28th – 04th December 2011

FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Content Page

1. DEVELOPMENT ECONOMICS • ‘I prepared my own budgets, budget speeches’ 04 • Role of sea ports in the logistics management process 09 • Bringing the world to Sri Lanka 12 • The sphere and duties of government 15

2. BUDGET • Budget 2012’s impact on the export sector 19

3. MANAGEMENT • Industrial security: an important link in the corporate field 27 • Why companies yearn for competency 30

4. TRADE & MARKETING • Marketing an emerging tourism destination in Asia: A country perspective of innovation and diversification 38 • Unprecedented opportunities for Investment Banking 43

5. TOURISM • Tourism industry eyes “achievable” targets 49

6. EXPORTS & IMPORTS • John Keells tea market report 51 • Rubber auction prices 53

7. STOCK MARKET • Error trade dampens overall sentiment 55 • The stock market - only a correction? 57

8. BUSINESS • Used car industry to become history? 61

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Development Economics

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The Island – November 29, 2011

‘I prepared my own budgets, budget speeches’

Two of a kind!

It is Politics even in retirement for former Finance Minister Ronald Joseph Godffrey De Mel as he is captured by the writer reading Margaret Thatcher’s Biography in his vast Charles Drive, Colpetty residence library, flanked by the photographs of him with US Presidents George Bush ( Senior) and Ronald Reagan and wife Nancy. Ronnie was the first Finance and Planning Minister when Sri Lanka liberalized her economy in 1977 and he must surely be reminded of the quote from the father of the laissez faire economy- Italian priest- father Vincent Mc Nabb(1868-1943) whose melodious rant said: " Some men wrest a living on nature, this is called Work; Some men wrest a living on those who wrest a living on nature, This is called Trade; Some men wrest a living on those who wrest a living on those who wrest a living on nature; This is called Finance.

Guinness Book record -holding Finance and Planning Minister Roland Joseph Godffrey De Mel reminisces his days at the Treasury, his life as a distinguished member of the now defunct Ceylon Civil Service, his political pursuits and his academic benchmarks.

It was the London Matriculation Examination in 1941. A 16 year old stripling in his callow youth, a prolific form and subject prize winner in his Upper Sixth Form at S. Thomas College, Mount Lavinia, as "the school by the sea" had it then, was aghast when the results arrived. After all, that was the examination for the entirety of the Commonwealth!

The formality at that time was to have the results of the successful candidates published in the newspapers of the day- the then Ceylon Daily News and the then Times of Ceylon. He looked at both morning newspapers with expectations to see his results missing!

Later, it transpired that both newspapers had erroneously missed out two whole two lines of candidates who had passed in the First Division. The error was rectified the following morning. His name appeared among the other successful candidates who passed in the First Division.

To add the spice, there was the congratulatory note from the then Education Department saying: "Our heartiest congratulations! You have been placed All Ceylon first in order of merit!"

"That was one of the few occasions or the only occasion that a S. Thomas’ College student emerged all island first in order of merit in any public examination!!", Ronnie chuckles That epic performance entitled him to a scholarship to either of the Ceylon University College or either of the two apex British Universities- Oxford or Cambridge….. By that time, he had also won his S. Thomas’ College Hockey and Tennis Colours as well, in addition to being the Under 16 cricket as well!

That, explicitly and succinctly, would sum up the childhood lifelines of the now 86- year old Ronald Joseph Godffrey De Mel, one of the most flamboyant yet controversial personalities in independent Sri Lanka’s

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contemporary history, as its 12th Minister of Finance and Planning, currently holds a listing in the much coveted Guinness Book of World Records for presenting a record uninterrupted eleven Budgets in any House of Parliament in the world.

Ronnie was passionate about Oxford or Cambridge, but the heart of the matter was that there were no civilians who could travel overseas from the then Ceylon. World War II was on. The only option was the Ceylon University College. There was no need to sit for the university entrance as he was exempt. It was only a few months following his entry, that the university college was transformed into a fully fledged University- the University of Ceylon- Colombo Campus.

Ronnie’s passion was for History. His first examination was in arts with the four subjects of History, Economics, English and Latin. The first examination in arts, corresponded to the intermediate examination in Arts of the University of London. He was placed first in order of merit in that too and with it the Gold Medal! Then a another scholarship to England, but the war was on. He was the Muncherji Fram jee Khan Prize, the Muncherji Framjee Memorial Gold Medal for Arts and the Pettah Library Prize for the best English paper submitted to the University. That was a key paper which everybody did unlike now. That was 1943.

Nothing succeeds like success. Ronnie pursued with his History Honours degree his passion, brushing aside all requests from the academics to pursue an English Honours Degree. He passed with first class Honours and emerged as the All Ceylon first in order of merit again! That made his emerge all Ceylon first in all three public examinations- the London Matriculation, the Intermediate in Arts and the History Honours Degree!! That too entitled him to the government scholarship in Arts to the Universities of Oxford or Cambridge but the war the stumbling block. "There was no way that I could have gone, and my mother would not have heard of it, unless I escaped in a submarine!!" Ronnie guffaws.

Ronnie- the eminent Civil Servant The next best option was to join the Ceylon Civil Service. Hundreds sat for a handful of vacancies. Possibly five out of over 500 were selected. There was also another CCS member in Ronnie’s Cabinet, possibly ten years his senior, and that was the Secretary to the JR Jayewardene Cabinet, who was also Permanent Secretary – Ministry of Defence and External Affairs during the stewardship of Premier Dudley Senanayake - George Victor Perera Samarasinghe, who served as boarding house master at his alma mater Royal College at the time of sitting for his CCS exams, who with a First Class English Honours Degree, was one of the four selected candidates out of 256 who sat the examination, passed and applied!! It was the crème- de la crème that got into the CCS. That was the highest that a Sri Lankan could aspired at that time and they were those whom conscientious fathers looked forward to give their daughters in marriage to!!

With his entry into the Treasury as a junior CCS officer, Ronnie was contemplating whether his career was to be in the Treasury or whether it was to be in academics in a British University, Oxford or Cambridge.

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He walked up to the then Secretary- a Knight of the British Empire- Sir Charles Collins and stated his case. Collins, listened to Ronnie patiently and remarked in a tone of arrogance: "Mr. De Mel, we do not want Doctorates in our Civil Service! What we want are people who could go into the country, know how our agriculture is developed, how the irrigation in this country works, how the roads are done and telecommunications work in this country. If you are appointed as a Government Agent, we want practical people who can go out there because PhD people will not fit into this system. It is incumbent upon you either to either be with us or do your PhD and an academic life …." The pep talk continued!!

Long deliberations with the family and persuasions, Ronnie relented to remain in the public service. For two years, he was a " Cadet Officer" where he was bashed and trained to take over the administration of the country. He served short stints in Vavuniya and Puttalam and returned to the Ministry of Agriculture and Lands as Assistant Secretary in 1950 at a time when there were three Assistant Secretaries and a Permanent Secretary and a Parliament Secretary and to the then Agriculture and Lands Minister- three times Prime Minister Dudley Shelton Senanayake.

That was the decisive period in the development of agriculture and irrigation in this country where Minneriya, Parakrama Samudra and Gal Oya were developed, and from a nation which produced only 50% of the rice requirement, we became self sufficient in rice , Ronnie reminisced.

Having enjoyed his stint as Assistant Secretary to the Ministry, he also served his stints in the then Ministry of Agriculture and Food Minister M.D. Banda in the 1965-1970 Dudley Senanayake government as Director of Cooperatives, which was a Class One, grade One post then. He was then Director General of Broadcasting.

Some of the illustrious CCS members of whom Ronnie has nostalgic memories are: Nissanka Wijeyeratne, who was later his bestman and colleague in the JRJ Cabinet as Education Minister first and then Justice Minister. "We are the people who ruled the country under the general direction of Ministers," he said. Some of the others included Balakumar ( Baku) Mahadeva ( later Chairman DFCC) Dr Sarath Amunugama, Andrew Joseph who later on became a top UN Civil Servants, along with Shirley Amarasinghe later Treasury Secretary and United Nations Under Secretary for the Conference of the Law and the Sea.

"Civil servants were tossed like a football and were perceived as not only as the jack of all trades but the master of all. Politicians were there but it was the Civil Servants who ran the country," he laughed

Ronnie enters politics Ronnie was not content. The CCS job was not fulfilling enough. Politics and political history were his hobby horse subjects in the University!! His father in law- Sir Leo Fernando was the MP for the Buttala electorate, which encompassed the entirety of the Moneragala District and half of the present Badulla District.

Ronnie resigned from the CCS in 1962. Despite the father in law Sir Leo Fernando being a staunch UNP member, he joined the SLFP, being the socialist at heart. He worked as one of the administrative Secretaries of the SLFP under the stewardship of Mrs. Sirimavo Bandaranaike, but the turning point was the Party wanting him to contest the Devinuwara seat in 1967 under a bi-election against the UNP which was in power at that time, created due to an election petition of the previous member T. William Silva, a former Minister of Industries. He was unknown and was contesting lawyer and a Junior Minister PP Wickremasuriya. Ronnie was dubbed as the man who parachuted from Colombo to Devinuwara during the four week election campaign. He won.

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Though a SLFP backbencher, but he created a huge impression. The opposition was strong with leaders such as Doctors r N.M. Perera, Colvin R De Silva, S.A. Wickremasinghe, along with Peter Keiuneman, Maithripala Senanayake, TB Subasinghe et al….

The three backbenchers were Ronnie, subsequent Fisheries Minister George Rajapaksa (father of Nirupama and uncle of President Mahinda Rajapaksa) and Habaraduwa MP Prins Gunasekera. That was the time that Bills were interesting and we used to sit through three days and three nights right along unlike now. Parliament was interesting and MPs took it very seriously then unlike now where they behave like hooligans, he noted.

Ronnie was re-elected with a bigger majority in 1970, but Mrs. Bandaranaike overlooked him for a Cabinet portfolio. He was completely disillusioned with the SLFP.

With the death of Dudey Senanayake in 1973, JRJ became the party leader but also the Leader of the opposition. There was this garden party at the Indian High Commission and Ronnie found someone tapping him on the shoulder. Lo and behold!! That was JRJ himself!! Ronnie recalls JRJ verbatim: " Ronnie, why don’t we think of getting together? !! Ronnie said: "Sir, I can think of that but this is not the place! My father in law is also a UNPers and we can always discuss things like that later"

A few days later, JRJ and subsequent first lady Elina phoned and visited Ronnie at his Charles Drive residence over tea where he has been living in for the last 60 years. No Minister’s bungalows for him!

JRJ, being the diplomat, left the two ladies in the drawing room and went into Ronnie’s private study with him. A straight offer was made with the promise of the rightful place in a future UNP government and with it, one of the top three slots in the Cabinet. There were only 17 UNP MPs in Parliament at that time. Ronnie asked for a few weeks and told him at "Braemar", 66 Ward Place that he was willing to cross over!

The United National Party swept into power in 1977 with a landslide victory of seven eights majority and Ronnie was Minister of Finance and Planning.

Ronnie- the Finance Minister Budget preparation in his time, was complex and arduous. The work with the officials commenced in January of a given year, though the presentation of it was in November The coordination with the line Ministries was around June. It was all my budgets in all the eleven budgets that I presented and even the speeches were mine which I drafted unlike now, where people read out what is prepared for them where they do not know what they are reading," he smiled.

One of those eleven budgets, Ronnie recalls, started at 2. pm and when he finished it was 8.30 pm , which was after a small tea break. By that, he also holds the record for the longest ever budget speech, surpassing British Prime Minister William Gladstone, who was also the Chancellor of the Exchequer in 1870. The ritual was that soon after the budget was present in Parliament with Ronnie inviting the first citizen- President JR Jayewardene for a private dinner to Charles Drive.

Opening the economy Barely a month after the UNP government assumed office in July 1977, Ronnie had to go on his fund raising drives – for Mahaweli, Ports, Roads, Housing Free Trade Zones. First it was British Premier James Callahan, Chancellor of the Exchequer Dennis Healey and Minister of Overseas Development Judith Hardt. James Callahan was in Sri Lanka during the war years and he was easy to convince and he agreed to fund Victoria which was a Sterling Pounds 100 million, then!

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There were also German Chancellor Helmut Schmidt who agreed to finance Randenigala, US President Jimmy Carter who agreed to finance the down stream development and Sweden agreed to finance Kotmale. Australian Premier John Howard , Indian Prime Ministers Indira and Rajiv Gandhi, Pakistan Prime Minister Zulfikar Ali Bhutto among a host of global leaders including Japanese Premier Takeo Fukuda.

At 86, and at the winter of his life, he goes for one hour walks at the Race Course and one of those who joins him at times, was President Mahinda Rajapaksa himself.

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The Island – November 30, 2011

Role of sea ports in the logistics management process

By Jayantha Rathnayake, Lecturer, CINEC Maritime Campus

Introduction. The Task that the logistics managers are expected to play in their assumed profession is necessarily multi- faceted by nature, involving one or more different types of transport modes viz. sea, air, rail , road , inland water ways, pipe lines, human carriers (Sherpas in Himalayas), animal-aided carriages and many more sub categories such as use of cables etc or any combination of above. In this context, the role played by sea ports has to be understood by giving due emphasis to the volume of cargo handled by world sea ports vis a vis any other competing modes. Port facilities attracts shipping and ships by performing the carriage function of cargo which, perhaps, is the relatively one of the least-complicated legs of the logistics process with more demanding steps commencing from the initial stage of cargo at the place of origin and subsequently at the terminal in the port. The relationship between sea ports and logistics is perhaps better explained through the analysis of the fundamentals that nurtured the rapid growth of logistics function in countries such as Singapore and the enhanced attention paid to logistics process in Sri Lanka since a few years back, which has acquired a significant position in particular with the cessation of hostilities in the country and kept a regular pace with growth of ports activities. Therefore, this paper is an attempt to look, albeit very briefly, at the role played by sea ports in the logistics management process citing examples from a limited number of data sources.

Role of sea ports Among a few port models (Any Port Model of Bird, Sea Port Zoning Model of Andre Vagarie , Port Development Effective Model of Stern & Hayuth are a few such models) found today, ‘dematerialisation stage’ (Final stage of four viz. Primitive stage, Dependency stage, independence stage and dematerialisation stage ) of the model 9 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

presented by Dassanayake (Dassanayake 1989) bears more relevance to the subject under discussion which examines the relationship of the sea ports and the logistics management function. Under the dematerialisation stage, the main feature of the port is marked by the port and city been integrated to such an extent that it becomes a port-city (i.e Singapore). Port will thus become a part of the international trade with well-connected sea/rail/road and communication networks thereby creating new economic opportunities in and around the port. When the logistics management is defined as " the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements" (Logistics Management is defined in a multiple way depending on the discipline or the purpose. For the purpose of this paper the definition given by Council of Logistics Management, http://www.clm1.org/mission.html, was taken) above stated status showcases the culmination of port development, after providing the foundation and consequently facilitating for further expansion of the logistics function by linking different modes for transmitting goods and services; and in the process becoming an integral part of the logistics chain.

Logistics Managers do not operate in a vacuum and the basic impetus for their existence and operation is the presence of cargo and over 90 % of global cargo is carried by ships (UNCTAD). In 2010 out of total global trading volume of nearly 9000 mil mt, a little over 8100 mil mt of cargo was handled by sea ports brought in by ships. Ships need, inter alia facilities for safe berthing and speedy cargo handling which is ensured by the sea ports. Therefore, one could say that the ports and the logistics function have an umbilical relationship where the latter can not exist without former. Thus logistics function thrives when the port to which it is linked is efficient and performing well and converse. This relationship could be further explained by looking at the countries which are known for having a strong presence of a logistics sector. As shown in the Table 2, Logistics Performance Index (LPI) for 2010 published by the World Bank (Performance of 155 countries in 6 areas of importance in logistics viz. a) efficiency of customs clearance b) quality of trade process and transport related infrastructure c) ease of arranging competitively priced shipments d) competence and quality of logistics services e) ability to track and trace consignments f) frequency with which consignments reach the consignee within the scheduled or expected time have been considered for LPI) shows that Germany is occupying the first place as the best logistics performer having scored 100 marks. The second place is occupied by Singapore with overall score of 99.2.

In this survey, done through 155 countries to determine the ranking of LPI, Hong Kong occupies 13th place whilst Thailand and India occupy 35th and 42nd places respectively and Sri Lanka occupies the 137th place, behind many Asian, African and Gulf countries (The Logistics Performance Index and its indicators, world Bank , 2010). A World Bank survey done in 2007 has found that the countries with low LPI scores tend to have higher average times to import and export (Ibid, vide p. 1). Conversely, lower time spent for import and export by achieving efficiencies should bring higher marks in the index; as Singapore is known for, though this is not the only criteria or one of the decisive criterions in awarding a place in the LPI index (Same analysis has shown that better logistics performance is strongly associated with trade expansion, export diversification, ability to attract foreign direct investments, and economic growth etc). Singapore occupying a top-notch position in the world ranking of the busiest ports in handling second highest number of containers till 2010 also supports the notion of a higher efficiency level achieved by this port.

If above data do not provide adequate testimonials to show that the success of Singapore port had a greater impact of that country achieving a very high ranking in logistics performance index, any of other two ports which occupy first and third position in the world ranking in terms of number of teus 10 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

handled, such as Shanghai or Hong Kong could be cited as a few more testimonials.

With regard to Hong Kong sea port, the Hong Kong State has following to say in their 2006 year book. ‘Efficient, reliable and well-connected, Hong Kong’s airport and (sea) port are vital to the territory’s logistics industry’ (Year Book 2006 p.13). In extolling the role played by the Hong Kong sea port in enriching the logistics, the above publication further says, "Our world-class port and award-winning airport, and the multimodal links they provide, have made Hong Kong the world’s busiest container port for 12 of the past 13 years, and the world’s busiest international air cargo hub since 1996. Our extensive service coverage offers ample choices: At the Hong Kong container port, 80 international lines operate 400 shipping calls per week to over 500 destinations globally, and the commercially-operated terminals boast a record of 50 gate movements per crane per hour".

Cargo volume creates a critical mass, which in turn enabled ports such as Hong Kong to develop one-stop integrated logistics service for just-in-time distribution in a wide range of areas (Stephen 2005). This formula works for other sea ports as well as seen from the ports discussed above and through the domestic experience. In the case of Sri Lanka, as stated else where in this paper, interest on logistics management and its importance came in to serious discussion and attention with the growth of the port of Colombo. Experts’ opinion on the future trend of the logistics sector also have positive stance on the increasingly important role to be played by the sea ports. The latest issue of Economy Watch says that logistics operations which are port based are predicted to grow at 20% to 25% (5th, Oct, 2011); a very high level of achievement and the single most influential factor for this could be the important role played by the sea ports in handling cargo in volumes and efficiently; an undeniable characteristic expected from logistics managers.

Conclusions Logistics Management, in the main, is related to managing cargo flow and the cargo in today’s context overwhelmingly transit through sea ports, having carried by varied types of vessels. Therefore, the sea ports plays a crucial role in the logistics process thus necessitating logistics managers to understand the functional importance of sea ports as, the growth and achieving continues efficiencies by former will be mutually beneficial to both parties.( [email protected])

References 1) Dassanayake, Sarath (1997). Sea ports and their generated business activities in transition – An examination based on a Case Study of the Colombo Sea Port in Sri Lanka. Rotterdam, Netherlands

2) Rathnayake, Jayantha (2010). Hub port status and the Sri Lankan ship owning sector- Faculty of Graduate Studies, University Of Colombo

3) UNCTAD Maritime Transport Review- 2010

4) The Logistics Performance Index and its indicators, World Bank , 2010

5) Year Book, Hong Kong, 2010

6) Economy Watch, Oct, 2010

7) IP, Stephen (2005). Premier logistics hub and gate way to China. Milan, Italy

8) List of world’s busiest container ports - Wikipedia,

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Daily FT – December 1, 2011 Bringing the world to Sri Lanka

Countries get known for various reasons and some labels stick for long time. Citizens almost always mould the character of the nation.

It is usual to hear the efficiency and punctuality of Germans. We Sri Lankans boast of being known for our hospitality and friendliness – may be at least to outsiders. However, it is also clear that we have not managed to achieve a position of eminence with a feature that sets us apart as a nation which had contributed to the country’s standing as an economically stable nation within the global community.

Trying to emulate some of the above-mentioned Germanic norms can do a world of good for us. During the early days the presence of spices lured nations to conquer us and we were quite easily subjugated. Those were the days when to be a strong nation the amount of real estate you held mattered more than the knowledge you had.

In the 21st century the shift of power is to those who have more knowledge and better innovation eco- systems. The basis of today’s global activities and attention revolve around such innovation economies.

National Nanotechnology Initiative The National Nanotechnology Initiative was an admission of the local intent to move in that direction. It is with interest that one can record the progress of Sri Lanka Institute of Nanotechnology, which resulted directly from this initiative.

1 December 2008 witnessed the date of active launch of activities of SLINTEC which culminated on 12 August 2009, the date of launch of research. Within a small time period an active group of research scientists had managed to support the concept of bringing world to Sri Lanka.

In the first research publication to reach an indexed journal – scientific journals that really matter in the scientific world – based on research happened in the institute. The paper and its reported findings – already covered by two international patent applications – drew much needed attention from a foreign company and with the intention to purchase the nanotechnology embedded development.

Interesting indeed and the initial discussion was followed by a visit to SLINTEC with full of hope by the external party! This is what is meant by bringing the world to you via innovation and numbers possible can be truly exciting.

Has anyone heard the story about the better mousetrap? Still the institute and the initiative are young from an innovation timescale. Technology management research indicates that in innovation 10-15 year time scales are the norm and one must be prepared for the long haul. However, with the system primed well, with time there should be a series of innovations reaching the market.

It is individuals that will think and act and may be as teams. It is the organizational linkages and efficiencies that enable the ideas to propagate across and allow realizing the market potential. The two together constitutes the innovation system.

Innovation Supporting innovation and innovation management differs from the standard management practices. We do speak lot about management and everyone is interested in MBAs these days. There are more courses distant, not-too-distant and face-to-face MBAs on offer from local to foreign institutes and people queue in 12 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

with high expectations – I do hope the individual expectations are to understand management and leadership and propel respective organizations to eminence or create new and exciting ventures and not collect points for migration nor collect letters to the end of your name so as to create artificial differentiation with the rest of humanity!

Learning under such expectations will not deliver anything substantial to the system and human resource development statistics from a national perspective are meaningless. Not many MBA programmes address innovation management and the concepts of intellectual property in any detail.

Sri Lanka perhaps lacks experience in these areas as is evident from the nature of activities or rather the absence of any happenings across. Many blue chip companies exist without any intellectual property to boast about in Sri Lanka.

The new economy is about innovation. In fact the concept of science and technology driving an economy has been pushed aside by the single word innovation. ‘Innovation in everything one does’ is the mantra. Boards in charge of research enterprises should have the required understanding to drive innovation. This understanding differs from the usual practices and may involve more risk taking and enterprise thinking. Board members may have to unlearn some of the concepts they may have and embrace new ways of doing things. The best for Sri Lanka is to learn from outside with some detailed observations from countries such as Singapore and Switzerland.

Boost from Budget The national Budget has been presented by the President and some more additional support to prime research and development has been supported in this Budget too.

The provisions given in the Budget are income tax on research income reduced to 16 per cent from the previous 24 per cent, research institutes exempted from VAT, income tax on research institutes reduced to 20 per cent, a triple reduction (improving on the double reduction given last year) on R&D to private sector that obtains services through Government research institutions, nominal fee for R&D services rendered to SMEs, 50 per cent of income from R&D services to private sector to be given as a promotional income and an allocation of Rs. 300 m to the National Research Council to encourage special research activities.

Certainly the thought processes that led to these inclusions should be appreciated as we are heading in the right direction. One must not forget, however, that one of the strongest yardsticks is how much of GDP is allocated to R&D and this figure is still in need of improvement.

Now all parties must come together to benefit from these policy initiatives. Organizations can align, but it is up to individuals to deliver. Policy steps facilitate the interaction.

The budgetary provisions to support research may not be too stunning from a public consumption viewpoint and may not make headlines though for two years in a row the solid support from the State has been demonstrated.

Unleashing innovation It is interesting that nations must understand to keep this process dynamic, a fact reiterated by three US authors. As Sri Lanka lacks a stable research environment, we must back up policy instruments with some active publicity and lobbying to realize benefits.

In the publication ‘Inside Real Innovation,’ the authors (Eugene Fitzgerald, Andreas Wankerl and Carl

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Schramm) state that there is an innovation crisis in United States of America. Innovations come from people and not from organizations, they are quick to point out.

They write saying researchers think deep thoughts and discover things, and thereupon the competitive marketplace picks the best ideas to pull through the pipeline, and products come out the end to propel the US to further economic success; hence their request for the State to prime the pump and keep the process of innovation going.

The innovation crisis is when no new things are appearing and what you can make up with old findings becomes less and less. We should understand this logic as outlined. SLINTEC’s research has shown the value potential and unleashing innovation across a wider community, the impact is bound to be significant. US understood this and pursued. For us it is a new learning in this century.

True engine of economic growth Thus the process of innovation – the process of taking ideas into useful form and function and bringing them to market – is termed the true engine of economic growth. Our definition of private sector as the engine of growth is quite wrong. We have merely identified an ownership aspect to lead growth.

Minus ideas and innovation, neither sector – whether private or public – is useful and should understand to be so. Positioning a sector as the engine of growth but not understanding what truly drives economic growth is a recipe for failure.

It is important to understand that both these sectors should be innovative to be really effective as if only one sector is innovative, then the progress of that will be hampered by the drag effect of the other.

Finally, it is ‘ideas put into useful form’ that matters and more of that from us will mean the upward movement of the economy and the resultant recognition from the outside as everyone likes useful developments. These can make the world beat a way to your door.

Instead of searching for salvation by relying on external remittances from migrant labour, payments for knowledge ideas and innovative products and services are what we should strive for. As shown already in some way by the newly-emergent SLINTEC, it is possible for us to do that with individual creativity and a system that is ready to accept new ideas.

(Professor Ajith de Alwis is Professor of Chemical and Process Engineering at the University of Moratuwa, Sri Lanka. With an initial BSc Chemical engineering Honours degree from Moratuwa, he proceeded to the University of Cambridge for his PhD. He is a Science Team Leader at the Sri Lanka Nanotechnology Institute. He can be reached via email on [email protected].)

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Daily FT – December 1, 2011 The sphere and duties of government

German political philosopher and diplomat Friedrich Wilhelm Von Humboldt produced a book titled ‘The Sphere and Duties of Government’ in 1852. It has since been widely acclaimed by academics of his time and thereafter by others who modified and refined his thoughts and produced various treatises on political theory.

This writer borrowed the title for this article as it is pertinent to the malady that affects our country. There seems to be a new interpretation in the style of governance in our country.

The welfare of the people and the rule of law seem to have taken a turn for the worse and if not arrested in time, it would spell disaster for the citizens of this country. It would also seriously undermine the values and principles on which the Sri Lankan State was founded.

Civil liberties of the citizens have been seriously undermined and the space for a meaningful discussion of very affairs that affects the citizens has been curtailed to a certainly degree.

What is a Republic? One salient feature in our Constitution is the freedom of expression guaranteed by the constitution and without which a state cannot identify itself as being a Republic. A Republic is a Latin derivation of “res publica” which means the ‘public affairs’.

Public affairs are conducted through mass media and there should be absolute freedom for the institutions to conduct public affairs without hindrance. Of course the Constitution clearly demarcates the limits to which a responsible journalist can extend his journalistic right and it must not encroach on the privacy of individuals. Neither can the government use the State media in violation of the rights of the individuals.

If the media is targeting an individual or the government it must also afford an opportunity through the same media for the other party to present their case. This is called audi alteram partem in legal parlance. Not only does freedom of expression denote the liberality in expressing ones thought but it also entails the right to seek, receive, and impart information and ideas. A responsible government must provide ample opportunities for the citizens or their elected representatives to express their views. The means by which information is spread has drastically changed since the time Humboldt had produced his treatise.

Protection of sources of journalists The work of journalist is to gather information by various sources. His or her professionalism culminates in finding as much sources as he or she could possibly muster and the information so gleaned would provide credibility for his or her article. This requires that the journalist must protect the source of information she used for the preparation of the story.

US Jurist John Henry Wigmore had articulated four points in this regard, viz: (1) the relationship must originate in a confidence that the source’s identity will not be disclosed; (2) anonymity must be essential to the relationship in which the communication arises; (3) the relationship must be one that should be sedulously fostered in the public interest; (4) the public interest served by protecting the identity of the informant must outweigh the public interest in getting at the truth.

At the crucial fourth Wigmore factor, the Canadian Supreme Court had declared that the court must balance

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the importance of disclosure to the administration of justice, against the public interest in maintaining journalist-source confidentiality.

This balancing must be conducted in a context specific manner, having regard to the particular demand for disclosure at issue. (Globe and Mail v. Attorney General of Canada 2010 SCC 41).

Constitutional rights of citizens As regard the administration of the government, it must ensure that all citizens are treated with equal standards. Equal opportunities must also be afforded to the citizens irrespective of the religious or ethnic background.

Constitutional rights are not meant for one community and it applies to whole length and breadth of the country. There have been a spate of deaths in Police custody and this aspect must be investigated through a Presidential Commission of Inquiry. Police office is not meant to uphold the law of the country and Police does not have the power to dispense justice in the Police station. The whole world is looking into our internal affairs and there are pro-separatist lobbies all over the world trying to capitalize on the situation. The separatist war took over 30 years to contain and thousands sacrificed their lives.

Political agitation for greater autonomy for Tamils took a violent form and later shifted into the form of terrorism targeting not only Sinhalese but Tamils political leaders as well. Those who advocated a separate State too succumb to the fate carved out by their own political ideology.

Those who engage in politics must realize that relying on violence for political objectives would be to their own detriment and would find that one day they too would be dragged into an unexpected end. It is always better to adopt a righteous path, however difficult it may sound though in active politics.

There are ample lessons we can learn from the history. It would be difficult to change the mindset of citizens overnight. Sri Lanka is a blessed country where the philosophy of Lord Buddha triumphed for more than 2,500 years and it would be a great disappointment to see the rise of lawlessness in our country. Every time there is a death over political violence, principles of Buddhist philosophy are avowed.

Supremacy of the Parliament Parliament is the place where people’s representatives gather to discuss the affairs of the people. It is the supreme organization in the country charged with protecting the sovereignty of the people and the Constitution. It must take into account the welfare of the people. If it plays to the agenda of the interest groups or pressure groups, then it is the silent death of democracy.

Money undermines the very meaning of democracy and the evil of money has not only corrupted politics but sports as well. Parliament also controls the public finance and it must have the ‘supremacy’ over the control of money.

It makes laws for the conduct of the citizens. Its members have certain privileges in order to be able to discuss the matters that beset the society. An MP must not be harassed or victimized owing to the vociferous nature of his probing questions with regard to the affairs of the State.

When there are privileges over and above the real ambit of the Parliamentary democracy, it would tend to play into undemocratic agendas (waiting to dissolve Parliament till it completes five years, etc.).

There is absolutely no need for a pension for people’s representatives as MPs are elected by the people and

16 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

their work is limited only for the deliberations. There should however be a proper research unit in the Parliament to assist the MPs for investigations, etc.

It is high time this aspect of making lifetime payments for MP was done away with. There are other pressing needs in society. There are patients who have taken shelter under beds of other patients in hospitals. There are hospitals without proper medicines.

Rural development, poverty elevation and education of children are the important tasks for the Government. These are the real development efforts and investments for the future.

(The writer is a freelance journalist and a political lobbying and government relations consultant.)

17 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Budget

18 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Daily FT – November 30, 2011 Budget 2012’s impact on the export sector

Proposal: 1. Encouraging export industries • Devaluation of Sri Lanka Rupee by 3%.

Impact: • The Sri Lanka Rupee has been appreciating vis-à-vis the competitor countries eroding the competitiveness of our exports. Therefore, the proposed 3% devaluation of the local currency is an encouraging step towards generating more export revenue and maintaining the competitive edge of our exports in the international market.

• However it is necessary to adopt appropriate measures to increase the efficiency and productivity of the export industries to mitigate adverse effects of the probable increase in prices of imported inputs.

Proposal: 2. Exploring export market opportunities • Entering into new Trade Agreements with emerging economies in Asia, Africa & South Africa. • Adopting measures to consolidate our position in the traditional markets. • Introduce reforms to Sri Lanka missions abroad.

Impact: • Nearly 57% of Sri Lanka’s exports are absorbed only by the USA & EU making Sri Lanka vulnerable to changes in those markets. Therefore, the State’s effort to diversify our markets is a timely move to exploit export potential of new/ emerging growth centres of the world.

• This will lead to effective use of Sri Lanka missions abroad, as a channel for promoting Sri Lanka’s products and services.

Proposal: 3. New measures for investment promotion • Rationalization of existing investment incentive regimes by amending the relevant laws.

Impact: • In order to achieve the Government’s economic growth target of 8%, it is required an investment of 35% of GDP. The present savings level is nearly 28% of GDP. Therefore, the proposed steps will contribute to attract investment and thereby bridge the country’s resource gap.

• At present investment incentives are granted under the Inland Revenue Act and the Strategic Development Project Act. Rationalizing these provisions will provide clarity to such incentives thus creating an investor friendly legal environment. All existing, new as well as SME enterprises are encouraged through this measure.

Proposal: Investment incentives • Four-year tax holiday for small scale industries investing a minimum of Rs. 25 m in following areas: • Agriculture or agro processing • Animal husbandry or processing • Fisheries/fish processing • Creative work including artwork. 19 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

• Tax holidays for medium scale enterprises engaged in any specified activity

Investment Tax Holiday Rs. 50-100 m four years Rs. 100-200 m five years Over Rs. 200 m six years

Impact: • Presently certain industries are eligible for tax holidays not exceeding seven years for a minimum investment of US$ 3 m. Lowering the investment criteria and extending tax holiday period by Budget 2012 will lead to attract more investment and also encourage SMEs to invest in export related activities.

• Encourage private sector investment in export oriented undertakings

Proposal: Tax holidays for large scale enterprises Investment/Tax Holiday Rs. 300-500 m six years Rs. 500-700 m seven years Rs. 700-1,000 m eight years Rs. 1,000-1,500 m nine years Rs. 1,500-2,500 m 10 years Over Rs. 2,500 m 12 years

Impact: • Encourage export oriented investment in large scale projects

Proposal: Tax concessions for expansion of existing enterprises nIf an existing enterprise is investing in an expansion project with a minimum investment of Rs. 50 m prior to 31 March 2015, such investment will be treated as a qualifying payment deductible from the assessable income of the enterprise subject to a maximum of 25% of the investment for each year of assessment falling within the period of four years commencing from the year of investment.

Impact: nExisting industries are encouraged to invest in expanding their activities.

Proposal: 4. Tea sector • Increasing subsidies for tea small holders • Replanting subsidy from Rs. 250,000 to Rs. 300,000 • New planting subsidy from Rs. 50,000 to Rs. 150,000

• A concessionary loan scheme with 8% interest rate and seven-year repayment period to assist Regional Plantation Companies [RPC] to plant and replant their tea lands.

• Permit Sri Lanka Tea Board to promote and popularise ‘Sri Lanka Tea’ using cess funds.

• Encourage joint ventures between tea producers and exporting companies to promote ‘Sri Lanka Tea’ in value added form

20 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

• 12% concessionary tax rate for such joint ventures.

Impact: • Tea smallholders are contributing nearly 76% to the total tea production. Therefore, increasing the new planting and replanting subsidy substantially will encourage smallholders and thereby enhance the productivity of the tea industry.

• At present, a large area of land under RPCs remains unutilized. The proposed loan scheme will encourage them to use their lands more productively.

• Sri Lanka aims at increasing export income from tea to US$ 2.5 Bn by 2015. Hence, carrying out an aggressive marketing campaign to promote Sri Lanka tea in the international market will help to penetrate into new markets and also to increase country’s share in the existing markets.

• At present a 28% income tax rate is applicable for manufacturing companies engaged in value added tea industry. Extending concessionary tax rates for joint ventures of value added Sri Lankan tea will encourage value addition and also promote productive alliances among industry stakeholders.

Proposal: 5. Rubber sector • Development of 10,000 ha of smallholder rubber lands in the Ampara and Mahaoya areas • Allocation of additional Rs. 200 m to improve tea and rubber and develop related research.

Impact: • The present rubber production of 153 m kg is not adequate to meet the increasing demand by the local value added rubber industry. Therefore it is vital to expand rubber cultivation to non- traditional areas. At present 54% of total area under rubber cultivation of the country is owned by smallholders.

• The productivity of the tea and rubber industry is not satisfactory and it is vital to introduce better agriculture practices, new high yielding varieties and improved techniques of tapping, etc. However, attention on R&D activities in these industries is not adequate. Therefore allocation of funds for R&D has positive effects on the plantation industry.

Proposal: 6. Minor export crops • Allocation of an additional sum of Rs. 150 m for the Export Agriculture Department to promote intercropping of cinnamon, pepper, cardamom and cocoa.

• Concessionary duty on equipment required for the promotion of high quality water management techniques.

• Tax concessions for establishing high standard processing factories for spices. • Permit R&D expenses to be deducted from taxes.

Impact: • International demand for our minor export crops is increasing but there is a supply limitation. Therefore, introducing inter-cropping as a mean of enhancing supply as well as productivity of these lands is an important initiative.

21 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

• An appropriate water management system is required to enhance the productivity of lands.

• Budget-2011 introduced export cesses on spices to encourage local value addition. Hence proposed concessions will further encourage the enterprises engaged in the value added industry.

• Encourage R&D leading to introduction of value added products and processes.

Proposal: 7. Rice export zones • Establish rice exporting zones in the Southern, Eastern, North Central and Northern Provinces. • Allocation of Rs. 200 m to related R&D and extension services. • Tax concessions for setting up of modern rice processing mills in the zones. • Allocate Rs. 100 m to increase production of seed materials, to provide extension services and technical knowhow in seed cultivation.

Impact: At present 1.06 m Ha of the country is under paddy cultivation and the total production is around 4.3 m MT. In 2010 Sri Lanka has exported 199 MT of rice to the value of US$ 80 m to Indonesia, Singapore and Thailand. As the result of the Government’s initiatives for developing rice cultivation, an excess production is expected in the future. International demand for rice is also increasing steadily specially in the Asian, American, European and African regions. Therefore establishing dedicated zones for paddy cultivation for exports and also granting concessions to attract investment to this sector is vital at this stage.

Proposal: 8. Fish sector • Expanding prawn farming in selected lagoons in the Eastern Province. • Concessionary loan for improving fishing in lagoons, tanks, rivers and for growing fish in tanks and ponds. • Allocation of Rs. 50 m to set up an ornamental fish exchange.

Impact: • The prawn industry has been experiencing a setback due to inadequate supply base for exports mainly due to attacks of diseases. Prawn farming in the Western Province has been restricted due to environmental concerns. Therefore, expanding the industry into new areas is vital as there is a high demand for Sri Lankan prawns in the international market.

• Encouraging fishing with new techniques will lead to increase quality supplies for exports. • Promote self employment and enhance supply base for exports and to introduce new species to export range.

Proposal: 9. Livestock sector • Assistance for dairy industry to explore export market opportunities. • VAT exemption for modern machinery and equipment.

Impact: • Encourage to exploit export potential of the dairy industry of Sri Lanka. • Enhance productivity of the industry.

22 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Proposal: 10. Craft sector • Rs. 100 m allocation for the development of traditional craft villages [10 villages]. • Rs. 100 m to set up new art gallery in Colombo. • Promote high standard art galleries in an around famous hotels/city centres. • Financial assistance through Lankaputhra Bank to improve their product. • Tax exemption for artwork, craft and related transactions.

Impact: • Harness local resources and skills for the development effort of the country. • Generate market opportunities for the products of local artisans. • Encourage adoption of new techniques to enhance design capabilities and productivity thereby meeting the needs of the international market.

Proposal: 11. IT industry • Allocation of Rs. 500 m to broad base the IT literacy development programme. • Setting up a Technology City in Hambantota. • BOI concessions to attract investment to the proposed Technology City in Hambantota. • Duty exemption for automated processing machines/computers.

Impact: • The IT sector has a large potential for employment and for export. The subsequent governments have made special efforts to develop the IT literacy of Sri Lanka. This proposal will further encourage the spread of computer literacy and thereby create a pool of persons with IT skills needed by the industry.

• Sri Lanka has targeted export earnings of US$ 1 b from the ICT sector by 2015. Establishing IT cities with dedicated infrastructure is essential to attract investment to the ICT industry.

• Create level playing field for BOI and non-BOI ICT and BPO industry.

Proposal: 12. Textile industry • Exemption of all taxes on imports of yarn. • Duty exemption for machinery imported for factory modernization. • Tax concession for substantial investment made to modernize existing factories. • Extend long-term tax holidays for related new investments. • Permission to sell 25% of the production in the local market.

Impact: Creating backward integration is one of the strategies in achieving US$ 5 b export income from garments by 2015. At present net foreign exchange capacity of apparel industry is around 35%. Therefore concessions granted for the textile industry is vital at this juncture to enable our exporters to source their raw materials locally.

Proposal: 13. Apparel industry • Permit export oriented apparel manufactures to sell up to 25% of their production in the local market on the payment of all inclusive taxes at Rs. 25 per piece.

23 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Impact: • Relief to apparel exporters. A means of disposing export surplus.

Proposal: 14. Encourage local value addition • Impose / increase cess on raw rubber, natural graphite, clay, sand, phosphate, stones, granite, sand stones, mica, ilmonite, rutile, titanium, zirconium and timber logs.

Impact: • This measure will lead to discourage export of such products in primary form and thereby promote value addition.

• Export cess on raw rubber has been increased from Rs. 12 per kg to Rs. 15 per kg or 2% of FOB to further encourage the local rubber product manufactures.

Proposal: 15. SME sector • Income tax concessions for SMEs • Pre commencement expenses of SMEs will be allowed to be deducted from the total statutory income of the year of commencement of commercial operation. • Reduce taxes on the importation of machinery and equipment not manufactured in Sri Lanka. • Impose mandatory requirements on financial institutions to lend 10% of their long-term funds to the SMEs and agriculture sector. • All State commercial banks and regional banks to set up a special SME Bank branch in all districts. • Reduce income tax rate from 28% to 24% for such branch activities. • 50% Government guarantee for banks providing loans for SMEs. • Increase threshold of ESC from Rs. 25 m to Rs. 50 m.

Impact: • Creating an enabling business environment for SMEs to realize full potential of the sector. • Encourage adoption of new technology and thereby enhance productivity. • Lack of access to concessionary finance is a burning issue experienced by SMEs. This innovative approach will lead to make available finance needed by the sector. • An effective institutional arrangement to broad base the industries across the country. • Encourage banking institutions to lend to SMEs as this measure will reduce the risk of lending to SMEs. • A relief to SME sector.

Proposal: 16. Skills development • Allocate Rs. 500 m to undertake special accelerated vocational training programmes. • Financial support to universities to commence diploma/degree programmes targeting creative industry.

Impact: • Develop human resources needed by the export industry. • Universities are encouraged to conduct demand driven programmes and thereby will provide HR needs of the industry to improve the quality of the products especially in the textile, jewellery and leather sectors.

24 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Proposal: 17. Research & Development • Reduction of income tax rate from 24% to 16% on research income. • Reduction of personal income tax rate applicable to all engaged in R&D field from 24% to 16%. • Concessionary tax rate of 20% for R&D institutions and exempting them from VAT. • Allow triple reduction of R&D expenses done through Government institutions. • A nominal fee for SMEs obtaining R&D from State institutions. • Allow 50% of the R&D income of State institutions to be shared among researchers. • Allocate Rs. 300 m to the National Research Council to encourage special research that would facilitate economic development.

Impact: • Sri Lanka’s R&D capacity is not adequate and industrial research being carried out is not demand driven. Therefore measures proposed for the R&D sector are important to motivate researchers and research institutions to carry out effective R&D work which meets industry requirements. • Encourage individuals engaged in research. • Encouragement for R&D institutions. • Encourage to build up relationship between the enterprise and R&D institutions. • Encourage SMEs to carry out R&D activities to improve their product. • Motivation for research staff of State institutions. • Strengthening capacity and competency of the institutions.

(The writer is the Chairman and Chief Executive of the Sri Lanka Export Development Board.)

25 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Management

26 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Daily News – November 29, 2011

Industrial security should be recognized on par with Accounting, Auditing and HR: Industrial security: an important link in the corporate field

F.N. de Alwis

Industrial security has never been given due recognition especially in the private sector. It should be recognized on par with Accounting, Auditing and Human Resource Management which also do not generate any income, but ensures by preventive and detection methods, waste, loss, damage, fraud to any organization thus ensuring that the organization is sure that its systems and methods in the company manual procedures are compiled with by all concerned at all levels, irrespective of the position they hold.

Security is concerned in the protection of life and property or assets. It protects from diverse possibilities – natural and man made, planned and accidents. It is as concerned with efficiency although not recognized by the senior management. The objective of Industrial Security is to ensure that assets and man power are deployed in a manner to ensure a good return in production and sales which will be in commensurate with the company’s efforts and its investments.

Security can be technically defined as ‘untroubled by danger or fear, with confidence, impregnable. Certainly not to give way or get loose or be lost.

The art of security management, it is said is at a pivotal stage in its development. This many have the security professionals stirred in his chair either in agreement or with a groan he is to endure yet another treatise on the corporate cop vs. the government mandarin. The art of security management is the art of the possible. It is time to stop recycling old arguments which move forward into a vigorous professional discipline about to open before us.

As an art Also security management is spoken of yet an art because it is really not a science but it may have technical dimensions which is in total disciplined in details with the abstract and the people. There are no simple answers in security unlike several other business skills which may clearly define solutions with graphs, tables or charts indicating what is ahead. In security that threat always is caused from other people with their attempts to steal, injure, damage or destroy. The ingenuity of criminals in seeking to do so will only have in the human limitations in unwillingness. Our response based on an open mind approach to threats and new technology with a willingness to understand not only the criminal part, also the detailed functioning of our own Securityis much an important business organizations. activitylike anyother discipline such as

finance,marketing and human resources.

27 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Security Management Investigating management, comparative policing, criminology risks, crisis and disaster management and several other topics pertaining to criminal justice could be obtained by way of qualifications through universities and other professional organizations but none of these qualifications will suffice to enable the corporate Security Directory to carry out his rules without previous security experience as much as medical doctorate will not qualify a student to be a surgeon before he is a houseman. The standards of high security management is being sought out in the public and private sector and the interest shown by students of security indicate the level of expertise which exist today and demand in the public and private sector. It is opportune for the profession to grow up and view itself on the point of view of the user, the CEO, the Board or the Management.

We should pause to realize and think what benefits the Security Manager will bring to such organizations. It is certain the corporate functions will bring no functional benefits, it is due to obscurity and disbandment at worst. The most common argument today is that security is often seen as merely a fringe business activity. In my opinion, this argument is both ill-informed and pointless as it is clearly shown in case of some of the world’s most successful businesses. Pointless because if it is so, in these organization, then it is the corporate Security Manager who should change that perception for no one else will and it is no point sitting and waiting for intervention from a concerned super power. One would ask where then should a Security Manager be in respect of the CEO? The answer would be a simple as to say that he should be beside the CEO. He does not have to be in the next office but he should be placed in a unique position of trust and that has been my experience in the field of Industrial Security in Sri Lanka. Such trust will not come with territory it must be earned.

Since after the CEO there is a Deputy Assistant in the Security Manager who has the greatest need to understand every aspect and complexity of the company’s operations. He can advise the Human Resource Department in vetting new employees, assist the finance division in fraud investigations, in creating corporate business continuity plans, crisis management procedures, disaster management procedures and safety systems and procedures. He should be trusted as a person with solid understanding of every aspect of company’s operations, whose sole loyalty lies not only to his department, the rule of law but to his company as a whole.

Skills in security management Many of the skills which we practice today are straightforward and relate to practical knowledge of systems and defences with other agency contacts which we link them to our experience or what we have noticed going wrong elsewhere. Our sense of “nose” for trouble are instincts, capacity for hard work which produces a management to out class many other Departmental Managers.

Of recent times, there has been a tendency for guarding to be contracted out and for security service guard force training, integrated systems, specifications and employ vetting to be outsourced. By this not only security costs have escalated beyond necessary levels but some of the most sensitive needs of the company’s operations have been exposed by handing over such operations to organizations with neither knowledge nor loyalty to the company with its essential objectives.

More to the point where security is concerned, if properly practiced not only is it merely a defensive tool used to security premises but will act as a vital corporate weapon. The effect of which is centered to the business and most critical objectives and interests. It is a core activity. The Security Manager has the vision so to make it. He does so because he knows just what a good corporate lead can do for his company.

If we are to create a new impetus in developing the Security functions as an essential corporate asset it is appropriate that we should examine these management skills which will enable the Security Manager to 28 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

manage his department effectively and in providing his CEO a professional service and not cause it to be a drain on the other corporate resources.

It is a fundamental principal that security is much an important business activity like any other discipline such as finance, marketing and human resources. It has been a fact that we in the security profession have failed to communicate this fact as a profession. Having said so security functions does differ from the management of other corporate departments in many specific ways. They could be enumerated as follows:-

* The varying of levels which security may interact with other departments and the pervasive ways it is involved in various aspects of operations.

* The potential mistakes made of a serious nature by reliably junior employees.

* The nature of the security service itself which may consist of accelerating and employing personnel who are invariably accustomed to distinct management styles which can be of a higher order and may be difficult to the corporate environment.

Security staff The fact that security staff as experienced by them in Armed Services and Police will like to exist above suspicion and acquire a degree of trust within the organization. Security in any organization is a service and it is important to realize that it is only by serving that we can fulfill our role.

It is essential that at each level the security staff should establish close relationship with its opposite numbers around the organization. He must meet every key manager of the management in his organization. The Security Manager must discover their needs, vulnerabilities, problems and their prejudices about security.

Thereafter he should work with them to help them to counter their own security problems. The Security Manager will be an integrator. He will have a first class view of every area of security activities in terms of medical analogy, it may be said that a Security Manager is not a brain surgeon, anesthetist, or a paediatrician but he is a physician.

He identifies the problem, produces the diagnosis, the chart, way ahead for a solution. Bringing about the specialist to install or integrate systems or to carry out a International investigation, the Security Manager needs to have a broad knowledge of security activity.

In designing security strategy, the Security Manager will objectively see and identify such problems. The idea that a chain is only as strong as its weakest link. It is quite appropriate and never more true than in a world of security. It is here that a Security Manager either sink or swim. He shall have the ability to carry out a threat assessment and risk analysis which is typical to the effective performance of a Security Manager.

It is pertinent to mention that with such assessment comes the designing of the security strategy incorporating written procedures, integrating electronic systems, recruitment, vetting, training in physical security systems, audits in the whole gamut of interrupting techniques which will provide a comprehensive and coherent security strategy. A knowledge of law appropriate to the country with proper application is of a significant nature.

(The writer is a graduate of the Institute of International Security UK, Fellow of the Industrial Security Foundation (Inc) Sri Lanka) 29 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Daily FT – November 30, 2011 Why companies yearn for competency

Attention to human resources In the management and organizational literature, as well as in practice, increasing attention has recently been paid to the importance of human resources in organizations. There seems to be a growing consensus that in many organizations these are the most critical of all resources.

The purpose of this article is to focus on the primary type of human resources, competences carried by individual employees and work teams. Competences constitute critical resources for the firm’s capability to take advantage of opportunities and stay competitive.

Besides being a central resource in itself, productive utilization of other resources requires relevant competence. Expressed differently, relevant competence is a necessary (and in some cases both necessary and sufficient) condition for strategic success. This perspective is different from traditional ways of viewing competence in the strategic management, organizational theory and marketing literature.

Although competences have been treated in applied parts of the strategic literature, this has predominantly been on a macro organizational level (Naugle and Davies, 1987, Prahalad and Hamel, 1990). There is hence a need also to include the micro level (employees and teams) when in organizations are analyzed.

Competency defined Competence (or competency) is the ability of an individual to perform a job properly. A competency is a set of defined behaviours that provide a structured guide enabling the identification, evaluation and development of the behaviours in individual employees.

As defined, the term “competence” first appeared in an article authored by Craig C. Lundberg in 1970 titled “Planning the Executive Development Program”. The term gained traction when in 1973, David McClelland, Ph.D. wrote a seminal paper entitled, “Testing for Competence Rather Than for Intelligence”. It has since been popularized by one-time fellow McBer & Company (Currently the “Hay Group”) colleague Richard Boyatzis and many others. Its use varies widely, which leads to considerable misunderstanding. Some scholars see “competence” as a combination of knowledge, skills and behaviour used to improve performance; or as the state or quality of being adequately or well qualified, having the ability to perform a specific role. For instance, management competency might include systems thinking and emotional intelligence, and skills in influence and negotiation.

Competency is also used as a more general description of the requirements of human beings in organizations and communities.

Competency is sometimes thought of as being shown in action in a situation and context that might be different the next time a person has to act. In emergencies, competent people may react to a situation following behaviours they have previously found to succeed.

To be competent a person would need to be able to interpret the situation in the context and to have a repertoire of possible actions to take and have trained in the possible actions in the repertoire, if this is relevant. Regardless of training, competency would grow through experience and the extent of an individual to learn and adapt.

First, the competencies concept is defined. Then the notion of competence portfolio is introduced and

30 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

central properties of competences as resources in firms are outlined. This leads to a discussion of how firms can extend the competence portfolio thorough co-operation with external actors.

Thereafter, the relationship between the mobility of individual and collective competences on the one hand and competitive advantage on the other is discussed. Finally, a traditional perspective on the management of competences in firms is contrasted with an alternative, future-oriented perspective.

Competence During the last few years, increasing attention has been paid to the significance of human resources in organizations in general and to competences in particular. Interestingly, this development has taken place within different fields of research in the organizational and management sciences.

One line of inquiry has concentrated on managerial competences and the nature, composition and application of such competences (Katz, 1974; Klemp, 1980; Boyatzis, 1982; Morgan, 1988; Yurkl, 1989; Bigelow, 1991; heller, 1993). Focus has predominantly been set on psychological aspects of competences and their implications for the execution of managerial tasks.

Another line of research has been preoccupied with the importance of competences for strategic management in business firms, illustrated by terms such as ‘core competences; ‘key competences’, ‘dominant competences’ and distinctive competences’ (cf Prahalad and Hamel, 1990; Hall, 1989; Itami, 1987; Naugle and Davies, 1987; Snow and Hrebiniak, 1980; Selznick, 1957).

One has been preoccupied with primarily with aggregate capabilities of firms as to their operations and competitiveness relative to other firms. A normative statement that has repeatedly been made by several authors is that firms have to protect and define their core competences (for an overview, see Bonora and Revang 1993). These are, so to speak, viewed as being the most precious asset in firm.

The most prominent expression of this is contained in the current renaissance and further development of the resource-based theory of the firm (Rumelt, 1974; Snow and Hrebiniak, 1980; Wernerfelt, 1984;, Hitt and Ireland, 1985; Winter, 1985; Teece, Pisano, and Shuen, 1990; Barney, 1991; Collis, 1991; Conner, 1991; Grant, 1991; Leonard – Barton, 1992; Gronhaug and Nordhaug, 1992; Hall 1992).

The basic logic of the resources-based perspective is that the firm’s unique capabilities in terms of technical know-how and managerial ability are important sources of heterogeneity that may create sustained competitive advantage and, moreover, that distinctive competences and superior organizational routines in one or more of the firm’s value-chain functions may enable the firm to generate rents from a resource advantage (Mahoney and Pandian, 1992:365; cf. also Hitt and Ireland, 1985).

Furthermore, it is important to note that it is not only the quality and composition of resources per se that matter, but also the way in which they are being utilised. As noted by Penrose (1959:54), firms may achieve rents not because they possess better resources, but because their distinctive competences allow them to make better use of their resources (Penrose, 1959:54; Mahoney and Pandian, 1992).

The concept of competence has been given highly different meanings and still remains among the most diffuse terms in the organisational literature. In a recent review, Collin (1989:20) states that, given the central role of competences in work life, surprisingly little attention has so far been paid to its definition (cf also Fagan, 1984). The term originates from the Latin Verb competere which means to be suitable.

Having been developed within psychology as a concept characterising individuals’ ability to respond to respond to demands placed on them by their environment (White, 1959), it has in more recent, work related 31 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

versions been applied to describe an underlying characteristic of a person which results in efficient work performance (Klemp, 1980; Boyatzis,1982; Heller,1993; see also Davies, 1973; Fagan, 1984; Mc Clelland, 1973; Pottinger and Goldsmith, 1979; Training Commission, 1988; SCANS,1991).

However, it can be argued that this definition is too limited because it does not encompass competence which, for some reason or another, is currently not being utilised. In many organisations a considerable challenge is precisely posed by the need to combine and employ existing knowledge which has not yet been put to use.

Individual competence may be gained through education and experience in the work place. Competence obtained through education is general in the sense that it is applicable in more than one firm and often within a variety of jobs.

Competence gained through experience is more or less specialised by being linked to the idiosyncrasy of the firm in which it has been acquired, hence, it will have value only within the organisation where it was developed (Becker, 1983). Such firm-specific competence may be easy or difficult to obtain.

In some instances, little training is required to develop the firm- specific competence necessary to perform the tasks in a satisfactory manner. It has, for example, been asserted that entry-level employees in a particular, standardised fast food chain are considered more or less fully trained after the completion of a two-hour training programme.

In other situations it will take tasks adequately. This is particularly the case when the knowledge underlying a skill is complex or cannot be articulated, i.e. tacit knowledge (Polanyi, 1962; Nelson and Winter, 1982).

It is furthermore fruitful to distinguish between actual competence, i.e. competence needed to perform a certain task, and formal competence, i.e. knowledge and skills as evaluated through examinations and various types of certification arrangements.

Formal competence is in certain situations legally required through authorisation regulations, as is the case for doctors, lawyers, plumbers, electricians and even chauffeurs. Formal competence is frequently viewed as proxy evidence that an individual masters certain skills which are considered indispensable or at least desirable in order to perform work tasks.

It is used both to indicate the level of competence and as a foundation for recruitment. Such use of formal competence measures also makes it possible to hire personnel without a through and cumbersome testing of their skills.

As a result, the transaction costs (cf. Williamson, 1981), in this case the firm’s recruitment and selection costs will be lower than they would otherwise have been it the candidates’ competence had to be tested by the firm itself. In the sociology of education, this has been called the filtering or screening function of education (arrow, 1973; Collings, 1976; see also Nordhaug, 1991a).

Formal competence is also frequently applied as a criterion for screening recruits to different formal training programmes financed by the firm. This may either be a way of rationing a scarce good in high demand or may reflect the fact that a minimum level of competence is necessary for participants to be able to follow the programme.

32 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

The competence portfolio The firm embraces individual with different competences, and consequently, one challenge is to co- ordinate and utilise a range of dissimilar competences that are spread among a large number of employees. It is reasonable to assert that the way in which this is accomplished strongly affects the performance of the firm. The firm’s competence assets at a given time may be described as a portfolio of competences (cf. Nordhauh, 1991b). A central point is that this portfolio may be more or less well understood by the firm’s management and employees. Few companies possess a complete understanding of their actual competence potential but may approach such a comprehension if the available competence resources are carefully tabulated and assessed.

We will argue that the firm’s competence portfolio can be fruitfully described in terms of its relevance for task performance, degree of uniqueness, visibility and domain specificity. The relevance of employee competences in regard to the performance, of work tasks is of course central. If the competences in place are not sufficiently relevant for the execution of the work tasks emanating from the particular competitive situation at the time, chances of achieving a satisfactory work performance are very slim.

The notion of competence visibility regards the degrees to which they are manifest or latent, i.e. whether they are being used or remain hidden and no immediate value to the company. Still, once detected, competences which are applicable in present or future work constitute a potential for the firm.

When key competences in the firm are unique compared to those of the competitors, when they are time- consuming to develop and when they are efficiently protected, they can generate impotent and sustained competitive advantages for the company.

An illustrative example is the competence of Swiss watchmakers, which for a long time, until the industry was revolutionised by the quartz technology, provided the Swiss watch industry with extraordinary competitive advantages. In this case, the competence was closely linked to the mastering of advanced techniques of precision mechanics, which, despite many attempts at imitation, proved difficult for others to acquire.

Yet another important factor relates to how general or non-specific the competences are. A competence’s degree of specificity may vary from being relevant only to one single task in one company to being applicable to tasks in many companies or an entire industry (cf.Nordhaug, 1993:ch.3).

A common assumption is that managerial skills are of a general nature. However, the following quote illustrates that is not the whole truth: ‘It has often been asserted that someone who is a good manager at home, also will be a good leader abroad. This is not necessarily true. Our experience has been that even though a manager may function well in one environment, he or she does not always function well in another environment’ (Heiberg and Odegard, 1983).

Whereas standard text books and most management development programmes predominantly aim at transmitting general competence, the quote underscores the fact that, to function well as a manager, the person I question must also have specific competence pertaining to the firm’s domain of operation.

This is also supported by the literature on experts versus novices. Both groups usually have basic, rule based knowledge. However, in contrast to novices experts possess detailed domain-specific knowledge (for an overview, see Ashcraft, 1989).In those cases where domain-specific competences are difficult to acquire, or take substantial time to develop, possessing them may represent an important competitive advantage. An example is the advantages of truly knowing and understanding the customers. This can lead to close and lasting relationships which the competitors cannot sever. We may, moreover, observe the advantages power 33 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

possible through domain-specific competence in biographies of business and political leaders, which often demonstrate how persons possessing and influence outcomes. Another point is that the competence applied and the manner in which it is utilised determines organisational performance, i.e. how the company’s competence manifests itself in the firm’s value activities. This has important implications.

(The writer is the Managing Director and CEO, McQuire Rens Group of Companies. He has held regional responsibilities of two multinational companies of which one was a Fortune 500 company. He carries out consultancy assignments and management training in Dubai, India, Maldives, Singapore, Malaysia and Indonesia. He is a much sought-after business consultant and corporate management trainer in Sri Lanka.)

First, the company’s configuration of competences, which reflects how these are chosen and combined, is crucial for the company’s competence s can create synergies such that: R (k1+k2)> R (k1) +R (k2), indicating that the result (R) of utilising sum of both competences k1 and k2 combined is greater than the added results generated by utilising each of the two of them separately.

Third, the utilisation of the firm’s competence has a social dimension. The way in which people interact can contribute to producing new, collective competences. This is clearly demonstrated in firmed with positive cultures, where the teamwork is effective and goal directed.

There are examples of firms which outdo their competitors not because their competence base is better or different, but because their co-ordination of the competences is considerably better. A well-know example is the tightly co-ordinate and collaborating football team that lacks star players, yet plays well enough to beat star-studded teams.

We may apply the concept of ‘social capital’ to denote the fact that co-operation can produce added values (Coleman, 1988). Individual competence may thus increase in value as it is used in co-operation with others. When competences are well co-ordinate, the social capital to be found in the firm’s internal network is substantial. (The fact that its competences base also may be augmented through the utilisation of external networks will be discussed later.)

The fourth implication is that the role of management is critical in regard to the interpretation, planning and employment of the firm’s applied and potential competence. This in turn involves giving priority to the development of the competence portfolio and searching for co-operative partners who possess valuable complementary competences.

Distinctive competences Understanding what distinguishes the firm from other firms is critical to its strategic development. The concept of core competences has been needed to depict what the firm is able to perform with excellence compared to its competitors. It is therefore essential for firms to analyse their competences in order to identify core competences, so measures can be taken to further protect and develop them.

Examples of competences include Apple Computer’s ability to develop and market user-friendly software and personal computers. Sony Corporation’s skills in manufacturing and miniaturising components, Honda ability to develop and produce light-weight, fuel-efficient engines, and Bang & Olufsen’s competence in development and designing high quality, user-friendly high fidelity equipment.

There is today tendency for many firms to concentrate more strongly on strengthening their core competence by outsourcing many of the activities needed to make the end product that can be performed with higher quality or more efficiently by other firms, which are then made suppliers and subcontractors. 34 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Hence, products are to lesser degree made by one firm only and to an increasing extent by contractual networks of separate firms (cf. Carnevele, 1991).

As already mentioned, the relevance of the competence is also crucial. If the degrees of uniqueness and relevance are high, a potential for competitive advantage is present. A third factor relates to how efficiently the competence base is protected.

If a person with a unique and relevant skill is the cornerstone of the base, the firm is extremely vulnerable to the degree this person is inclined is inclined to shift to another company.

An example is the company employing an outstanding scientist who is key is carrying the unique R&D work. If this employee quits, the function of the firm’s distinctive competence may erode. Such developments have been observed at many universities. For example a making science department at a US university was ‘wiped off the map’ when prominent more or less simultaneously left for positions at competing universities. In case where the distinctive competence is linked to collaboration between individuals, it is often far better protected. First, the competence depends on a combination of several, which may make it more stable and less vulnerable. Second, the fact that the distinctive competence of the firm embraces supra-individual elements through the existence of team skills will make it difficult for competitors to observe, decompose and duplicate. Scandinavian Airlines System’s (SAS) successful transformation during the 1980s has, for example, been partially attributed to its ability to develop and utilise the employee’ collective competence through inculcating in to the corporate culture a shared mindset emphasising excellent customer service paired with generation of crucial competences. Despite the public openness of the top management and the many easily duplicable ‘smile-to-the customer courses’, few other airlines seemed to succeed in imitating SAS’s distinctive competence at the time.

Competency based interview A competency interview (also referred to as a situational, behavioural or competency based interview) is a style of interviewing often used to evaluate a candidate’s competence, particularly when it is hard to select on the basis of technical merit: for example, for a particular graduate scheme or graduate job where relevant experience is less important or not required.

However, increasingly, companies are using competency based interviews as part of the selection process for experienced recruitment, as it can give valuable insights into an individual’s preferred style of working and help predict behaviours in future situations.

Conventional job interviews may focus on questions relating to an applicant’s past or previous industry experience, but this is an ineffective tool for graduate level candidates who are not expected to have any former experience in the industry they wish to work in.

Questions about industry experience will not be part of a competency interview. Instead interviewers will ask questions that require candidates to demonstrate that they have a particular skill or a “key competency” the firm is looking for. Candidates will be asked to do this using situational examples from their life experiences, to illustrate their personality, skill set and individual competencies to the interviewer.

Competency interviews may also feature questions that probe candidates on their knowledge of the company and industry they have applied to. This type of interview question tests candidates on their motivation and commitment to career.

A typical competency based interview will last for one hour. At most major firms, competency interviews

35 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

will also be standardised. Consequently all applicants can expect to be asked identical questions. Employers typically use some of the following as their key competencies:

ƒ nTeamwork ƒ nResponsibility ƒ nCommitment to career ƒ nCommercial awareness ƒ nCareer motivation ƒ nDecision making ƒ nCommunication ƒ nLeadership ƒ nTrustworthiness and ethics ƒ nResults orientation ƒ nProblem solving ƒ nOrganisation

36 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Trade & Marketing

37 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

The Island – November 28, 2011

Marketing an emerging tourism destination in Asia: A country perspective of innovation and diversification

By Dr Nalaka Godahewa, Chairman Sri Lanka Tourism

The Global Tourism arrivals grew by 6 % in 2010 recovering from a 5% slump in 2009. In 2010 we saw 940 Mn tourist arrivals globally, with global tourism revenue reachingan all time record of USD 919 Billion.

At the beginning of the year UNWTO has predicted a further growth of about 4-5% in 2011 as global tourism industry is recovering fast.

China and Malaysia, the no 1 and 2 tourist destinations in Asia are now amongst the to 10 most popular tourist destinations in the world.

It is in this background we are discussing as to how an emerging tourism destination such as Sri Lanka could be effectively marketed. Surrounded by so many ambitious neighbors with large marketing budgets focusing on tourism as a key economic driver in their respective countries this is indeed a challenging task for us.

To be successful in marketing one must first understand the market, the behaviors and expectations of the target customers and the industry trends. I would like to highlight 10 major global trends in the tourism industry today,

1. Regional and short haul travel becoming popular 2. A defensive mindset and tight budgets. 3. Consumers are becoming more demanding 4. Travelers are searching for meaningful experiences. 5. Consumers seeking more green 6. Independent women traveling with friends. 7. Travelers are more activity oriented than destination oriented 8. Web and mobile technologies are emerging as powerful marketing tools 9. Instant access to information through traditional and social media 38 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

10. China is dominating growth of both inbound and outbound

When Sri Lanka Tourism developed its 5 year tourism development strategy in consultation with the key industry stakeholders this year we gave due considerations to the above facts, particularly in refining our tourism product and the marketing strategies.

Sri Lanka is a distinct island located just below the southern tip of India. It has a land mass of 65,610 sq km, surrounded by 1,330 km of coastline. Geographically, Sri Lanka is well positioned on the sea route connecting the East and the West. This is why historically Sri Lanka was an important trading hub in the ancient world. Trade links with China Egypt, Greece and Rome goes back as far as 1500 BC. Sri Lanka is believed to be the island fortress of legendary king Ravana in the great Indian epic Ramayana . The Sinhala Race,the majority ethnic group in the country was founded by "Vijaya’ a North Indian Prince who arrived in a ship with 700 supporters. From 1505-1948, the island was under the colonial rule of the Portuguese, Dutch and British

This beautiful island has an inherent advantages of having a highly diversified tourism product which could be pitched against any other well established tourism destination in the world. It has Beaches like Maldives or Mauritius, Ancient heritage sites like Egypt or Greece, Rain forests like Congo or Amazon, Art & Culture like India or Thailand, Waterfalls like Zambia or Canada, Wildlife like Kenya or South Africa, Natural Beauty like Switzerland or Myanmar, Gemstones like Madagascar or Burma , Spices like India or Indonesia and Festivals like China or Brazil.

With such a comprehensive tourism product one may wonder why hasn’t Sri Lanka emerged as a top tourism destination in Asia so far? It is due to a very simple reason. For 30 long years the progress of this beautiful country was hindered by an internal conflict orchestrated by one of the most brutal and horrendous terrorist outfits that the world has ever seen; The LTTE. Fortunately for Sri Lanka and also for the world this 30 year long armed conflict ended on18 May 2009 with complete annihilation of LTTE under the enlightened leadership of his Excellency Mahinda Rajapaksa, the President of Sri Lanka.

During the last 3 years of post conflict period the resettlement and national reconciliation programs have made significant progress setting an example to the rest of the world. Government is now totally focused on the Economy. In 2010 country recorded a 8% GDP growth. In 2011 first half we have maintained same growth rate. The per capita income is expected to grow from current $2400 to $4000 by 2016. Number of industries have been identified by the government as key economic drivers. Amongst thesetourism industry also plays an important role

The economic development policy of the government draw attention to all segments of the society. The development according to the vision of his Excellency the president Mahinda Rajapakse cannot be confined to a few sectors, few organizations or few individuals. A larger cross section of the society must benefit from the economic activities supported by the government. The development task has begun from home by government supporting activities that improve the house hold economies. The community based economies are being improved by providing the necessary assistance in terms of training, credit financing, subsidies etc. Townships are being developed to offer better life standards to the society. The overall investor friendly government policy framework, supports the emerging economy. The infrastructure development and capacity building are highest priorities of the Government currently.

His Excellency President Mahinda Rajapaksa has set a target for the tourism sector to reach 2.5 Mn tourist arrivals by 2016. In Mahinda Chinthana, the government policy framework for future, he states; quote " I will introduce an accelerated development program for the tourism industry. I will launch a program to

39 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

fulfill the infrastructure and other requirements in order to attract 2.5 million tourists annually by 2016" unquote –.

The Minister of Economic Development Hon Basil Rajapaksa who is also in charge of tourism has introduced a 5 year master plan for tourism development in order to achieve the following key tourism objectives;

1. Positioning Sri Lanka as one of the most sought after tourist destinations 2. Promote tourism to reach annual tourist arrivals of 2.5 Mn target by 2016 3. Increase the annual foreign exchange earnings to USD 2.75 Bn by 2016 4. Attract USD 3 Bn or more foreign direct investments (FDI) to the country within next 5 years. 5. Increase the room capacity to 45,000 by 2016 6. Reach 500,000 direct and indirect employment within the next 5 years

The tourism development strategy 2011-2016 focuses on 5 main areas.

1. Creating an environment conducive for tourism 2. Attracting new tourists 3. Ensuring arriving tourists are happy 4. Improve domestic tourism 5. Improve the global perception about the country

Sri Lanka Tourism with the assistance of key industry stakeholders have identified a number of projects and activities under each one of the above and they are being implemented currently.

The Government of Sri Lanka has clearly identifies tourism as a private sector driven industry and has confined its role to Planning ,Policy making, Providing common infrastructure, Coordinating capacity building, Identification of thrust areas/zones/ projects, Facilitating efficient project clearance, Ensuring transparency and welfare and coordinating country promotions and research

Dr P B Jayasundara , the secretary to the ministry has been involved in a series of consultative meetings with the industry to identify the key issues faced by them. A number of initiatives have been taken by the Government during the last two years in a positive direction to support the industry. For example, restoration of a simple tax regime, improved licensing procedures and faster service, setting up of a one stop shop for tourism investment approval. Expediting city development, revising 40 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

regulations to align with international standards, extensive use of technology for tourism promotion activities (web marketing, electronic ticketing for key attractions, online visa, call centre facilities etc) , development of a 5 year strategic plan with industry participation.

The private sector is expected to focus on identifying and investing into new business opportunities, building Infrastructure and man power, training staff and improving service standards, creating value added products, marketing year-round capacity , ensuring corporate social responsibility and ensuring sustainability

According to the major tourism trends I mentioned earlier, the tourists are today looking for more enriched, meaningful experiences. They demand value for their money. They like to travel short distances and see more things within a limited budget. They look for more activities in a single location. The new positioning strategy of Sri Lanka tourism takes these global needs into account and tries to capitalize on our inherent strength of being a highly diversified tourism product.

Sri Lanka is an island whose main advantages for tourism are Authenticity, Compactness and Diversity. The unique advantage of Sri Lanka as a tourism destination could be elaborated around these 3 core strengths.

With a 2600 years of recorded history ,everything about Sri Lanka is authentic and there is no necessity to manufacture a story for marketing purposes. Nature has blessed the country making it an extremely attractive destination for tourism. So authenticity is our first advantage.

With only 65,610 sqkm land mass, the entire island of Sri Lanka can be explored within a few days. Even the longest distance across the country can be covered within a few hours and if you are flying within one hour. Even a busy traveler can see most parts of the country within a short period of time due to this second advantagewhich is being compact.

The third and the biggest advantage is the unparalleled diversity of our tourism product. For the convenience of marketing we have summarizedallattractions in Sri Lanka into 8 categories. The number 8 has been selected because there are 8 letters in the name Sri Lanka. The 8 different product categories that we want to promote are;

1. Beaches - Pristine 2. Sports & Adventure - Thrills 3. Heritage sites - Heritage 4. Mind and Body wellness - Bliss 5. Scenic beauty of the country - Scenic 6. Wild life & Nature - Wild 7. People & Culture - Essence 8. Year-round Festivals - Festive

Now just think of any tourism destination in the world where you can find all these in one place. Even if you do, where else can you cover all these within a few days.Sri Lanka is probably the only country which makes it possible. That’s why we can call Sri Lanka "Wonder of Asia".

Since many tourists view exploring Sri Lanka as a refreshing experience,we have chosen the tag line "Refreshingly Sri Lanka, wonder of Asia". If we continue to use this tagline over a period of time we can make it globally known such as "Incredible India" , " Malaysia Truly Asia" or "Amazing Thailand" with much less marketing expenditure. 41 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Also in order to establish the fact that it is a compactdestination, we advice the industry to use the theme " the 8 wonderful experiences in 8 wonderful days’. However this will depend on the type of packages that each tour operator wants to promote.

Under each category, we want to focus on about 3 icons when promoting the destination rather than focusing on too many. For example " Sigiriya’, ‘Temple of tooth relic ‘and ‘Dambulla cave temple’ are the most widely promoted heritage sites. When it comes to wild life we hope to promote ‘ The elephant gathering at Minneriya’ , ‘leopard watching at Yala ‘ and ‘blue whale watching at Mirrissa’ as talking points. When it comes to sports and adventure ‘surfing at Arugambe’ is already well established. ‘Scuba diving’ and ‘ballooning’ are two other sports with high potential that we can popularize over time. Similarly for all 8 categories we are in the process of finalizing what we need to focus when promoting internationally.

Tourism should be a sustainable industry. There are two aspects that Government is quite keen to ensure. Firstly the economic benefits of tourism should be shared by a larger cross section of the society . Hence the supply chain development and value creation becomes key. Secondly the no development can compromise the environment. The government policy, regulations as well as the nature loving culture of our people will take care of this aspect.

As an emerging tourism destination we are quite keen to innovate in the technological front. We believe that the future of tourism belongs to technology. Over the last two years, since the end of the war, a number of initiative have been taken in this area. The Sri Lanka tourism website has been completely revamped to make it a informative , user friendly, dynamic and interactive site where one would find more videos and pictures than text. Users can share there experiences and upload pictures and videos to the site. Website is linked to a number of social media networks such as face book and twitter. Industry has been requested to use the government web portal for marketing their products. We would like the entire tour planning process of the tourist from hotel reservation, airline ticketing, visa approval, tour planning, finding a guide , purchasing tickets for key attractions and even booking a taxi to be facilitated online. Call centre’s and online tourist information will obviously be part and parcel of this exercise. We want to get maximum advantage of the fast evolving mobile phone technology for tourism. Initially there will be some resistance from parties who may feel that technology is cannibalizing traditional distribution networks. But our advice to them would be to embrace the change and exploit the opportunities rather than resisting the inevitable. The consumers are getting sophisticated. The world is moving forward. We need to keep up.

Over the next few years Sri Lanka will continue to focus on attracting local and foreign investors for the purpose of enhancing our product range and creating value. A number of investment opportunities which include Hotels, Golf Courses, Race Courses, Water parks, Theme Parks, Marinas, Shopping Malls, Taxi Services ,Entertainment Studios, Adventure Sports facilities, Light Aircraft Services/Sea Planes, Boat Manufacturing, Boat Hiring, Convention Centers and Tourism , Educational Institutes have been highlighted in the tourism development strategy 2011-2016 published by the Ministry of Economic Development.

Sri Lanka has a great potential in Tourism. The vision and the strategies for growth are clear. What is required now is to continue the positive momentum and implement the plans with commitment.

(Key Note address at the 5th UNWTO/PATA forum on Tourism Trends and Outlook held in Guilin China on 27th Oct 2011)

42 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

The Island – November 28, 2011

Unprecedented opportunities for Investment Banking

- Frontier Capital Partners CEO Nishan Sumanadheera

Frontier Capital Partners Ltd, under two years from its inception, has reached the forefront of the investment banking industry in Sri Lanka, surpassing many renowned and leading investment Banks. During this period, it facilitated many mega deals, including many investments made by listed and unlisted companies. In 2009, it facilitated the C.W. Mackie sale to Lankem worth over Rs.1.4 billion, the Confifi Hotel Group sale to LOLC and Browns group worth Rs. 2.5 billion last year and this year, the Softlogic Holdings’ acquisition of Asian Alliance Insurance worth over Rs.3.3 billion, surpassing all big numbers of major acquisitions this year.

Here, the company’s Managing Partner/ CEO Nishan Sumanadeera is in conversation with The Island Financial Review.

Q:What is your core business? A: Ours is a boutique investment advisory firm doing fee and fund based activities both in Sri Lanka and abroad. Our core team, with their diverse expertise and experience in different disciplines have leveraged their professional experience and personal relationships with the extensive networks throughout the world to bring the best solutions to business needs of our clients.

We provide cutting edge and tailor-made investment strategies and solutions to our clients throughout the entire spectrum investment cycle from the point of entry to the exit. These solutions range from the initial formation of businesses, financial feasibilities, business modelling and appraisals, to promotion of investment, facilitation, arrangement of equity and other types of funding into new and existing projects. Mid term strategic solutions include capital market activities, business expansions and diversification, corporate finance services such as takeover and merger advice, deal facilitation and execution, mezzanine finance arrangements and equity placements.

We also provide advise and assistance relating to restructuring, recapitalization and end term solution such as disposals, divestments and liquidations of businesses in order for our clients to realize capital gains and exit from a particular investment.

Apart from the core business activities of investment banking, we have refocused on some of the activities traditionally considered as cost drivers by many organizations. We have revolutionized and created a platform to monetize these cost centres/activities to be core strength of our business. These services include Legal & Company Secretarial Services, Equity Research, Media and Information Technology.

Apart from our fee-based activities, we have already made few strategic investments in Sri Lanka. We continue to identify new opportunities and make further investment in niche growth sectors. Currently we are in the process of raising US$ 10m from strategic foreign investor who had already pledged to be our long-term technical and financial collaborator. We are targeting a listing on the Colombo Stock Exchange by 2015.

Q:What made you venture into these specialized businesses? A: Being involved in Investment Banking and Legal services for over 15 years in many investment banks including that of Asia Capital PLC as the Head of the Investment Banking and Legal Divisions, it 43 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

was very easy to understand the synergies of providing complete legal and financial solutions under one roof. However, integrating information technology and media into the core business was novel and revolutionary. Regardless of these synergies, we always maintain Chinese walls between each activity to ensure confidentiality and independence of advise.

Q:What are your perceptions of the recent legislation for acquisition of under- performing Assets and the decision to depreciate the Sri Rupee against major currencies? A: Any legislation or initiative to improve the efficiency and the performance of any enterprise or underperforming asset should be welcomed. As businessmen and entrepreneurs we constantly compare Earnings per Share (EPS), Return on investment and assets (ROI). There are other performance measurement yardsticks of competing businesses to determine the efficiency and performance. When performances of our companies and its subsidiaries are below benchmark, we as stakeholders often take decisions to divest, capitalize or liquidate businesses. As a responsible government it is important to maintain a steady pace of growth by ensuring efficient performance of assets and businesses that have greater impact to the country and its people. Therefore government decision should be welcomed for greater interest of the country provided that such acquisitions are handled transparently in an accountable manner.

Devaluation is imperative against major currencies in the backdrop of the global debt crisis. Although I am great believer of free movement of currencies, in which demand and supply determine the equilibrium of the exchange rate, I believe current exceptional global crisis requires timely and more radical action to redirect our economy. Overnight depreciation of the currency though radical, I believe is the only way to prevent market speculation, which would have resulted in greater risk to the economy. Sri Lanka being an import- driven economy this move is likely to have greater short term pressure on inflation and interest rates.

Q:What are the future opportunities for Investment Banking? A: They are unprecedented. As an investment banker, you live in your own imagination, the essence of success. It is hard to find textbook investment banking solutions to complex real life opportunities. Every investment banking solution needs to be tailor-made and requires out- of- the- box thinking. Imagination has no boundaries. It is only when the last tree has died and the last river has dried and the last fish been caught that the investment banker will run out of solutions. Sri Lanka is not for sale but businesses will change hands at least one more time during the next decade paving way for many opportunities.

Decades ago, investment banking solutions revolved around resurrecting sick companies via restructuring, but today Mergers and Acquisitions (M&A) activities have become order of the day. I would see many opportunities in this area. Further, Sri Lanka needs capital to rebuild and grow in this post-conflict period. The capital available in Sri Lanka’s corporate sector is limited and it is here that Investment Bankers can play a major and catalytic role in promoting foreign direct and portfolio investment. Sri Lanka’s corporates must engage Investment Bankers with international reach in order to access foreign capital. For example, John Keells Holdings would not have been able to build South Asia Gateway Terminals if it did not access international capital markets via investment bankers in 1994. SAGT now contributes nearly 40% of JKH’s earnings. Therefore, the role that Investment Bankers can play in developing Sri Lanka is immense.

44 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Q:How did the local investment banking industry evolve in the last two decades? A: Investment banking has evolved from being just an impressive word spoken in corporate boardrooms into real life, everyday solutions practiced and adopted by investment bankers and investors collectively to add shareholder value via capital market activities.

With the introduction of the Companies Act in 2007, legislation in Sri Lanka added more flexibility and diversity, which has undoubtedly helped investment bankers to innovate new solutions within the existing legal framework of the country. This was a welcome change, and I must say was the turning point of the industry.

With these changes together with capital market boom, current day Investment Bankers have the opportunity to provide a variety of services, which was far-fledged and unimaginable two decades ago.

Q:What are the growth ingredients for Sri Lanka? A: As an analyst it is very difficult to determine ingredient or conditions for growth. We can characterize the successful economies of the postwar period, but we cannot name with certainty the factors that sealed their success, or the factors they could have succeeded without. It would be preferable if it were otherwise.

Many countries have grown, for a time, on the back of a much shorter set of policies and reforms. But we suspect that over the course of 10 or 20 years of fast growth, all of these ingredients will matter. Low inflation, for example, will not compensate for poor education or backward infrastructure. To sustain growth over a long period, a set of things needs to come together. Doing some basic things may produce beneficial results. But the items the policy maker neglects will eventually haunt the economy’s progress.

Q:What are the inherent risks in investing in Sri Lanka? A: Emerging Sri Lanka vouches for economic, regulatory and political stability, the hallmark of any good investment destination. No place on earth is risk-free, likewise no investment. Each country has its inherent risks factors, currently geopolitics affecting Sri Lanka should be an important factor in your watch list.

Private investment and Investment Banking needs policy consistency, coherence and transparency in order to flourish. Therefore the government should look to build on these areas, which will in turn help build confidence in Sri Lanka’s capital markets.

Q:After the phenomenal rise of the All Share Index (ASI) by 284 percent to a high of 7,797.96 on February 28 the market euphoria is now gradually receding with the index falling below its lowest ever during the last two years. What do you think of the direction of the Stock Market? A: The market had already enjoyed peace dividends and time has come for investors to adopt a more prudent approach towards the stock selection instead of chasing behind rallies and leveraging their portfolios in anticipation of higher returns. Investors need to identify value stocks, based on fundamental analysis and Value For Money (VFM) approach involving analysis of strength and weaknesses, future growth potentials, opportunities and threats applicable to respective businesses.

The market is in the stage of correction and consolidation and Colombo’s investor sentiments will be no longer be influenced by IPO’s, illiquid trading or irrational market behaviors which had been a hallmark during last two years.

In future, investors are likely to be more prudent and likely to make their investment decisions based on corporate earnings and asset values. We are likely to a witness an uptrend of growth in stocks and blue chip shares during the next stage. Valuations of the stocks are likely to get attractive in the backdrop of 45 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

higher quarterly earnings and market correction, which had resulted in nearly 25 percent decline from its peak.

Q:What are the best investment sectors in the CSE? A: In an emerging market, as Jim Rogers said, you need to own a bank, a brewery and a newspaper!! The Banking sector will always remain, as a proxy to any emerging economy whilst beverages and media would have more than proportionate growth.

Sri Lanka is historically known to be a travel destination; hence the leisure and travel sector would always remain in the top drawer. There will be new lines of tourism; many people will come to Sri Lanka for their medical and higher education needs paving way for new opportunities. These new opportunities coupled with ageing Sri Lankan population will help health and education sectors to have a phenomenal growth. The infrastructure development, which is considered as the most, promising opportunity by emerging market investors, also should remain in your shopping list.

Q:How do you cope with market fluctuations? A: It is generally easy to deal with matured investors because they understand the risk involved in capital market activities. It is retail investors that require frequent advise. As a seasoned investor you generally invest funds in different asset classes with varying risk return combination. Market investment is an art not a science.

Q:What factors are considered by "matured" companies when buying assets in certain sectors? A: There are many factors considered by investors prior to engaging in a M&A deal. Some of these opportunities can be considered once in a lifetime, a dynamic businessman would not want to miss. It is their vision, dynamism, business acumen that drives them towards these opportunities. Mature companies and investors do not place too much significance on past financial performance, more weightage would be given for business synergies. Historical financial information cannot be considered a yardstick of the future growth potential as it has been proved wrong many times. Most of these mergers and acquisitions have happen depending on investment objective, appetite and style of the respective investor.

Q:What measures do you propose to arrest the declining stock market which seems to be sinking faster than the Titanic?!! A: Any artificial measures taken by regulators against the free market movement is likely to result in prolonging the eventuality. Hence we should allow free market forces to determine the bottom. In the past we have seen many ad-hoc remedies resulting in failed attempts to rejuvenate the stock market.

Q:Can you spell out as to how much more it will fall? A: Stock markets are subject downward and upward movement due to varying factors. These factors and its future implication usually result in negative or positive by sentiments of the investors. The global debt crisis and some of the international factors have resulted in negative sentiments of the investors’ community. These factors have resulted in lower demand for equity investments as against the other asset classes.

The Market is currently is in the phase of correction and consolidation. It is likely to result in a downward trend until valuations become more realistic and reasonable. It is surprising to see some companies without any real business or assets of any value trade at very high multiple to its earnings or at a substantial premium to assets value. These valuations have to get corrected and total market capitalization should be close to value of businesses.

46 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Likewise there are many companies with future earnings potential, which still trade at cheaper forward multiples. Share Prices will have to eventually reflect the corporate earning. Hence I consider this down trend to be an opportunity.

Q:Investors, who have pumped in US$ 2 billion into Treasury Bonds are aghast at getting less Dollars with the depreciation when they exit. Some say that they want to exit what ever the losses were. Your comments? A: Foreign Exchange Rate usually affects returns of the inbound investments. Sri Lanka used to have a steady Rupee depreciation of approximately 2% per annum during last 20 years. Comparatively our bond rates still far more attractive to foreign investors especially inconsideration of the investment risk and current global factors.

The Government is also keen to commence local industries in consonance with the theme : Apema ratak, Apema Deyak. How do you see the private sector sentiments in that regard? Granted that earnings is the core business of business. But, don’t you think that this is more noble than blue chips investing in hotels abroad ?!!

A: All business decisions of the private sector will have to make commercial sense regardless of whether these investments are inbound or outbound. Private sector would be more than willing to invest in local businesses in consonance with special themes, provided that theses investments which are commercially and financially viable.

Q:Sri Lanka is spending US$ 400 million in subsidizing the New Zealand milk farmer and another US$ 300 million in sugar imports. What is stopping blue chip corporates looking at both these sectors not only in terms of growth in corporate earnings, but also in the national interest as well given that the trade deficit is projected at US $ 11 billion this year? A: Sri Lanka is considering the benefits of import savings similarly to the export earnings. Corporate would certainly look at new investments in the area of import substitutes such as local Milk Powder and Sugar if necessary incentives are provided to the investors.

Q:There is a lot of hype on public sector- private sector partnerships. Given that each IPO is oversubscribed so many fold running into billions, why can’t the government and the private sector team up for, say, major infrastructure projects where the funds are raised here, without running to the World Bank, the International Monetary Fund and the EXIM bank of China where the latter’s interest rates are even higher than the donor concerns? A: Oversubscription of IPOs does not necessarily means there is an abundance of excess cash. Some oversubscriptions were due to large sums of monies being given to investor by way of margin lending by banks. Agree that there should be fund raising with regard to infrastructure project, which could be funded jointly by government, Private Sector Companies and private investors.

Q: Don’t you think that there should be more companies obtaining listings, especially in the apparel sector? A: Among factors which discourage companies from obtaining listings are stringent disclosure policies and regulation. Regulators should make listing simpler and straight forward. Regulators should provide more incentives for listed companies. There are more than 30,000 registered businesses but only 300 listed companies. This ratio should be at least 30%. Central Bank’s directives to make Finance and Insurance companies listed can be considered as a step taken in the right direction.

47 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Tourism

48 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Sunday Times – December 4, 2011

Tourism industry eyes “achievable” targets

Accomplishing a year-end target of 750,000 tourist arrivals in October – two months ahead of schedule - has boosted confidence in the industry to reach over 800, 000 in 2011. Considered a major achievement, the Sri Lanka Tourist Hotels Association President Anura Lokuhetty believes that tourist arrivals will possibly move past the new target of 800, 000 by the end of the year if the current trend continues.

He noted that in achieving this target for the first time a number of interesting trends have also been observed. In this respect, trends pertaining to the age of tourist arrivals that were in the range of 20-39 years upto 2006 have changed since then where the majority of tourist arrivals are in the age group of 30- 49. In addition, spending per guest per night has also increased upto US$100 while the length of stay of a tourist has also increased in most Western European customers that needs to be sustained, it was pointed out.

In this respect, it was noted that tourist arrivals from the UK have been a cause for concern due to the current recession and its impact on other European markets as well. Industry analysts however note that the UK market performed well by the end of October last year compared to a 1% increase this year considering the circumstances within which the European market operate at present.

On the other hand, an improvement has been observed in tourist arrivals from the Nordic countries, a trend that was noted to have occurred even prior to the 1982 period, Mr. Lokuhetty said. This increasing trend is likely to ensure Sri Lanka would be capable of meeting its target this year but it was noted that in order to achieve this there needs to be a concerted effort towards marketing.

Focusing on new markets like China and regional development is imperative; Mr. Lokuhetty said adding that fluency in Mandarin is also required. Industry analysts point out that Sri Lanka is considered to be doing well and maintaining good growth. In the meantime, while India is currently coming up with a 44% growth, Chinese visitors to the island have increased by 71.6% and Japan by 44.8% during October this year. 49 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Export & Import

50 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Daily News – November 28, 2011 John Keells tea market report: Tea production drops in October

Sri Lanka’s tea crop of 23.6 mkgs for the month of October 2011 registers a substantial drop of 4.1 mkgs compared to the corresponding month of 2010. In fact it is the lowest crop recorded for an October since 2006. The shortfall for the month has come mainly from Low Grown with a negative variance of 2.9 mkgs followed by High Grown 0.786 mkgs and Medium 0.494 mkgs. Sri Lanka’s to date production in 2011 stands at 269 mkgs compared to the All Time Record year of 276 mkgs in 2010 end October. The to date negative variance over the corresponding period of last year has now widened to 6.2 mkgs.

Although reports from the plantations at all elevations suggest a good harvest in November and with only two months left in the year Sri Lanka’s production at the end of the year is likely to fall short of last year’s record crop of 331 mkgs by little over 2%.

Interestingly the shortfall in 2011 has mainly come from the Medium Grown with a deficit of 9.32% compared to the overall deficit of 2.27%.

Last weeks 0.97 mkgs of ex estate teas met with lower demand. A few select best Western High Grown teas sold well following quality, whilst all others were firm to Rs.5 to Rs.10 easier. A handful of select best BOPFs sold well, whilst others declined Rs.20 to Rs.30 on average. The few Nuwara Eliya BOPs on offer were Rs.15 to Rs.20 easier, whilst BOPFs too tended lower. A few Uva BOPs were selectively dearer others were lower. BOPFs declined Rs.10 to Rs.15. The Best Low Grown CTC PF1s declined substantially by Rs.50 to Rs.60 and at times more, with a number of invoices remaining unsold. Others shed Rs.10 to Rs.15 on average. High and Medium types too were lower by Rs.20.

The 3 mkg of Low Growns that were on offer this week, met with less demand. In the Leafy catalogue, select best BOP1 gained Rs. 5 to Rs. 10, poorer sorts were firm. Well made OP1s were mainly firm. Best and below best categories appreciated Rs. 10 to Rs. 15. Poorer sorts met with less demand. OP/OPAs shed Rs. 30 to Rs. 40. Select best Pekoes declined, whilst the others were firm.

In the Small Leaf category too prices declined for the FBOP and FF1s, however better Tippy varieties met with good demand and sold at attractive levels.

At the bottom end of the market, all varieties were lower to last. There was less demand from the Russian buyers whilst the Middle Eastern markets were only selective.

51 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Western Teas A few select Best BOPs sold well following quality, other good invoices declined Rs.5 to Rs. 10, Below Best sorts declined Rs. 10 to Rs. 15, plainer varieties were firm to irregular. Select Best BOPFs declined Rs. 15 to Rs. 20, other good invoices eased by a similar margin and at times more, Below Best and plainer varieties shed Rs.20 to Rs.30 on average, Medium BOPs advanced Rs.10 to Rs.15, whilst the BOPFs shed Rs. 20 and more.

Nuwara Eliya Teas BOPs declined Rs. 20, whilst the BOPFs eased Rs.30 on average.

Uva Teas BOPs declined Rs. 30 to Rs.40, whilst the BOPFs shed Rs.10 on average. Uda Pussellawa BOPs advanced Rs. 10 to Rs.15. A few select Best BOPFs advanced following special inquiry , others shed Rs. 10. CTC Teas Select Best Low Grown CTC PF1s declined substantially, others were Rs.10 easier. High & Medium PF1s were firm to Rs. 5 easier. BP1s were firm.

Low Growns Lower demand. Select Best OP1s shed Rs.10 on average, however the well made Best types advanced sharply by Rs.10 to Rs.15 and more at times, clean Below Best types too gained by a similar margin, the balance tended lower by Rs.5 to Rs.10. Select Best BOP1s shed Rs.10 to Rs.15, Best types too were irregularly lower by Rs.5 to Rs.10, however the Below Best types gained Rs.5 to Rs.10, poorer types were lower by Rs.3 to Rs.5. Select Best OPs declined Rs.20 to Rs.40, Best types too were lower by Rs.10 to Rs.15, Below Best and poorer sorts were firm to Rs.5 to Rs.10 lower. Select Best OPAs maintained last levels, the balance shed Rs.5 to Rs.10/-. Select Best Pekoes declined Rs. 10 to average, Best types were firm, clean Below Best and poorer types were fully firm. Select Best Pekoe1s declined Rs.40 to Rs.60, Best types maintained last levels, Below Best and poorer sorts were firm to Rs.3 to Rs.5 lower at times. Select best and best BOP/BOP.SPs were barely steady, below best and poorer sorts declined Rs.10 to Rs.15.

Select Best and Best FBOPs shed Rs.10 to Rs.15, Below Best and poorer sorts too declined and at times remained difficult of sale. Select Best tippy varieties met with good demand and advanced above last, best types too gained a few rupees, below best and poorer sorts were irregularly lower to last.

Off Grades Select Best and Best liquoring Fngs1s were lower to last by Rs.10 to Rs.15, whilst Below Best and poorer sorts too declined by Rs.10 to Rs.15. Select Best and Best BMs sold at firm levels, whilst Below Best and poorer sorts eased by Rs.5 to Rs.10. All BPs sold lower to last by Rs.10. Select Best BOP1As were firm on last levels, Best and Below shed Rs. 5 to Rs.10/-, poorer sorts too declined Rs.5 to Rs.10.

Dust Select Best Dust1s were firm, improved teas in the Best and Below categories appreciated Rs.10 to Rs.15, whilst the balance declined by a similar margin. Clean secondaries were firm, whilst the Below Best and poorer sorts appreciated Rs.10 to Rs.15, Best Low Grown Dust / Dust1s were firm, whilst the balance were irregularly dearer by Rs.5.

52 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Sunday Observer – December 4, 2011

Rubber auction prices

53 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Stock Market

54 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Daily News – November 28, 2011 Error trade dampens overall sentiment

The bourse yet again, closed on a negative note with both indices recording consistent declines throughout the week.

The ASPI lost 334.76 points (5.45%) to close at 5805.76 while the MPI recorded a 5.54% decline (representing 296.63 points) to close at 5052.91. Turnover in value for the week was led by JKH, Bukit Darah Plc and Colombo Land & Development Company Plc, which accounted for 40.67% of aggregate turnover volume.

The weekly turnover value recorded a 16.94% increase to Rs 5313.39mn compared to last week’s Rs 4543.74mn, amounting to a daily average of Rs 1062.68mn.

Turnover in volume, however, declined by 6.76% over the week as 303.49mn shares changed hands relative to last week’s 325.51mn shares. The Diversified Sector led the turnover in value for the week accounting for 37.83% of total turnover value or Rs 2010.15mn.

The Banking and Finance sector trailed, contributing 20.18% or Rs 1072.39mn; the Manufacturing sector meanwhile contributed Rs 588.05mn or 11.07% to total turnover value over the week.

The Banking and Finance sector continued to dominate the weekly turnover volume, accounting for 46.98% of total turnover volume as 142.58mn shares changed hands.

The Manufacturing sector contributed 18.58% or 56.38mn shares, while 29.93mn shares (9.86%) changed hands in the Diversified sector. Market Capitalization continued to decline over the week, closing at Rs 2115.17bn relative to last week’s value of Rs 2208.51bn, representing a 4.23% drop. Market PE however, was 12.71x. The week’s top price gainer was Kandy Hotels Company Plc with a 26.25% price gain for the counter to close at Rs 252.5. Orient Garments Plc recorded a gain of 14.60% to close at Rs 36.10 while Equity Two Plc gained 10.74% to close at Rs 29.90.

Also amongst the top gainers were Ceylinco Insurance Plc [NV] and Huejay International Investments Plc recording gains of 7.29% and 5.65%, respectively.

Lanka Ashok Leyland Plc recorded the highest price decline over the week (37.16%) to close at Rs 2325.00, as against last week’s closing price of Rs 3700.00.

Udapussellawa Plantations Plc declined by 25.21% to close at Rs 27.00 while Radiant Gems International Plc closed at Rs 109.80, recording a 23.75% week-on-week drop. The bourse closed with net foreign sellers maintaining last week’s selling momentum. Total net sales for the week were Rs 439.41mn as against last week’s net sales of Rs 348.30mn, representing a 26.16% gain. Foreign purchases recorded 40.21% decline to Rs 155.38mn. Blue Diamonds [NV], once again, topped the volume list accounting for 8.24% (or 25.02mn

55 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

shares) of the week’s aggregate share volume; SMB Leasing Plc meanwhile, contributed 7.63% of the total share volume as 23.16mn of its shares changed hands over the week.

Point of view Markets fell below the critical technical support level of 6000 on Thursday amidst rising interest rates on sovereign bills and bonds.

The downward trend continued on Friday with markets hitting a year-to-date low amid a temporary error trade which consequently dampened overall investor sentiment.

Some institutional buying was evident though, with bargain hunting on select stocks. Similar sentiments should prevail in the week ahead. Despite the passivity in markets, corporate earnings for Q3 have been robust, and the multitude of tax concessions and incentives proposed in the Budget should positively impact future earnings potential across a number of sectors.

56 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Sunday Island – December 4, 2011 The stock market - only a correction?

By R.M.B Senanayake

The stock market decline accelerated the week before last and some expected the worst predicting a market crash. But last week after the brokers met the president the market improved and price indices climbed as he promised to do away with credit restrictions. Presumably the forced selling will stop. But will the brokers cause another bubble? They say a market crash and a bubble are like a cloud and rain. You can have clouds without rain but you can’t have rain without clouds; bubbles are like clouds and market crashes are like the rain. Historically, a market crash has always arisen from a bubble and the thicker the clouds or the bigger the bubble, the harder it rains.

There can be no rain without clouds and similarly there can be no market crash unless there is also a bubble. But a market crash is not the same as a market correction. Market corrections are comparatively small being about 5% or so while a crash is much higher. The week before last, the All Share Price Index as well as the Milanka Price Index fell by a little over 5%. This could be considered as a market correction provided the market does not continue to fall as investors panic and sell.

What then is a bubble? A bubble takes place when the stock prices move far above their intrinsic values or market fundamentals. It arises in the first place because investors or the large majority of them have become speculators. An investor bases his decision to buy a stock only after examining the fundamentals of the company and considering whether the price of the stock is such as to provide him a reasonable return on his investment. The returns from a stock are the dividends and theory has it that the price of a stock should reflect the sum of the discounted values of the dividends which will be paid by the company in the future.

One way of considering whether the stock is worth the price is to look at the dividend yield which is the dividend divided by the market price of the share. If the dividend yield is low the stock may be considered as overpriced. Investors look at another ratio called the Earnings Per Share and its inverse the Price Earnings Ratio. Our market PER was as high as 25 (it means that it will take 25 years to repay the investment by way of dividends if the level of earnings remain the same) when the stock market boomed in 2010. It fell to 15.1 but rose to 16 after the president agreed to remove the restrictions on credit.

What caused the bubble? Why did the stock prices go up so high? It is because the participants in the market had become speculators and traders rather than investors. While the investor buys low and sells high the speculator buys a stock when it is moving up ( or sells a stock when it is declining hoping to buy back later at a reduced price) and takes profit when it has gone still higher. He may help the upward movement along by deliberately buying up the available quantity of the particular share in the market, expecting others to follow him. Others follow him on the herd instinct. This is helped along by brokers circulating rumors about how good the share is and how much it will move up.

There are allegations that a group of high net worth individuals deliberately pushed up the prices of certain illiquid stocks where the supply in the market at a given time is small and can be cornered. If a speculator corners such small supply he could drive its price up well above its intrinsic value. This seems to have happened and the Securities Exchange Commission apparently found such allegations credible and has investigated them.

57 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

The SEC also fixed price bands which prevented a stock from increasing above its upper band. Despite it however stocks moved up and up. But as the price shoots upwards the original speculators who hold the share will sell. But there must be buyers to buy them at these high prices. As the share price rises above its intrinsic value there will be fewer and fewer buyers. But those who bought the share originally hoping it would rise would then find it difficult to sell the shares at a profit since they bought high. There have to be new buyers who are themselves expecting the share to rise some more. But such new buyers will be fewer as a share rises in price way above its intrinsic value.

Credit driven bull market The brokers gave credit to market participants. They seem to have given credit lavishly ignoring the necessity for equity which any prudent lender would want. There was the 50% margin rule under which a client could only borrow up to 50% of the value of his share portfolio. When the market value of the share portfolio falls the broker was expected to raise a margin call and ask the client to top up the value of his portfolio in cash. Brokers seem to have ignored these prudential limits and provided credit liberally. So with such credit the clients bought into high priced shares expecting their prices to move up further and give them a profit.

But as the supply of new clients dries up the high prices are not sustainable. Then when the brokers were required to stop credit by the Securities Exchange Commission the supply of new speculative buyers dried up instantly. It is then that the prices of the shares began to fall as the brokers had to insist on cash settlement by T+5. (Trade day plus 5). The market was suddenly converted into a cash market. When clients did not pay on T+5, the brokers had to force sell their shares and the market came down.

The SEC had also required brokers to clear debtors who had exceeded the 50% margin value of their portfolios. Brokers had to call upon their clients who were in debt to them to pay up. If they failed to pay up they would have to force sell their shares on which they had a lien. But when broker firms force sell to cover margin requirements or to comply with the SEC rule then the market has to come down. This constitutes the bursting of the bubble.

The Crash of 1929 in USA The Great Depression of 1929 in USA was preceded by a stock market crash in Wall Street. Subsequently a Committee of the U.S Congress which investigated the crash uncovered evidence that the brokerage firms were giving unlimited credit and investors were buying on credit and reselling to obtain a profit. Many investors had turned out to be speculators rather than long term investors.

It is not known how much credit the broker firms extended to clients and how much of their debts are non- performing. Broker firms themselves are poorly capitalized and when they give unlimited credit they are really creating new money far above their liquid assets. When new buyers were induced to buy overpriced shares on the basis of rumors about their performance or other likely price sensitive events such as a take- over or a new investment by the firm, the whole scenario replicates a pyramid or Ponzi scheme. A bubble is built up on hype and it bursts when new buyers who hold for the long term dry up because the prices are too high. Then the high prices are not sustainable and they begin to decline.

A stock market which bursts can harm not only the individual investor but the economy at large. The stock market collapse of 1929 led to dole queues, soup kitchens and bank collapses. A similar crash took place in Japan in 1990 which led to years of stagnation in the economy. So it is right not to allow a bubble to form. The crash in the Golden Card Credit Company led to contagion which affected several other companies of the Ceylinco Group and to a run on other registered finance companies.

58 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Cheap money the underlying cause A huge influx of money has entered the market through individual retail investors who have no understanding of economics or company fundamentals. They bought shares not as long term investors but as speculative traders. They were encouraged by the brokers to buy and sell rather than hold for the long term. The availability of unlimited credit allowed clients to buy beyond their financial capacity - over- leverage. The brokers promoted such trading since they earned commission on business volumes generated.

A crash is a significant drop in the total value of a market, almost undoubtedly attributable to the popping of a bubble, creating a situation where in the majority of investors are trying to flee the market at the same time and consequently incurring massive losses. Attempting to avoid more losses, investors during a crash are panic sellers, hoping to unload their declining stocks onto other investors and cut their losses. Hopefully there may not be panic selling now but prices may decline some more. An orderly correction is needed.

59 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Business

60 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Sunday Times – December 4, 2011 Used car industry to become history?

By Sunimalee Dias

ON THE ROAD - Sri Lanka’s used car industry is likely to be phased out eventually following government plans to allow for only year-old vehicles to be imported in the future. This industry has over time captured a sizeable market share gaining much popularity among the consumers over the brand new vehicle dealers. However, the currency fluctuations, imposition of increased duty on cars and the reduction of the age of imported vehicles have had their toll on the industry.

Bandula Weerasinghe

Colombo roads change post 1977 “When we started the currency was very strong and this situation was similar worldwide,” a veteran pioneer in the used car industry Bandula Weerasinghe told the Business Times. The industry that started out in the late 1960s and 1970s was given a major boost in the post-1977 budget under the J.R. Jayewardene administration that led to the opening up of the Sri Lankan economy.

Mr. Weerasinghe said that it was in the 1978-1980 period that the industry blossomed and it was during this time when even he commenced operations. At the time, he noted there were only about four vehicle dealers that imported cars while others would buy and sell those that were available in the local market. During the 1980s diesel and commercial vehicles like the Lite vans and trucks joined the roads of Colombo.

Subsequently, local consumers were becoming increasingly selective of the type and range of vehicle they wished to purchase, he related adding that they would be conscious of the condition of the vehicle and the accessories available. Further, about this time, there were a number of individuals joining the industry; as a result, the product improved as competition continued to pick up until around 1985. Showrooms started coming up that changed the landscape from an era when most would have been carrying out the business in their own backyards.

61 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

One of the first showrooms to come up in Colombo was Ishara Traders and Mannapperuma Traders and another in Katugastota, Kandy. Mr. Weerasinghe explained that his car sales outlet was one of the very first to be found along Dutugemunu Street in Kohuwala where now there are 39 altogether.

He pointed out that today they also cater to an exclusive clientele as a result of which they select and bring down even sports vehicles and other special vehicles even air freighting them in relation to demand.

Future demand likely to drop But today a possible shift towards a reduction in age of vehicles is likely to hamper the ability of consumers purchasing vehicles, Vehicle Importers Association President Yoga Perera told the Business Times.

A flurry in demand was evident when the government in 2009 reduced the vehicle import duty. However importers noted that this was short-lived as they would now have to face up to the possibility of this industry soon fading out. Mr. Perera noted, “You should not deprive the reconditioned vehicle buyer from getting a new vehicle.”

He pointed out that this year the age was reduced to two years from last year’s 3.5 years resulting in a 40% drop in sales. Lately the industry has gained its position as the one of the top 10 revenue earners for the Sri Lankan government, it was pointed out.

Sales improved in 2009 when a reduction in duty was imposed but a possible reduction in age of imported vehicle had negatively impacted on sales, he noted. Mr. Perera said that since the last 4-5 years each year the market had witnessed a decline in sales of 7-8% every year.

Top of the range abound Commenting on the range of cars imported to Sri Lanka, Mr. Weerasinghe observed the country has seen some of the top range cars. Prior to 1977 there were very few cars that plied the streets of Sri Lanka like the Morris and Oxford.

However, after this period there was an influx of vehicles with the Toyota’s and the Liteace, lorries and TATAs while later the Bentley and Porche also joined the roads of Colombo. Today the roads are inundated with a wide range of vehicles from Indian, British and Korean to Japanese and even Chinese.

Popularity in the Maruti Suzukis started out about 3-4 years ago with about 1000 imported per month while now the TATA Nano is gaining prominence with about 500 – 600 vehicles imported per month, he said.

62 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

In addition, the market has also seen an influx of hybrid cars imported on reduced duty as these vehicles operate as half electric and half gas and are half the price, he said. It was pointed out that today almost every car manufacturer produces hybrid vehicles but purchasing it has become expensive.

Currently the most popular brands that continue to remain are Toyota and Nissan which are also considered the poor man’s car including the Mitsubishi and the Japanese Suzuki. Mr. Perera on the other hand observed that when the European market faded away in the 1970s there was a shift towards the Japanese market. This shift was mainly due to the durability and standards and economical nature of the Japanese vehicle.

However, he complains that today it has become evident that there are sub standard vehicles that have entered the market “as there’s no conformity” adding that vehicles must ensure safety and economy for consumers. He pointed out that with vehicles from the Asian region entering the market “a person using a second hand Japanese car will not buy an Asian car.”

Trendy lifestyle The second hand car industry has contributed to a marked shift in lifestyles among the Sri Lankan populace. During the 1960s and late 1970s there was just a handful of cars seen on the roads of Colombo and in this respect it remained a vehicle exclusively for the elite.

However this trend started to take a shift since the post 1977 era when accessibility and ease of purchase was impacting on the people in a way they were now keenly awaiting the new second hand vehicle arrivals.

Today this trend has grown to an extent where some Sri Lankans believe in the myth that there is a need to change their vehicle every two years, Mr. Weerasinghe explained adding that on the other hand companies would maintain cars for a period of four years due to the leases obtained to purchase these following which they would consider buying a new vehicle.

“It’s a way of life,” he said but noted that today the reconditioned vehicle importers are directly affected as new car agencies are trying to push their new cars. But statistics indicate that for every 100 new cars sold per month about 1000 used cars are purchased by Sri Lankans, he said.

Vehicle purchasing trends and the story behind their number plates is also an interesting one where in the early days old cars had English number plates which shifted to the use of the “Shri” that reverted once again to the English number plate, Mr. Weerasinghe explained.

He said that today the consumer is able to purchase a number plate of choice upto three series ahead at a higher price as it previously cost only Rs.7, 500 but now it is at Rs.70, 000. Other trends observed are car prices that which started out from Rs.100,000, Rs.150,000 and Rs.200,000 during the early days when this industry commenced operations in the country to imports today that range from Rs.2.5 million and upwards.

63 FCCISL News Alert Weekly Business Highlight 28th – 04th December 2011

Moving on The growth of the second hand car industry has moved in leaps and bounds that has built space for more complementary industries to flourish like the spare parts industry and imported body part traders, Mr. Weerasinghe said.

However, this is likely to change and create a sudden direct impact on all these sectors as a possible increase in duty and reduction in the age of imported second hand cars is imposed on the market. “We had lots of meetings, we didn’t think it will happen in fact we thought that the cheaper the vehicle the more affordable it will be for the masses,” he said.

With speculation rife even after the presentation of the budget that there is a possibility it will be reduced importers believe the first to be affected will be the employees. He noted that if there is a duty hike the demand is likely to drop as imports are also curtailed at the moment. These sentiments were also echoed by other small and medium scale vehicle sales outlets including Mr. Perera.

The complementary industries and its dependants are likely to be affected once the age of imported vehicles is reduced resulting in a possible closure of an industry that had one time gained momentum and steady growth but will become only a part of history in the near future.

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