NDB approves Rs. 2.5 b to strengthen plantations sector
Thursday, 27 June 2013 01:28
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Pledges furthersupport in future projects
Importance of the plantation sector to the national economy
With a rich heritage of over 150 years, Sri Lanka’s plantation sector still maintains its grandeur as an integral part of the country’s socio economic composition, with its notable contribution of 2.7% (tea, rubber and coconut) to the national GDP and also as one among the largest employers. The national production of both tea and rubber is contributed by Regional Plantations Companies (RPC’s) and small-holders with greater contribution coming from the latter.
Sri Lankan tea, considered among the best in the world, commands much higher prices than its global competitors. Sri Lanka presently produces around 326 million kgs of tea annually. While still being considered as an important contributor towards the world’s tea production and exports; Sri Lanka is required to sustain a few challenges which include raising long term financing required by the industry for its capital expenditure.
The rubber industry, introduced to Sri Lanka in 1876, has since been an integral part of country’s export agriculture. At present, the country ranks among the world’s top ten largest producers and one of the largest exporters of natural rubber. Sri Lanka’s rubber industry consists of two main sectors of raw rubber and high value new product innovations in finished rubber goods. Presently, Sri Lanka produces about 152 million kgs of natural rubber annually.
The plantation sector by nature requires heavy capital investments especially in the area of field development, which needs to be undertaken on a regular basis for improvement of production and yields. Considering the long tenure taken for the new planting / replanting to come to bearing / harvesting stage, these investments also require long tenures to earn a return. Inadequate long term financing required for the continued field and factory development activities has been a significant impediment to the progress of the sector. Further, low cost funding is of paramount importance for the continued filed development in plantations sector.
NDB’s role in the plantations sector
Thus from its inception, as a development financier, NDB has played a significant role in funding the plantations sector of Sri Lanka. Sri Lanka’s endeavour to improve the plantations sector has been facilitated through dedicated credit lines from multilateral agencies such as the Asian Development Bank (ADB). Two such major credit lines were made available to Sri Lanka by ADB, i.e the Plantations Sector Reform Project (PSRP) during late 1990’s for the purpose of reforming the plantation sector and then secondly the Plantation Sector Development Project (PDP) as a booster to the sector which was reformed some time ago. NDB as a premier development financier has played a noteworthy role under these schemes.
Plantations Sector Reform Project (PSRP)
Along with the plantations sector being reformed and management and ownership of the estates being transferred to the private sector, the private sector was faced with the challenge of sourcing long term financing required for the development of estates taken over. The ADB extended its support by way of a long term financing of around $ 40 million to the sector through the government, where the Central Bank of Sri Lanka performed as the apex body. Financing made available through this credit line was then required to be routed through a banking channel, which possessed the skills and expertise of carrying out the due diligence required to evaluate such projects which are of development nature in a specialised sector.
NDB: Financing and building capacity in sector reforms
In this backdrop, NDB has been playing multiple pivotal roles. Most importantly, it played the role of a financial partner to the private sector, which was at that time embarking on a nationally important project of reviving the plantations sector. This was done by providing long tenure loans required for the field development activities and factory modernisation activities which was of dire need at that time. The total tenure of these loans extended up to 15 years inclusive of a long grace period up to 5 years. Total facilities approved by NDB under this credit line amounted to approximately Rs 2.5 billion.
With its decades of project financing experience and the in-house legal expertise available, NDB also played a project partner role where advice on project management and legal aspects were made available to the RPC’s and this was undoubtedly appreciated by the companies as value added services which could not be measured in monetary terms.
As one of only two development financiers of the nation, NDB also worked with the government of Sri Lanka closely, to ensure that the expected objectives of this reform credit line was achieved, thus acting as a sound banking channel with development project evaluation skills, in which the government placed enormous confidence. Further, NDB moved beyond traditional boundaries of financing projects and stretched its professional services to taking up the additional responsibility of building capacity among its fellow commercial bankers, who were new to the development financing concepts at that time.
Plantations Sector Development Project (PDP)
Once reformed in 1990’s the sector was provided with a further financing booster through PDP in early 2000’s which was again made available by the ADB. The total value of the credit line was around Rs 2.5 billion and NDB was proud to be ranked as the lead Participating Credit Institution (PCI) among seven PCI’s with approximately Rs. 1.2 billion worth of loans being granted. These loans also carried long tenures extending up to 15 years inclusive of similar long grace periods.
Therefore, NDB has been providing much needed financing assistance for the development of these national assets, which are significant in terms of earning foreign exchange to the country as well as in terms of providing employment.
NDB’s lending with its own funding
Having identified the need for long term funding and the working capital financing required for the sector, NDB has continuously supported the sector by way of both long term loans and securitisation facilities even after the above said credit lines were fully exhausted (in the absence of concessionary funding from multilateral funding agencies). Total credit facilities approved amounting to approximately Rs. 2.5 billion in 2012 to the plantation and agri-business sector is the best credential for its continued support even in the absence of credit lines. NDB not only partnered with its plantation sector customers in developing fields, factory modernisation and working capital funding, but also in their strategic investments overseas.
Contribution to the small holders
Small holders in the plantation sector are a very important stake holder group contributing a significant amount in terms of tea and rubber production to the national output. NDB began working closely with the small holder category by acting as a PCI in the Tea Development Project which was a credit line jointly managed by Central Bank of Sri Lanka and Tea Small Holders Development Authority.
NDB’s future role in financing the sector
With strong determination to remain as a dominant financial player in developing the plantation sector, NDB is now gearing itself towards enhancing its role as a long term financier for the investments in capital expenditure required by the plantations sector. All plantation categories without being limited to traditional tea and rubber plantations such as coconut and oil palm will also be considered in its future funding strategies.
In this regard, it will extend not only its financial assistance but also the know-how available to both large scale players (RPC’s) and small holders. Small holders dispersed across the country would be reached through the branch network. Special funding line sourced from overseas with the support of the Government of Sri Lanka in managing the exchange risk as mentioned in the government’s budget proposals for 2013 will be harnessed in funding development projects in this important sector. These term loan facilities are expected to be at competitive rates and for significantly long tenures so as to suit the industry needs.
Hence, with its proud history as a key financial partner to the sector, expertise gathered over decades of financing the industry, NDB is now gearing for a stronger business partnership with this nationally important sector in the country.