Comments /2673 Views / Tuesday, 22 May 2012 00:30
Sri Lanka’s tea industry generates around 1.5 billion dollars to Sri Lanka and provides almost a million jobs to the economy today. In fact Sri Lanka is considered a model to the world across the value chain, from growing to production and from physical distribution to the most admired auction system in the world.
From a demand perspective, the recent initiative of Ceylon Tea securing the place of becoming the first tea beverage to be certified globally as being ozone friendly sure spruces the industry to be the benchmark of driving the new age economy of Sri Lanka.
I will be failing in my duty if I do not commend the most recent initiative of the 10 million dollar global tea campaign that has been architectured by a unique private-public partnership led ably by the Sri Lanka Tea Board, which when operationalised will be a first in the world of tea and in fact an eye-opener to the booming tourism industry of Sri Lanka.
In the last two weeks we have seen the healthy debate on the theme ‘tea hub,’ which was really interesting. Whatever the outcome, the fact remains that a healthy debate in the open is the culture we must foster in the country.
But the fact remains that Ceylon Tea, which is synonymous with the country name, has now become God’s worry. In 1960 Sri Lanka commanded a production share of 20.8% globally and an export share of 35.1%. Today, we are at 8.8% share on global production and only an 18.8% export share.
Whilst the numbers may be alarming, to be honest these numbers are acceptable given that Sri Lanka’s supply capability is at 300-325 million kilograms of tea per annum and world supply has propelled to 3.7 metric tonnes, hence the only business option that Sri Lanka can pursue is a niche strategy so we can also command a premium pricing which can offset the high cost model in which we operate.
This entails strong policy decisions on the supply chain end and from the demand side of the business in line with changing market conditions. Whilst perusing the viability of the tea hub concept from a demand side, from a supply side I see a huge gap unfolding. Let me throw more light on this concept and why it has become God’s worry of Sri Lanka.
If one tracks back at some media reports that we saw of this industry, some analyst were putting the situation as an industry on the brink of collapse due to the last wage increase. The wage rate catapulted to Rs. 515 at the last revision, which is a 27.1 per cent increase on the earlier rate of Rs. 405 whilst on the demand side the Middle Eastern and North African uprising resulted in a decline in auction prices by almost Rs. 20, which resulted in the industry going down to the wire on continuity.
Whilst some can say that the workers in a tea plantation must be remunerated as per the increasing quality of life just like other parts of the country, a point that needs to be noted is that if the Cost of Production (COP) becomes greater than the Net Sales Average (NSA), the industry becomes nonviable like what has happened today (refer table 1 for details)
If we go back to the history of the corporate tea sector of Sri Lanka, we see that in the 1970s, large extents of plantation lands were acquired by the Government of Sri Lanka and vested under State institutions, the Janatha Estate 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 were Government-owned, the JEDB and SLSPC sought 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 industry’s history. Incidentally the tea industry was the first to undergo the privatisation process in the country.
How it worked
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 were 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 being absorbed by the private sector corporations, during the post-privatisation period. The RPCs turned around the Rs. 1.5 billion loss-making venture into profitability, which signalled that the privatisation process had worked.
Supply chain issues
Whilst some can argue that it is time to drive in a new ethos in the value chain with concepts like a tea hub, which I think is good for the industry to evaluate, we must also focus on the supply chain issues of the tea industry.
One of the key issues was to manage the supply chain issue of the increasing COP, to increase productivity. However, a point to note is that productivity in the corporate sector of the Sri Lankan tea industry is mainly dependent on the yields it could generate.
The yields of this segment of business have dropped from the year 2000 from 1502 kg per hectare to 1323 kg per hectares in 2007. Research revealed that one of the reasons for the declining productivity is due to the senility of the tea stock in the corporate tea sector.
2) Senility of tea bushes
If we anlayse this point in more detail, research reveals that from the total extent of Old Seedling Tea (OST) in Sri Lanka, 75 per cent of it belongs to the corporate tea sector as per table 2, whilst only about 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 on a yearly basis.
A key remedial programme that can be implemented is a robust replanting programme in the corporate sector. But with the current issue of COP converging on NSA, replanting is only a strategy on paper as it is unviable financially.
The Tea Research Institute (TRI) stated that the current volume of approximately 126 million kilograms output from the RPCs will decline to 98 million kilograms of tea within the next five years as the tea in the RPCs are at senile stage and yield is declining rapidly. The loss to the country in volume terms will be 28 million kg of tea per annum and in value it will be 92 million dollars while in rupees it will be a colossal Rs. 9.9 billion.
The TRI has outlined a scheme for a replanting programme to be implemented. The issue however is that for one hectare acre of tea to be planted, it costs over Rs. 2 million, which cannot be justified financially given the escalating COP and the corresponding NSA value.
This is why the replanting rate has been at the low ebb of only 0.67% of the total tea extent when the norm as per the TRI is at 3% of the land under cultivation. Refer Table 3 for details on funding requirements.
In the recent past we have seen the smallholder sector also reporting the same trend. From a volume of 240 million kilograms of tea that the small holder sector had produced around three years back, it dropped to 210 million kilograms and last year it has reported only 188 million kilograms of tea, with the core reason once again being the ageing tea stock.
The problem is very serious in this segment of business that accounts for almost 70% of the business because almost two-thirds of the tea farmers own a tea plot which is just one acre of tea. This means that their only livelihood is this business and if replanting is to be done, how will that farmer live during the three to four year gestation period? That is the million dollar question even if funding for replanting is given by the State.
Hence, it is clear that unless some serious policy decisions are taken not only from the demand side but whilst perusing interesting concepts like the tea hub, Ceylon Tea is heading to rough waters.
I would also advocate that unless a structured evaluation process is in place for this industry in a private-public partnership approach, time and again we will see sporadic new thinking coming into play like the tea hub without addressing the more important core issues of the industry.
But I will be failing in my duty of I do not state that unless we pursue options like the tea hub, we will not pick up the new emerging trends in the global market place from a demand end and Ceylon Tea will be left behind in the global game. The key question is, which comes first? Is it correction of the supply chain or driving the demand chain with new techniques like the tea hub?
(The writer has a double degree in marketing and an MBA and is currently reading for a doctorate in business administration. He is an alumnus of Harvard University, USA. The thoughts expressed are his own thoughts based on his doctoral research studies and not the views of the organisations he serves in Sri Lanka or overseas.)
2 July 2015
An economy, much like a household, must learn to live within their means. If what they ‘consume’ far exceeds what they produce (domestically) and what they earn (via exports), then bankruptcy is a matter of time Printing m...
2 July 2015
Colombo can generate fertiliser/soil conditioner and support hydrophonics Imagine a city which derives its own energy from its own waste – both electricity and transport fuel. Think about the impor...
1 July 2015
A comparison between Slobodan Milosevic and Mahinda Rajapaksa Slobodan Milosevic was the President of Serbia from 1989 to 1997 and President of the Federal Republic of Yugoslavia from 1997 ...
30 June 2015
This year marked the 110th birth anniversary of Nanayakkarapathirage Martin Perera, better known as Dr. N.M. Perera; Leader of the Lanka Sama Samaja Party, popular labour leader, one-time Mayor of Colombo, outstanding Parliamentarian, Marxist, int...