Plantation industry needs long-term Master Plan: Malik Fernando

MJF Group Director Operations Malik J. Fernando has called for a Master Plan for the plantation sector.

In a press statement issued this week, Fernando says an industry-wide Master Plan is required for Sri Lanka’s 150-year-old plantation industry to realign itself with internal and external changes and to remain competitive.

“We need to develop a common Master Plan that all stakeholders, including the Government can work towards. Tea, the main plantation crop, requires long-term strategic direction, but right now, this is sorely lacking. The entire plantation industry needs five to 10 year rolling plans to enable long-term planning and financing of the required investments,” said Fernando.

Changing landscape

Fernando, who joined the MJF Group – which owns the international Dilmah brand – as a Management Trainee nearly 25 years ago and oversees the diversification activities of the Group, notes that the current production model for tea is unsustainable in the long-term given the high production costs, low yields and volatile market prices.

“The industry is badly affected by high costs and low yields. Tea prices have been at record highs for the past two to three years and could not be expected to remain at those levels continuously. The global turmoil also impacts demand,” said Fernando.

The close to 30% wage hike in June 2011 is seen as unsustainable within the current production model, with some high grown estates already losing as much as Rs. 150 per kg of tea. Fernando points out that the Sri Lankan tea industry is uncompetitive against international competitors.

“While wages are 60% higher in Sri Lanka than in Kenya, worker productivity is 60% lower in Sri Lanka. The daily labour wage is now over 150% of the value of a kilo of tea sold at the auctions. This is only 80% in Kenya,” explained Fernando.

Meanwhile, yields are dropping as tea plants get older, and companies cannot afford proper agricultural practices.

This combination of rising production costs, lowering yields and price uncertainty, Fernando, says, “is a deadly cocktail”.

Market risks are also rising, particularly in the traditional Arabic tea markets, due to recent political changes. These changes would put Sri Lanka’s low grown, smallholder teas at risk in the medium term.

“Together with democracy, central purchasing will be replaced with free markets. Multinational companies will enter and attempt to change tastes and demand patterns in these countries, increasing the competition that Ceylon Tea will have to face,” explained Fernando.

Realigning the tea sector

To realign Sri Lanka’s traditional tea sector to face the future, Fernando says Government support is needed in long-term financing and regulatory changes. For financing, Fernando suggests a model similar to India’s ‘Special Purpose Tea Fund’ for replanting, infilling and rejuvenation of aged tea bushes.

“A similar programme can be offered in Sri Lanka to all growers, both companies and smallholders. The export levy on bulk tea introduced last year can fund part of this cost. Bank investment funds from VAT savings can also be channelled for such activities. Out of Sri Lanka’s total 220,000 ha of tea around 5,000 ha can be targeted for replanting annually, under an accelerated programme,” suggests Fernando.

On the regulatory front, Fernando suggests that the Government consider lease extensions to 99 years, for companies that implement proper agricultural and management practices.

Restrictions on land use by Regional Plantation Companies (RPCs) should be reviewed, says Fernando, to allow RPCs to diversify land use as a hedge against a downturn in a mono-crop situation.

“We must move away from the perennial mono-crop model to a maximum land productivity model. This means planting rubber, oil palm, fuel wood or other fruits or vegetables in fields that are not suitable for tea,” explained Fernando.

Addressing regulatory obstacles is seen as vital to encourage innovative solutions for industry challenges. Fernando points to the attempt at forestry as one example where plantation companies and the country could not benefit because of regulatory confusion.

“To reduce fossil fuel dependence, around 20,000ha of fuel-wood was planted, with borrowed funds, under a master plan with Forest Department approval. But companies were not allowed to harvest the fuel wood, even under supervised conditions. This has contributed to the increase in the cost of production due to contractors transporting firewood from other parts of the country, much of it indiscriminately felled and the use of imported liquid fuel instead of renewable fuel-wood,” noted Fernando.

Another regulatory change helpful to the industry would be to make the tea growing sector zero rated for VAT, as the present exempt status prevents claiming of input VAT.

The industry also needs to invest in training and skill development to regain its innovative edge, through research into sustainable practices, moving away from fertiliser intensive methods that deplete soils. Many companies already have a serious commitment to sustainability and have obtained FSC and Rainforest Alliance certification.

“We must encourage scientific research on the latest technology such as nano technology, bioremediation techniques, soil organic enhancers and slow release fertilisers. Genetically modified plant material, integrated pest and disease management systems with biological predators, should be encouraged,” said Fernando.

While the industry needs to upgrade skills for the future, Fernando notes that Sri Lanka’s plantation industry already has a large pool of professional agriculturalists. This pool of human resource can be deployed to make Sri Lanka self sufficient in food and to foster high value export crops to regional markets, points out Fernando.

Change the traditions

Many other tea industry traditions may also require changes to ensure Sri Lanka’s 150-year-old tea industry’s long-term viability.

“The industry-wide bargaining with unions is out of date,” says Fernando, “and the colonial plantation model of resident labour is outmoded.” Because of the resident labour model, RPCs bear unusually high ‘cradle-to-grave’ social costs, playing the role of welfare providers to estate families – a situation not faced by any other industry in the country.

“The Government should help meet the social cost of non-workers because 68% of people living on RPC estates are non-workers,” points out Fernando.

Changes are already slowly unfolding. RPCs are starting to move to a ‘bought leaf/out grower’ model of self-employed worker/farmers, who are allocated specific lands and supply green leaf to the factories and work on their own time. This ensures no flush is lost, maximises field productivity and empowers the worker.

A move away from a fixed wage also gives higher incomes and dignity of work.

Part of the factory profits is shared with the farmer, who receives comprehensive extension services from the factory. This, says Fernando, is a successful global model, already practiced in East Africa.

Meanwhile, all industry stakeholders, producers, workers, unions and Government need to recalibrate their relationships and focus on the common wealth, says Fernando.

“The unions and workers do sense that the industry is not sustainable on the current basis. Indian unions recently reduced wages 11% in response to worsening conditions. Companies need to engage closer with unions and workers; we are in the same boat,” notes Fernando.