The tea industry is one of the key pillars of Sri Lanka’s economy. But for some time Sri Lanka’s tea cup has been in a storm and a new recipe for revival and sustenance is imperative at this point of time.
Mirror Business recently sat down with Sri Lanka Tea Board Chairman Rohan Pethiyagoda for a detailed discussion over the current status and way forward for the country’s struggling tea industry, which still earns over a billion dollars in revenue per annum. Following are the excerpts from the interview
Could you provide a snapshot of the current status of the industry?
The year I came in, 2015, was probably the worst in the industry’s recent history. The prices were depressed, largely due to political instability and trade or financial sanctions in several of our best markets, including Russia, Iran, Turkey and Iraq. These are powerful markets for Ceylon Tea. The production exceeded the demand and the prices crashed.
The past year has arguably been the best in recent times but that is no credit to me. We experienced a severe drought and the production fell by about 15 percent. That was enough to send the prices rocketing up by almost 50 percent. A lot of people who made losses in 2015 were finally able to return
At the same time, all is not well. Almost two years ago the government banned glyphosate, the main weedicide used in the tea industry. That was done without any planning or warning. As a result, in many tea-growing regions weed control has gone completely out of control.
For regional plantations the cost of production is already high, so they can’t afford to hand-weed tea; it is simply too expensive. The worst part of this predicament is that because there is no weedicide legally available, illegal weed-killers are being used, such as those meant for paddy cultivation.
If traces of them are found in the exported tea, we could face serious difficulties in importing countries. We are monitoring exports very carefully while urging the industry not to resort to such practices. Hopefully the government will reverse its policy on glyphosate; if it does not, we can expect major problems.
There is no scientific evidence from anywhere in the world that glyphosate causes any harm to human health. In most developed countries, this herbicide is considered safe enough to be sold even in garden stores. How come the issue is only for Sri Lanka? The fact is that glyphosate, when correctly used within a scientific weed-control regime, is very safe, especially when compared to the alternatives.
Has the industry collectively expressed its opinions?
The industry has been complaining for quite some time. We need to remember that we are competing with other countries. No other competing countries such as India and Kenya have banned glyphosate. They are thus at a huge advantage. As it is, the cost of plucking a kilo of tea in Kenya is one-third the cost in Sri Lanka. They are simply more efficient.
The ban on herbicides puts a further disability in the way of our manufactures. How can we compete in the global market? No importing country has raised even slight concerns about glyphosate within legally-established residue limits.
The tea industry has repeatedly highlighted this issue but has had little success in changing the government’s mind. I hope the government will take serious notice of this crisis and act soon. I think it will eventually, simply because economic forces will compel it to, but by then the damage may be irreversible. Well, they can’t say they haven’t been warned.
What are the other threats the industry faces?
Climate change! It is happening so fast that we simply won’t have time to adjust. The rainfall patterns in the island are changing rapidly and a ‘dry hole’ is developing in the centre of the country, in the heart of the tea-growing region, which used to be the wettest part of the island. No longer. For all practical purposes, even Nuwara Eliya is now in the dry zone: it receives substantially less than 2000 mm of rain annually.
We have no option but to develop new varieties of tea that will be drought resistant. That is a very slow process. We are not talking here specifically about genetically-engineered tea, but varieties developed through conventional selection. That said, we should develop genetic engineering technology, too. All options should be on the table.
Alongside this, the present 50 percent hike in raw material prices is something no exporter could have foreseen. This cannot immediately be passed on to their overseas customers. Even the biggest exporters are getting badly squeezed. And then there is the rising price of finance, with bank interest rates steadily edging upwards.
Moving on to our status in the global front, how well is Sri Lanka performing on that stage?
I worry that, because of the rising cost of production, we’re struggling to maintain the superlative quality that made Ceylon Tea world famous. The solution to this lies in a closer integration of the production and export arms of the industry and especially a move to increase the present 40 percent market share of value-added teas. This is, of course, already a remarkable achievement compared to our competitors, but we’re in a different economic league from our competitors now and have to think in terms of value, not just volume.
Unfortunately for us, our best markets are politically unstable: Russia, Turkey, Iran, Iraq and Syria are all under stress. Selling to them is difficult. It is astonishing that Ceylon Tea still makes it into Iraq despite all the trouble there, even when such countries have economic problems. However, they tend to buy our cheaper teas and when they can’t afford even those, they turn to teas from our competitors.
This has happened in the past. Egypt and Pakistan were among our best customers but we lost them for the simple reason that they could no longer afford to buy our tea and so turned to Kenya. These unreasonably high prices will damage us in the long term and—I never thought I’d say this but I would actually like to see the market cool down a bit. Our challenge is to improve our productivity. While a Sri Lankan worker plucks 18 kilogrammes of tea a day, Kenyans pluck 55 kilogrammes a day and get paid half as much. We need to realize that we are pricing ourselves out of our own market.
If you were to point out three areas that need urgent attention, what would they be and why?
The reintroduction of glyphosate would be a good signal since it will reduce the cost of production and also deliver better environment and soil nutrition outcomes by reducing the silt runoff that results from manual weeding.
Second, the tea industry is heavily overregulated. There are literally hundreds of circulars, rules, guidelines and regulations that the industry is bound by. Every little aspect is governed by some regulation. That doesn’t allow for a flexible industry. I would like to see a drastic reduction in red tape and give more responsibility to the industry to regulate itself. The industry must decide how it should operate, not the government. All governments are to varying degrees both inefficient and corrupt. We all know that. If the industry regulates itself, I think we will see much better outcomes. But Sri Lankans even in the private sector are suspicious of the private sector: in many ways, we have fallen victim to the Marxist rhetoric of the 1960s, which touted the government as the only honest broker for the popular interest.
Thirdly, I would like to see a single IT system that monitors and auto-regulates the whole of the industry’s value chain, from the tea bush to the ship. This is the only way you can cut down excessive regulation. We should get to the point where we can use technology to audit the value chain in real time.
There has been an ongoing issue on refuse tea. What measures have been taken to nip the problem?
A small proportion produced by every factory, 6 to 10 percent, is considered to have too much crude fibre to comply with the ISO3720 export standard. There are a few unscrupulous exporters who buy such teas from middlemen and mix them illegally in their blends. Refuse tea used to be sold at factories at around Rs.40 per kilogramme. By the time it reaches Colombo, the price approaches Rs.200 since a lot of people have to be looked after along the way. That’s why the STF has been to such pains to curb
this illegal practice. It’s a bit like the ‘kassipu’ industry.
Sri Lanka produces 25 to 30 million kilogrammes of such tea a year. So we decided to try an innovation. We told the refuse tea operators in Gampola that if they build processing centres to extract the good tea from it, we would allow this to be legally sold through the Colombo auction. We registered the first six centres that achieved 80 percent in the good manufacturing practices (GMP) scale.
We licensed them to sell the reprocessed tea at the auction. By this means, those who were operating in the black economy came into the white economy. The processed tea they were illegally selling for Rs.200 now fetches more than Rs.500 at the auction. Now dozens more want to join the legal framework. We might not approve all but would encourage them to form cooperatives. This type of innovation is important. I am not saying it is perfect. There are issues and some are trying to exploit the system. If the initiative does not succeed, we will shut it down.
Ceylon Tea is considered premium in most part of the world due to its quality. However, a section of the industry players have alleged there is a drop in the same due to lack of focus on quality control.
Could you shed light on the efforts taken to ensure quality?
This is a huge challenge. We produce about 300 million kilogrammes of tea a year. Kenya generates about 30 percent more than us. Yet, they have only some 110 factories whereas we have 715. They produce 30 percent more tea with one-seventh the factories. Almost 70 percent of Sri Lanka’s tea comes from smallholders and given the large number of factories, there is strong competition for the available leaf. When prices are good, like this year, there is huge demand to set up new factories and when times are bad they come to the government for handouts.
I would like to see maybe 150 fewer factories than we have today. My view is that the next time they are under stress the weaker factories should not be given subsidies but allowed to go out of business. Creative destruction is an important part of a successful economy. For the good to succeed, the bad must be allowed to fail.
The same principle applies also to the regional plantation companies (RPCs). By continually forgiving their debts and defaults the government is not doing the country a favour. So, if 100 factories shut shop, I won’t be shedding any tears. The industry will be the better for it. The quality must be underpinned by market demand, not regulations.
Cost of labour is quite significant in the industry and the extension of the minimum wage bill was more of a patch-up to buy more time. Any long-term win-win solution being thought out?
The cost of living goes up as a result of several factors, including inflation, currency depreciation and, of course, economic growth. Sri Lanka is subject to all these forces and, of course, labour will demand ever higher wages. There is nothing wrong with this. However, unless wage increases are tied to productivity increases, no business model can succeed.
Up to now it has been the government that has been the middle-man in wage negotiations. That is very dangerous because it interferes with the employer-employee collective bargaining process. Also, the governments are by definition political and tend to look at wage increases as vote-winning handouts. The unions need to realize that productivity is the key to sustainable growth. We need to allow a free dialogue between the unions and RPCs. Unfortunately, I don’t think any Sri Lankan government will let that happen; the temptation to pander to unions, which are themselves politicized, is too high.
The truth is our plantation workers are not paid enough. Let’s face it; Rs.700 or Rs.800 a day is not enough to live on. Our cost of living is very high. Yet, Ceylon Tea is expensive to produce for a reason. Our per capita GDP is about US $ 4000 a year. That of India, our nearest competitor, is US $ 1800, less than half ours, whereas Kenya’s is just US $ 1400. So our tea is expensive and will become more expensive still. We must remember that as our cost of living goes up, our earnings expectations too will go up and we will have to meet that demand. Up to now the message to the industry has been ‘produce more tea!’ But my message to the industry is, ‘produce better tea!’ Factories and plantations
that cannot do that should look at doing something else.
You must realize that tea plantation workers too have aspirations. Even today, 70 years after independence, plantation workers remain to be fully invested in the mainstream of Sri Lankan society. They are ‘given’ housing and social services but do they own any land? No. Are they part of a revenue-sharing model? No. The most fundamental thing a person wants his child to have is a piece of land. But plantation workers are perpetual tenants. There is simply no land to buy in the plantation areas. No government or union will address this. The unions won’t do it because the moment a worker owns a piece of land she will cease to be a union member. The fundamental issue is land. This is a politically toxic subject but it must be faced. And we need to come to grips with the fact that land reform in Sri Lanka was a farce that hugely hurt the plantation economy with no compensatory social dividend. The state is hogging all the land. My view is that
land should be the property of the people, not the state.
It’s no doubt the industry is facing challenges from all sides. If this situation continues to persist do you opine the industry would diminish?
In a sense, I hope it will diminish! I would like to see a cleaner, smaller, higher-value tea industry, like Japan’s. We should not emphasize volume over value. We should be producing the world’s best tea and selling it at the highest price. The bottom end of the producers should be allowed to drift out.
Sri Lanka is never going to succeed by producing cheap tea and competing with countries that can do it at half the cost. Our cost of production is too high for that. We need to look at US $ 5 as a minimum price per kilo at the auction. We need to strengthen value-added exporters and not strangle them with red tape and taxes. And we need to look at tea as part of our national value chain, not in rupees but in social dividend.
Why is branding Ceylon Tea on a global scale a hassle? There are the funds, commitment of the industry, but still for all a five-year delay.
I am very frustrated by this. The government’s tender process for intangible services such as advertising is very cumbersome and inefficient. When you are buying such a service how do you demonstrate objectivity?
Appreciation of an advertisement is subjective. This is something the government is not well equipped to do as they are averse to risk. When you do take a risk and something goes wrong, as in the oil hedging deal, the public has no mercy. So the mantra is to avoid risk.
So what do you suggest be done?
We need to think carefully whether the government should do this at all. This is the stakeholders’ money, not the government money. The basic problem is having to go through these rigorous procedures. Even I am cautious since I am accountable. The best way is perhaps to have the industry collect the money through one of their institutions, such as the Tea Traders’ Association (TEA), and then conduct the campaign through an international media firm.
But that would mean the government handing over much of its control to a private-sector stakeholder and the governments hate to give up control of billions of rupees! For the moment, we don’t have a choice but to go with the system: once the money comes to the government there is no provision to give it away.
How are the industry stakeholders reacting to this? The fund is built by them by way of a levy.
They are very frustrated. So am I. They have been putting pressure on me to stop collecting the money and frankly, I think they have a good case. I am willing to have that discussion with them. The decision is not mine alone to make but I am sure the minister too will be open to discussing this openly and finding a solution that would work best for all. But I do admit that there is a lot of justifiable irritation in the industry about the money not being spent.
Is the Tea Board supported well enough by the Plantations Ministry? I ask this because with the earlier leadership there were hiccups and delays in implementing strategies and they were partly attributed to that.
The ministry is responsible for financial and administrative oversight and I am okay with that. The minister directs policy and that is how it should be too. Things go wrong when these roles are switched. For example, if a minister directs finance or administration, you have a disaster. But I think that we have the right balance. Of course there are tensions to deal with, but these result more from style than substance.
In many cases this is because I see myself as a servant of the industry and not as a servant of the government. But we always seem to find a constructive way forward. The more important thing is that the industry’s voice gets heard, both at the Tea Board and the ministry.
I think anyone in the industry will confirm that they have an unprecedented level of access both to me and the minister and everything is open for discussion and debate. My mobile number is openly available and I take every call and return every missed call within the day. All my commuting time is spent on the phone. The answer may be ‘No’, but everyone is heard. And that’s how it should be.
Venturing into new markets has been on the cards for quite a few years, given the volatile situation in the Middle East. How successful such efforts have been?
Most certainly. Both China and the US are going well. China has been growing by 20 percent to 30 percent a year for the past several years. Similarly, the US too is performing well. There are lots of innovative Sri Lankan companies operating there. Ceylon Tea has made huge inroads in hotspots such as California and New York and even into multinationals such as Coca Cola.
What are the targets set for the industry in terms of export earnings?
At the moment we are looking at US $ 1.3 billion a year. I have seen a target of US $ 5 billion by 2020 being mentioned but that was contingent on the free import of foreign teas for blending and re-export. That did not happen and the exporters are constrained to buying only Ceylon Tea at the auction. I think even US $ 2 billion is ambitious at present. Such targets need to be based on fact, not wishful thinking.
Our challenge is to establish a premium. Yes, high-end Ceylon Tea is streets ahead but we are still producing 40-50 percent of our tea that is substandard compared with the rest of the world. Our challenge should be to deliver better quality and add value, rather than hoping that somehow the world market will pay a higher price.
Any other areas that require emphasis?
I am disappointed that we have still not been able to give a legal meaning to the word ‘Ceylon’, which is such a great brand not just for tea but also for the country itself. How much Coke would be drunk if ‘Coca Cola’ changed its name to ‘Another Fizz? Brands must never be discarded: they must be built on.
Just look at Singapore and the Raffles brand. Buyers may not know what Ceylon was, just as they do not know who Raffles was, but they associate good things with it. But without a legal recognition for ‘Ceylon’ we cannot stop others from using it in their branding, since legally the name doesn’t belong to us.
We must recognize Ceylon as a foreign-language name for Sri Lanka. There is no shame in that, but the idea is politically toxic. Many countries have one name for themselves and another in international usage, such as Bharath and India, Deutschland and Germany, Nippon and Japan. We need to get over our persistent inferiority complex and capitalize on our colonial legacy. Those 500 years are part of our history and who we are; let’s use it to our advantage rather than pretending it never happened.
Another issue is the very poor appreciation of tea in Sri Lanka. Our per capita consumption of tea is 1.4 kilogrammes but of sugar it is 30 kilogrammes. We need to regard tea as more than just a colorant for our sugar. I want to see a nation of tea snobs, talking endlessly of their favourite single-origin pekoes.
Any message you want to convey to the industry?
The industry is doing fine and they hear enough from me. But I do have two messages for the government. Not just this government, but any government. First, take land reform seriously. Unless citizens are given broad and secure title over land, the nation’s greatest asset, Sri Lanka can never succeed. No nation that has denied its citizens land has ever succeeded.
Second, lighten up a bit. Ease up on red tape. Give regulatory power back to the stakeholders. It is easy to preach, but we need to accept that institutions such as the Tea Board, while part of the solution, are also part of the problem. We are in many ways a source of inefficiency, red tape and delays. If we in the government cannot do our job efficiently we need to clear out of the way and allow the industry to get on with what they are good at doing—making people prosperous. Our job should be not so much to manufacture tea as to manufacture prosperity.