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a ‘sustainable agri-business management’ model is key

25 Jan 2016 - {{hitsCtrl.values.hits}}

Recently I read an article published in a weekend paper titled ‘Should plantation workers be working at poverty level wages?’ by Lanka Estate Workers’ Union

President Vijay Kumar. He has raised very relevant and important issues pertinent to the current affairs of the tea industry, in particular the labour wages issue. However, in my view, he has not really addressed the core issue, taking into consideration a more holistic view.

The challenge would be how to convert the tea estates in Sri Lanka into a socially and environmentally sustainable, yet commercially viable business unit (triple bottom line) in a broader perspective, to create greater business value. This is the real challenge as the management of plantations could be viewed as a ‘complex adoptive system’. The overall goals and objectives of the tea plantations in general are twofold.

(a) Increasing the export earnings (at present the third highest foreign exchange earner)
(b) Provider of employment (already one of the largest employment generators)
My own view is these dual objectives are contradictory in nature and therefore, there is an incongruity in terms of achieving the end objectives simultaneously. It goes without saying that the export competitiveness cannot be attained whilst simultaneously providing employment to every resident person in the plantations. This is because the estate managers need to focus on gainful deployment of the workforce in order to achieve higher productivity.
The ‘cost-leadership’ strategy becomes one of the necessary prerequisites to achieve export competitiveness, especially in view of the current global trends in the beverage industry. The only solution available in the short run is to have a ‘balanced’ approach.

Socialism in capitalist tea cup
Capitalism is an economic system in which the means of production are privately owned and operated for a private profit; decisions regarding supply, demand, price and investments are made by private actors in the market rather than by central planning by the government.

According to Marx, the central driving force of capitalism is in the exploitation of labour. “The ultimate source of capitalist profits is the unpaid labour of wages.” Marx calculates that the total required for subsistence is equivalent to about six hours of labour a day. “But will the owner allow his workers to knock off at the end of their six hours? To earn their wages, they must work for another six hours, thus providing the “surplus labour” that creates the owner’s profit,” Marx argued.

Interestingly, according to the current labour practices in the tea estates, the male workers who provide sundry work such as pruning, weeding, fertilizing, etc., put in less than six hours work only and stop work by 1:30 p.m. Within the overall capitalist economic system, the tea plantations working environment, especially the determination of wages and the number of working hours per day and other labour practices, seem to be similar to a socialist system.

Most of the high grown tea estates are running at colossal losses and the plantation companies (Regional Plantation Companies (RPCs)) are either borrowing money from the banks or subsidising tea losses with profits generated from oil palm and other income. To be more specific, the tea prices at the Colombo auction are in the region of Rs.420 (cumulative 2015 was Rs.402.50 only) and the cost of production of a kilo of tea is around Rs.460 thus making an average loss of Rs.40 per kilo. If this trend continues, the high grown teas will end up in some Rs.2 to 3 billion losses by the year end.

It is unbecoming of the private sector owners to bring in money from outside to finance such losses. The worst case scenario is that the estates will be compelled to curtail or totally abandon the development programmes such as re/new planting, factory modernisation, social welfare activities, etc. The estate sector would get into a vicious cycle of low productivity leading to losses getting accumulated and eventually making the estates go bankrupt, meaning no bank will provide funds to sustain the operations.

Poverty dip to continue
The bitter increase of poverty in the estate sector, reported earlier, was an eye opener towards the hard-working estate population who contribute immensely to the growth of the country’s export trade. The general perception on the estate workers by the trade unions and the public who are sympathetic towards the working class is ‘With the high cost of living, this salary is not enough even for meals each day, let alone other expenses….’ The World socialist website sometime back reported: “They are among the most oppressed layers of the Sri Lankan working class, living on the plantations in cramped accommodation without essential facilities such as electricity and running water.”

The Census and Statistics Department has completed the Household Income and Expenditure Survey 2012/13 (HIES) conducted once in every three years, aiming at investigating the living standards of household population in Sri Lanka. The poverty level is measured by the head count ratio, which presents the total number of persons live under the poverty line as a percentage of the total population.

One would wonder whether it is correct to take the international poverty line of US $ 1.9 per capita per day as the criteria to determine the poverty line without adjusting for the purchasing power parity (PPP) exchange rate for that country to reflect the true living conditions. Some of the estates in the RPC sector are certified with Ethical Tea Partnership (ETP) and the ‘living wage’ concept (which is above the minimum wage) is one of the criterions in granting the ETP certificate.

The household per capita income is generally used as a better indicator to understand and compare the living standards of the people in any country. However, the per capita income varies in reverse to the household income because of the household size. (Household size in the tea plantation sector is 4.3 as against the national average of 3.9 persons per family).

The latest calculation of poverty shows that the poverty level of the country has further declined from 15.2 percent reported in 2006/07 to 6.7 percent in 2012/13. The value of the official poverty line of Sri Lanka was Rs.3,624 (Rs.3,028 in 2009/10) per person per month for the 2012/13 survey period. We are pleased to note that the estate sector has recorded a substantial reduction of the percent below the poverty line from 30 percent to 10.9 percent. How did it happen?
Wages and cost of living
Under the present collective agreement, the basic daily wage is Rs.450 plus Rs.30 per day with additional allowance of Rs.140 tied to attendance. The overall income depends on the workers and the management, who jointly decide the number of days of work per month—generally around 25 a month.
The high inflationary conditions prevailed in the last 30 years up to 2010 has now ceased. In the year 2014, the annual average inflation was only 3.3 percent and last year (2015) it was 2.8 percent. The inflation can be simply defined as the overall general upward price moment of goods and services in the economy usually measured by the consumer price index. The demand for wage increase stems from these inflationary tendencies.

However, the wage increases granted in April 2013 and in April 2011 were 20 percent and 27 percent, respectively. These are considered as substantial taking into consideration the previous increases as well. The previous wage increase granted in April 2009 of 39 percent was also considered high. In the year 2006, the daily wage was only Rs.260 per day and now it is Rs.620, which is nearly 138 percent increase during the last nine-year period.

As stated above the overall income depends on the number of days of work per month, generally around 20 a month. With the allowances, the workers receive an average monthly salary of Rs.15,500 (excluding EPF/ETF). With the over-kilo allowance the pluckers get even more. One can argue that the estate population per capita receives more than US $ 1.90 per day after taking into consideration all the cash allowances and free provision of housing, water supply, etc.

From the above it can be seen that there has been a steady increase in the disposable income of the estate workers thus reducing poverty in the estate sector. The ongoing programmes of the government such as providing infrastructure facilities (road network, electricity/water supply), livestock development at estate level, etc., also would have contributed to the reduction of poverty.

The World Bank report highlights the need for ensuring the labour force living within the commercial property to have improved movement to and from the towns. The report talks about relieving management of welfare responsibility toward resident and the obligation of residents to provide labour to the estate.

Correction process
At present, the Sri Lankan tea industry is facing many challenges. The RPCs, which account for 35 percent of the tea production of this country, are at cross roads and faced with severe cash flow crisis. Basically, the three main challenges are (a) inadequate and non-remunerative tea prices, (b) overall high cost of production mainly due to low land productivity and (c) estate worker daily wage model not linked to productivity.

Sometime back, ex Tea Research Institute (TRI) of Sri Lanka Director Dr. U. Petiyagoda under the topic ‘Tea industry: Golden goose or lame duck?’ wrote on the need to improve soil in the degraded land especially in the high grown tea estates.

“..It is claimed that this goose which has laid golden eggs for more than one and a half centuries, is currently the third largest foreign exchange earner, employs over 100,000 persons… However, some features are troubling…. most estates appear to report losses...”
Dr. Petiyagoda in his article very correctly commented on the tea replanting practices. “In tea Estate practice, when replanting becomes due, the soil is “rehabilitated”…. It was rather wishfully believed that two years of grass can rectify a hundred years of abuse. Experiments tended to show that the practice was of no benefit to the succeeding tea.”
Since 1860s tea has replaced coffee as a mono crop in many parts including some land with high sloping gradients. One can argue the degradation of certain tea lands was due to inadequate attention to environmental concern for sustainable development.
One of my articles published recently, I have touched on the importance of soil organic matter and soil building. The organic carbon content (organic matter) of soil decreases fast after harvesting the crop.

Follow expert advice
These challenges need to be addressed through consultation by all the stakeholders. My view is that the solution lies in implementing the recommendations already given by expert advisors concerning the areas mentioned above. Let us examine one by one.

1. Degradation of tea fields/soil fertility management.
In Sri Lanka, the land productivity in the tea sector is reported to be very low compared to other tea-growing countries. The major reasons for this situation include factors such as land degradation, poor soil fertility status and adverse climatic conditions. Land degradation is the reduction or loss of the biological or economic productivity and complexity of rain-fed cropland. In Sri Lanka, major contributors to tea land degradation are soil erosion and soil fertility degradation.

It is therefore, important to adopt a ‘sustainable agricultural model’ focusing on ecological balance. As reported by the Planters’ Association (PA) Chairman, the RPC estates continue to invest funds annually on field development programmes despite making colossal financial losses. Further, most of the RPC estates are certified with the Rain Forest Alliance, Ethical Tea Partnership and ISO 14000, ISO 22000 (environmental compliance, food safety), etc. This is a step in the right direction.
The TRI has declared the year 2015 as ‘Soil Fertility Management Year’. Time is opportune to seriously address soil fertility management aspects and adopt best agricultural practices recommended by the TRI considering the vulnerable situation of the tea estate land managed by the RPCs. Let us look at this important issue on a fresh and open mind and implement the TRI recommendations.

2. High wages in relation to low labour productivity.
There has been wage increases from time to time to estate workers without due recognition of the low labour productivity mainly due to high bargaining power of the trade unions. It is therefore important to study the far-reaching implications on the socio/political and economic aspects in arriving at plantation worker wage models, which is a ‘complex adaptive system’.

The three stakeholders, namely, the government, RPCs and trade unions could reach a consensus and facilitate implementing ‘Ramani Gunatilleke’ report (which was initiated by RPCs/EFC four years back) on new approaches to estate worker wage models. It was recommended that the current daily wages be changed to productivity-linked (piece rate) wage models. According to her report, the wage negotiations need to be decentralized based on either agro climatic level or even “an enterprise bargaining” level.

It may not be possible to convince the workers and the trade unions to migrate into a revenue share model, without having an intermediate arrangement based on a hybrid model - green leaf rate coupled with a guaranteed minimum daily rate. The PA/EFC committee has already proposed two optional wage models and unions could take this as a basis for negotiation in order to arrive at a reasonable, yet commercially viable model. Let us hope that the three stakeholders follow the “expert recommendations”.

Conclusion
The way forward would be to have a shared understanding among the three stakeholders and reaching a consensus on implementing a ‘sustainable agri-business management’ model as described above. The whole ‘industrial relation issue’ needs to be first reassessed with a fresh and open mind as a way forward. The ultimate success depends on the commitment shown by the three stakeholders, in particular the RPCs, to execute the said business plan efficiently and effectively. The three stakeholders must unite first. Individual RPCs need to examine their own site-specific issues, land suitability for tea, agroforestry and other diversification options, etc., and adopt slightly different strategies and action plans. The speedy solutions to the above factors will shape the future sustainability of the Sri Lankan tea industry.

(Jayampathy Molligoda is a Fellow member of the Institute of Chartered Accountants of Sri Lanka and holds a Master of Business Administration (MBA) from the University of Sri Jayewardenepura. He is currently Director/CEO of a leading Regional Plantation Company in Sri Lanka and can be contacted through [email protected])

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a ‘sustainable agri-business management’ model is key

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