Tea: Link producers with exporters?

Tuesday, 8 July 2014 00:41 - - {{hitsCtrl.values.hits}}

The Ministry of Finance and Planning Annual Report of 2013 states that Sri Lanka’s tea industry generates over $ 1.5 billion in revenue to Sri Lanka, whilst provides almost a million jobs to the economy. Though privatised business of the industry generates only 35% to the total production of the country, it drives the sector with modern management technique infusion and value chain development with some companies out beating global international brands in the local market that indicate the talent base in the industry. Tipping point If one were to go back in time, we can see that the gap between the Cost of Production (COP) and Net Sales Average (NSA) was 9.4% in 2001. Over time due to varied issues this difference has contracted to just 1.9%, which indicates the serious issue that the industry is up against purely from a survival perspective. This highlights the importance of the industry taking strategic decisions either by driving the efficiency of the supply chain or taking remedial measures like merging with the demand chain name export companies so that business becomes viable. This has become a tipping point decision like develop new business models with an aggressive drive on commercial forestry or total value chain development which is in fact practices that many companies have rolled out.

Tracking back to 1970 It’s important to track back to history of the RPCs. In the 1970’s large extents of plantation lands were acquired by the Government of Sri Lanka and vested under the state institutions the Janatha Estates Development Board (JEDB) and the Sri Lanka State Plantations Corporation (SLSPC) under the Land Reform Act No. 1 of 1972. However, with the increasing inefficiency of the two corporations that was government owned the JEDB and SLSPC sought for Government assistance to offset the mounting operational losses that had increased to almost Rs. 1.5 billion per annum for both corporations by 1992. In the face of mounting financial losses suffered by the two corporations, the Government appointed a Task Force which recommended the entrustment of the management of the plantations to the private sector. In view of this, the Government initiated the privatisation of the sector in 1992 which led the Sri Lankan tea industry to witness one of the most significant structural changes in the history of its industry. Incidentally the tea industry was the first to undergo the privatisation process in the country. 1992 and beyond In 1992 when the State opted to privatise the management of State plantations, 23 Regional Plantation Companies (RPCs) were set up, of which 20 RPCs were leased out to 12 management companies during the period 1992/1993, resulting in the conversion of 461 estates managed by the JEDB and SLSPC to 20 RPCs under the Companies Act No. 17 of 1982. In the administrative structure of the RPCs, 100% ownership was retained by the Government, whilst the respective RPCs was initially assigned lease-hold rights of between 12-29 estates for a period of 99 years for a nominal lease rental and thereafter adjusted the same to 53 years. This was the birth of the new operating model of the corporate tea sector of Sri Lanka. With the new management architecture in place, it resulted in the best tea plantation managers been absorbed by the private sector corporations, during the post-privatisation period. The RPCs turned around the Rs. 1.5 billion loss making venture in to profitability. In the financial year 2007/8 the RPC recorded the best performance of a Rs. 14.9 billion net profit with the addition of modern techniques of management, which provided structure to the agriculture driven colonial entity. But in 2013 we see that the hard work done by the private and public sector is coming apart given the challenge from the supply chain area. In 1996 when the privatisation agenda was in play the gross profit was at 8.2% and net profit was 5.9% whilst with some strong decisions by the private sector and favourable global climate the GP was increased to a healthy 18.4% in 2007 and a net profit of 9.9 by 2007. However, with available data we can see the challenging situation now with an 8.3% gross profit percentage and 7.2% net profit in the year 2012/13 which is the reality. In fact if one invest their money in a bank account the return will be better with zero risk.

Rs. 9.9 billion loss One key ramification of the above low profitability issue is low investment on replanting just to keep the organisation alive. If we analyse the available data, it is reported that of the total extent of Old Seedling Tea (OST) in Sri Lanka, 75% of it belongs to the corporate sector and only 9% of this extent has bushes less than 60 years of age while the rest is well over 60 years. Hence it could be said that senility of the tea bushes is one of the main reasons for the declining productivity and correspondingly lower production volumes that Sri Lanka has witnessed in the recent past. A key remedial program that can be implemented is a robust replanting program in the RPCs. But with the current issue of where COP converging on NSA, this remains a statement on paper that cannot be implemented practically. One study by the Tea Research Institute states that the current volume of approximately 126 million kilograms output from the corporate tea sector will decline to 98 million kilograms of tea within the next five years as the tea in this sector are at senile stage and yield is declining rapidly. If one quantifies the loss to the country in volume terms will be around 28 million kg of tea per annum and in value it will be 92 million dollars while in rupees it will be a colossal 9.9 billion rupees. I guess these are the points that needs to taken into account when wage rates are to be increased but sadly these aspects are not even on the agenda. The TRI has outlined a scheme for a replanting program to be implemented. The issue however is that for one hectare acre of tea to be planted costs almost Rs. 4 million which cannot be justified financially given the escalating COP and the corresponding NSA value. This is why the replanting rate has been at a low ebb, according to some research reports. The Tea Research Institute (TRI) stipulates that the replanting rate must be around 3% in a healthy agricultural practice system. But once again this has been an echo on paper as financial viability is in question. Especially in the corporate that have conglomerates tourism, renewable energy and may be even education can be more attractive business ventures than investing in the tea sector. What next? Hence it is clear that unless some serious policy decisions are taken based on market dynamics Sri Lanka’s tea corporate tea sector will be heading towards very rough waters. One key recommendation is for the Global Ceylon Tea campaign to be launched given that from October 2010 monies have been collected on the private sector exports and now this fund is over Rs. 5 billion. But sadly this has become a non-starter which is tragic for the industry that is under pressure on the supply chain end and in the demand side virtually in every market the market shares are declining. The sponsorship of Sri Lanka Cricket was one of the shining lights but it needs to be backed with some market specific promotional activity so that we can swing consumer demand to Ceylon Tea and the brands that carry this identification. We must keep in mind that the tea industry is the first privatised entity in Sri Lanka and it has been kept alive with some smart and sharp working models given that in the last 20 years amidst a war situation the industry held the country together. Now that peace has returned, the need of the hour is a strong and structured decision making in a balanced manner between the private and public sector based on facts and data. The challenge is, who has the power to drive this thinking in a political economy? This is the million dollar question.

(The thoughts are strictly the writer’s personal views based on his doctoral studies and not the views of organisations he serves in Sri Lanka and the Maldives.)