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SLTFOA calls for task force, industry deregulation

19 October 2015 02:59 am - 0     - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe



The Sri Lanka Tea Factory Owners Association (SLTFOA) called for the appointment of a Presidential Task Force to ascertain the future sustainability and to de-regulate the industry.

“We recommend that a Presidential Task Force is appointed to ascertain the sustainability of the tea industry as a whole, and to come out with an overall national policy for the development and sustenance of the industry,” SLTFOA Outgoing Chairman Gaya Samarasekara said.

He was making the comments at the AGM of the association, where Plantations Industries Minister Naveen Dissanayake said that his ideas were “noteworthy”. 
SLTFOA’s factories cater to the smallholders operating in lower elevations, who produce nearly 70 percent of Sri Lanka’s tea. “This industry is highly regulated from the brush to the cup, and a special task force needs to be set up to make recommendations to the government to de-regulate as appropriate,” Samarasekara added.
He noted that giving the Rs.80 guaranteed price for a kilo of green leaf has achieved the opposite effect.
“This scheme was formulated and approved without the consultation of the stakeholders, which has caused several problems to the factories and smallholders.The current methodology adopted for paying the subsidy defeats the idea of making quality tea,” he added.
Rs. 5 billion was allocated for the subsidy in the interim budget in January. Rs. 5.4 billion was spent by end-September, despite the subsidy requiring Rs. 1.3-1.5 billion a month if implemented properly.
Samarasekara noted that lower-end manufacturers are benefiting from the subsidy, while the higher quality manufacturers are attempting to lower costs and quality to stay competitive.
SLTFOA CEO Gehan de Livera said that this was due to some corrupt tea inspectors giving only Rs.50 guaranteed price for even the best quality tea; reserving the Rs.80 subsidy for factories which provide bribes.
“There are only a handful of those factories. They pass an envelope with around Rs.50,000 to the inspector each month and get the Rs.80 subsidy. So these people take any quantity of leaves at Rs.80 in large volumes and make profits,” he said.
De Livera said that most factories process leaves given by suppliers with close working relationships, but even such suppliers will not be able to handle the current status quo. A Rs.80 subsidy converts to Rs.584 at the Colombo Auction, while Rs.50 amounts to less than Rs.342. The auction average last week was Rs.383, falling from Rs.453 year-on-year due to global upheavals.
Around 50 percent of tea lots at the auction are left unsold, and the poor quality teas are repeatedly placed in the process, further reducing prices.
De Livera said that the B-60 programme implemented in 2014, which mandates factories to accept at least 60 percent good quality leaf is also being circumvented by certain parties, similar to the subsidy.
“The B-60 programme leads to corruption,” Dissanayake agreed. Samarasekara said that the best option would be for the Tea Board to intervene at the auction, ensuring all stakeholders get equal treatment, or to provide a subsidy based on elevation averages.
He further said that the number of factories in the country is higher than required and new construction and expansions, which are taking, place without consideration placed on the availability of tea leaves must be halted.
“Many factories operate well below capacity, therefore giving rise to fierce competition for the available green leaf. When one factory rejects poor leaf, another factory accepts it,” he said.
Sri Lanka has over 700 factories with over 400 in the smallholder areas. Kenya which is the largest tea exporter in the world has only 80 factories.
Samarasekara urged the Tea Commissioner to monitor processing capacities of factories and to inform brokers not to catalogue teas above such capacities.
“This would also put a stop to recycling of teas coming to the tea auctions that distorts the national production and sales figure,” he added.
He also requested that a treasury guaranteed working capital facility be extended to the factories to meet the external pressures facing the industry, as only one factory was provided a facility this year during its opening.



Rs.5 bn marketing campaign
Meanwhile, Dissanayake said that a new tender for the digital aspects of the Rs.5 billion tea marketing campaign will be discussed with the Premier Wiclkeremsinghe, as that tender process was found to be less than satisfactory, with other ad agencies pitching better than the winner. Dissanayake said that Phoenix Ogilvy, which won the traditional media campaign, will not be given the digital marketing campaign despite it submitting tenders for the latter as well. A well-placed source said that the previous regime split the campaign into two to avoid placing all eggs in one basket, despite communication breakdowns, which may arise from such an action.
The digital campaign wound up in the hands of an Indian company. The source said that this was due to domestic political reasons.
Dissanayake noted that though the ad agencies were only given the production process of the campaigns, a debate is ongoing whether to allow them to do the media buying as well. Media buying is the biggest revenue stream for ad agencies.
“In the tender process, the ad agencies were to do only production and the Tea Board was to do the media buying. The government will save 15 percent of the costs if the Tea Board does the media buying, but does the Tea Board have the expertise? That’s the debate,” he said.



Subsidy and intervention
Prime Minister will be having a special meeting with Dissanayake and Southern Development Minister Sagala Ratnayake on Wednesday to discuss pertinent issues relating to the tea industry.
“We will be meeting the Prime Minister this week to discuss the subsidy and intervention,” he said. Dissanayake has previously said that the tea subsidy ended on September 30 may be taken forward, following Cabinet approval in a different format with a lesser scope of around Rs.700 million a month.
He said that around Rs.300 million saved each month till December, amounting to nearly Rs.1 billion would be used to intervene in the tea auction.
The Sri Lanka Tea Board intends to buy tea at higher prices to artificially hike up the auction, and sell the tea back to the auction at a profit at a later date, similar to the practice in 2008.
Sri Lanka Tea Exporters Association Former Chairman Niraj De Mel said that while such intervention too is undesirable for free markets, it may be a better solution than subsidies to smallholders, as all stakeholders in the industry will receive the benefit. Dissanayake has some doubts over the matter as well.
“The 2008 Iraqi situation when the Tea Board intervened; is it the same situation now? What if the prices don’t go up? What if it actually goes down? Does the government become a hedger?” he pondered. However, he assured that any decision to influence an industry, which has over 2 million citizens depending on it, would be taken based on stakeholder approval. He noted that while the government will work to stabilize the industry in the short-term, long-term sustainability requires all stakeholders to work in harmony.

 
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