the government has set up the SME Bank specifically to look into the needs of this sector. IT companies with assistance from the government should target this segment and carefully understand the needs of each of these organizations and invest in technology with customized software solutions, keeping in mind that they are SMEs.
The objective of IT companies should be initially to simplify their businesses by scanning the best technologies of the world so that cost could be controlled. It is only once that confidence is established, that one needs to develop systems to drive competitiveness.
As Sita Yahampath, the owner of Kandygs Handlooms, once told me: "IT came in handy at the time of the company’s diversification from spinning to dying, printing and garmenting. As we grew, we were getting more orders and needed intricate IT tools to serve our customers. It has also brought in more transparency in data and information management." Hence, we see the importance of R&D and technology investment for Sri Lanka’s economy
Sri Lankan SMEs - IT driven
Besides, IT systems also enable companies to respond faster and more effectively to customer requirements. Chaminda Tilakumara, the GM of a leading financial service provider which launched an online portal, said: "We needed a robust, dependable IT software system as with the increasing customer and overall business requirements, and considering that technologies in the financial services area get outdated quickly, we need a platform that was robust and dependable. We chose an IT platform that was able to deliver a complex infrastructure in a challenging environment, fitting our ambitious growth strategy. Which explains the importance of research and development and the technology transfer required to compete in today’s world."
SME growth and link to R&D
Adopting IT solutions helps SMEs in managing growth says Asoka Hettigoda, MD of Siddalepa. " As businesses start growing, rudimentary enterprises planning, especially manual, won’t be able to keep pace with on-going development. A fully fledged business infrastructure is needed. While software and IT solutions have been around for along time, we need support with focused research and development assistance so that we can differentiate the company’s brand in the global marketplace."
The convenience comes at a price.
SMEs have to investmoney on R&D and technology to be competitive in to- day’s world. It will make life simpler, but efficient. The typical investment would be around Rs. 200,000 depending on the solution to be provided. But the cost can be recovered through savings resulting from cutting down on losses that are incurred due to slow response. With the increasing industrial zones emerging in different parts of the country that offer tax incentives, an enterprising SME will have three to four manufacturing facilities in different parts of the country. In such a situation, it will be nearly impossible to manage inventory without a good soft ware solution.
Raw materials need to be managed efficiently to reduce working assets. The software solution will also help in an efficient management information system that can drive quicker decision-making thereby encouraging stronger growth.
Apart from the SME sector, if we take, for instance, the coconut industry, a key challenge that local industry faces is competition from exporting countries. Sri Lanka can counterattack this strategy by investing on R&D and launching products like coconut paste, virgin oil, low fat coconut flour, innovative creams/ pastes/ non-dairy products/ confectionaries/bakery products and beverage products. barrister brushes, coconut water-based products for sports and energy drinks so that the magical mark of 25 billion rupees in export earnings can be crossed. That is case in point on how R&D can spruce up the Sri Lankan economy.
Let’s take up HACCP certification required for the 150 DC millers. Once again R&D leading to technology transfer will give a boost by opening up entry into EU countries which have enormous opportunities for growth. The current incentives given to modernize the DC millers will sure have an impact on the productivity of this sector in the long-term, but strategic investment in R&D can propel the industry to a new height, say industry experts.
The clear success story for the country in 2006 was the tea industry. The strong growth momentum seen in exports in the year has ended the year at a record performance of Rs. 91 billion foreign exchange earning, which has captured the attention of the policy makers. However, we cannot rest on our laurels as this performance is mainly due to the higher prices Sri Lankan teas fetched on account of the severe drought experienced in Kenya. From a R&D point of view, it’s important to note that the output of tea has declined to 310 million kg., down from the 2005 mark of 317 million kg. The challenge is whether R&D coulddrive the introduction of new clones into the industry so that with the same extent of land we have a higher output. That can drive the industry to the magical number of Rs. 150 billion in the years to come.
If we were to examine the best practices of the world, like in Japan and South Korea we can see that research, development and commercialization are separate functions. The research agencies are linked to the university system. Developing houses is linked to the business world. The cycle makes the university system align the curriculum to satisfy business needs. Hence, naturally the graduates are in demand by the business world. Sri Lanka needs to take a cue from this factor if we are to solve the unemployment issue of graduates.
Another learning is that development houses are funded by the government so that strategically the government directs which industry should be developed. For instance, in Brazil, the direction will be to make the coffee industry competitive. We need to take a decision on which industry Sri Lanka needs focused strategic investment. Is it the tea industry or the apparel industry? We also must take the global learnings on which investment will bring the best returns to Sri Lanka. The return does not have to be only from a monetary sense, but also from a social-economic point of view, namely, employment.
Sri Lanka and Knowledge Economy
To conclude, let me share the new term that will encapsulate Research and Development investment of a country – Knowledge Economy. A typical knowledge economy drives competitive advantage with technology than age-old practices like what we see in the Sri Lankan coconut and tea sectors.
With strategic investment, one can find new ways to improve productivity and breakthrough innovations. This can move Sri Lanka to a new plain in the global business arena like what Samsung has done to South Korea. Samsung has destroyed the Japanese iconic company – Sony.
With deep pockets, the South Korean giant Samsung realized that if it wants to set itself apart, like creating novel products of its own, especially if it wants to stay ahead of fast rising Chinese rivals, the company must invest on Research & Development (R&D).
Samsung has won over consumers with clever designs and multi-functional gadgets, like camcorders that download songs and refrigerators that also surf the internet. It has swept upwards for cellphone designs that look like dashboards, tuxedos or pebbles in a stream.
Last year, the company had a $ 59.2 billion in sales and a reported profit of $7.9 billion – 13 times as much the 2005 earnings forecast by rival Sony. Whilst the company has become an outstanding company for refining other people’s inventions, it was a strategy that worked well for the moment.
Sri Lanka needs to take these global learnings and drive R&D investment to at least 1 per cent of GDP in the near future, so that the current ‘engines’ of growth that help generate a 7 per cent plus economic growth. If we do not follow the Vietnams of the world, who simply copy Sri Lankan products, but invest in a more cost-effective platform, we will recapture the markets that we have commanded for years. The world in moving fast and Sri Lanka needs to keep up or else be left behind very badly.
The writer is an award winning marketer turned Economic Strategist, who has given leadership to several business sectors in the country in 2005/6 for the achievement of a record 7.4% GDP growth. He currently is Director, Economic Affairs in the Secretariat for Co-Ordinating the Peace Process (SCOPP), whilst reading for his doctoral degree.