Business

Tea Industry: The price of success

Last year the highest net sales average ever was recorded by the tea industry. Yet plantation companies are not getting the required benefits due to the Economic Service Charge (ESC) and Value Added Tax (VAT) introduced this year. What are your thoughts on this?

Itís not only ESC and VAT but there is a need to look at what the plantation industry supports. It supports a very large number of workers and their families. There is a social responsibility that the plantations offer to society at large because plantation companies bear that burden. Itís not only the wages and employment that they offer but infrastructure facilities on estates as well.

Last year was one of the best years since 1997. It was also the best year for tea prices but plantations have not been able to take advantage of the boom in prices. The main issue was wages where we anticipated a 22% increase. The plantation worker does require to be paid more than Rs. 180 because they deserve a much higher level of remuneration but all these cost millions of rupees. There has to be conditions where the plantation sector can reap some benefits as well.

When the government imposes ESC, and VAT is exempt for tea and rubber, there are additional costs being incurred by us. The VAT exemption is going to cost Rs. 24 million per annum while the ESC will cost Rs. 11 billion rupees per annum This will add to a situation where the plantations are unable to reinvest in development and sustain themselves on an operational level.

The problem is that the government does not seem to be able to understand the difficulties in a large industry like this. Dialogue between the plantation companies and the government is no longer evident. Prior to nationalisation the plantation industry was always consulted before the budget. In 1975 when all the companies were nationalised, it became unnecessary to consult the plantations. Thatís really the crux of the matter. Once the plantation industry re-established itself as a private sector entity then it became necessary for the government to consult and look into the problems of the industry.

My grouse is that this has not happened. The plantation industry contributes 14% to 15% in foreign exchange to the economy. So why not support us?

Do you feel that the tax levels were disincentives for production as opposed to improving and expanding it?

When you introduce taxes, which are going to affect profits, then the profits that companies make are going to be negative. When that happens there is no money being diverted into development, such as replanting tea or rubber plants or acquiring new machinery for factories. What has been happening in the last five years is that plantation companies have had their backs to the wall and they are not spending on development activities that in the long term will yield a higher return. Whoís going to spend Rs. 1 million on replanting tea or rubber only to expect a return in 15 years? The government needs to look at a scheme of assisting plantation companies to get subsidies in replanting and infilling tea.

The input VAT is not reclaimable by us because we are exempt from it. When tea is exported, the exporter gets his refund. All the exporter has to do is to buy the tea at a certain price ó he knows his margin and when he buys it at a profit ó itís already calculated. The VAT is the icing on the cake for him. But for the producer who bears so much there doesnít seem to be anything, there is some disparity, which should be addressed. The VAT exemption is going to push us back further. It will cost Rs. 24 million a year.

Plantation companies were not replanting at expected scales and this has had a direct effect on production in general. Does your company face this problem and what are you doing to offset this?

No they are not. A recent Tea Research Institute (TRI) report showed that very little is being replanted. In the 1950ís, the government formulated a need for replanting and there was a subsidy scheme the government introduced at that time. The idea was when you plant 2% a year, by year 2000 you will have 100% of the tea replanted. It never really *works like that because subsidies were withdrawn and 2% is not very practical in the current context 1% is practical but 2% is a high target to go for. Itís what the government should aim at.

Has privatisation and the consequent changes in the size and scale of operations contributed to the increase in levels of productivity and competitiveness of tea plantations? Is this the way forward for the plantation sector in the long term?

Definitely. Prior to nationalisation there was an improvement in productivity Sri Lankaís productivity, which was 1,100 kg per hectare, has now risen to about 1,600. This is partly due to a large number of smallholders planting tea in the low country. Even the labour productivity is much higher. In our own plantations, after nationalisation, the plucking intakes ó that is the number of kilos a plucker will take a day was around 8-9 kg. Now itís about 17-18 kg so it has virtually doubled.

We always look at the productivity of the tea bush, of the soil or of some machine but very rarely do we look at the productivity of the human being. I think we have come -to a stage where we need to look at our employees and how much more productive they can be ó that might make the difference between success and failure.

Persistent and steep decline in the prices of plantation produce, within the context of globalization ó be it tea or rubber ó remains a key challenge. How does a plantation company like yours counter this scenario?

Our company like others are price takers ó we donít drive the market to that degree, but Sri Lankan tea fetches some of the highest prices in the world. Thatís because of our reputation for quality and for on time delivery. In spite of all the hazards that we have faced like the JVP riots, the auctions were always held on time. No auction was ever disrupted so the delivery to the buyer was always prompt. There is confidence in the tea trade around the world in Sri Lankan teas.

In the last financial year, Kenya took over in tea exports but until that time Sri Lanka was number one. Iím sure we will, be equal with them or ahead of them in the coming years. As a major player in the production of tea, we command a sizeable volume to keep our prices up as well. Iím optimistic that prices will be very much better because demand has kept pace with production.

The industry feels that unless they resort to mechanisation, they cannot compete in world markets. But mechanisation is bound to affect employment ó existing and potential. Where do we find the balance.?

We find that mechanisation is becoming an imperative - not because itís going to save costs but because we find we are short of workers. Since we are short of workers, we need mechanical implements that will do the job of workers. In the low country for instance, workers are in very short supply. So we are compelled to mechanise. Itís a happy arrangement because we are not throwing people out of employment and simultaneously we use mechanisation to make gains in both productivity and in costs.

Productivity issues have emerged critical in the face of competition from China and Kenya. What can Sri Lanka do to increase productivity and be competitive in the global market?

We are competitive in the world market but if we need to improve in productivity we will need to have a variety of tea or what we call cultivars. This will bring our costs down and make us competitive. We need to improve the planting machinery and upgrade it so we can be competitive as far as costs are concerned. It takes about five weeks for production of tea to be converted to cash, which is a long period of time. We will have Rs. 150 to 200 million worth of stock thatís produced but unsold. Efficiency can be gained by improvement in plant and machinery but also in improvement of our own auction process.

Our auction is very efficient but still itís difficult to handle the large volumes that are coming in. There needs to be modern technology used in the system to get the tea from production to sales as fast as possible. That will improve the cash flow, reduce the cost of borrowings and add to overall competitiveness.

One of the noteworthy features of the plantation industry is the high level of unionisation seen in the industry. How do plantation companies like yours deal with this?

Unionisation is something that has been there for 100 years so I donít think it can be looked at as an impediment. There was a need for workers to look at their rights and there was somebody to safe guard them. I think it has come full circle where we understand the unions and they understand us. We have very good relations with the, trade unions and that goes for all plantations. What we need to do now is to jointly see what difficulties we have and sort them out.

An obvious priority is improving the infrastructure to plantations, particularly in education and training. Isnít the lack of these facilities a basic barrier to productivity growth?

With nationalisation all the plantation schools were taken over by the government, so it is part and parcel of the education department. Individually the planters assist schools within their vicinity. They will for instance paint a school or a classroom or get involved in other activities. We donít get directly involved in education itself.

A critical issue is to bring the plantations to the mainstream of economic development. This involves strategies to provide basic needs to the workers. What do you think the plantation sector needs to do to meet this vacuum?

Social conditions and education needs to improve. Education is an area where you need much greater assistance from governments and donors to help upgrade the system. A lot of plantation workers are not educated sufficiently, they drop out from school and that has to be addressed. Living conditions need to improve and they need to be educated to higher levels so that they integrate with the rest of society. There seems to be some segregation.

There is a growing disinclination among the younger generation of plantation workers in opting for plantations as a career. How does the industry plan on countering this?

One of the drawbacks is the social stigma. Itís a perception that needs to be changed and it canít happen overnight. Some of the plantation companies have addressed this issue by trying to rename workers, say Ďplucking techniciansí instead of pluckers. But giving them a particular designation doesnít become meaningful. The reason why some of the plantation youth are not entering plantation work is the natural tendency to go for white collar jobs and not get involved in manual labour. There again itís because of the stigma that you are a labourer. Once dignity of labour comes into plantations then people will *accept any job.

Where would you like to see Sri Lankaís plantation sector as a whole in the near future?

I would like to see Sri Lankan plantations companies as a role model for the world, both in the human resources field as well as the management and agricultural fields. Plantation companies need to reach a state of sustainability playing a role in corporate social responsibility. Iíd also like to see not only the plantation companies, but employees as well, achieving a level of prosperity.

Courtesy: Plantation world

 

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