Dairy dilemma

Losses of State-Owned Enterprises growing has already been flagged by the Finance Ministry but it is worth seeing why these losses occur and what can be done to stem them.

It has been reported that Milco Ltd., a State-run firm, has slipped further in to the red in 2018, losing Rs. 820 million, up from Rs. 114 million a year earlier, as expenses outpaced revenues and interest costs grew. This comes amidst calls by top Government officials, including President Maithripala Sirisena to reduce milk powder imports.

For decades, the dairy industry has been one of the most protected sectors in Sri Lanka, but even after absorbing huge amounts of public funds, it remains one of the least efficient and most contentious segments of the economy. Caught in the crosshairs of politics, bad decision-making, mismanagement, and outdated economic thinking, the dairy industry is a microcosm of how interventionist economic practices can harm both consumer and producer.

On the surface, successive Governments have justified billions of rupees worth of subsidies to the sector, on the basis that Sri Lanka spends over Rs. 40 billion annually to import milk powder, and have argued that import substitution would save the country precious foreign exchange while meeting nutrition needs. But this has had limited success, as the local industry has failed to be competitive. This is also why milk products such as cheese are expensive in the local market, despite the existence of large-scale local producers.

As part of the Government’s import substitution program, particularly under former President Mahinda Rajapaksa’s administration, the State spent billions of rupees on importing thousands of dairy cows, and handed them out to small farmers in select areas of the country. However, farmer associations and experts have since pointed out that these cows do not suit the Sri Lankan climate, and farmers are forced to spend significant amounts of money on their upkeep. Large numbers have perished over the years, and those left produce smaller volumes of milk than initially projected. After many trials and failures, milk production has improved, but little investment was made in establishing efficient delivery systems to consumers. Value chains are important for an industry to become competitive and deliver high quality products to consumers at reasonable cost. For example, while the Government has spent much money to increase production, there has been little investment in expanding processing plants, with even Milco having problems absorbing the production. Last year, farmers went on protest after Milco was unable to pay 375,000 farmers because it was making losses. Therefore, it is clearly time for a rethink at policy and implementation levels.

Consumers, especially in urban areas, need to have easy access to milk products. At the moment, it comes in the form of milk powder packets. Changing consumption trends is difficult, and therefore investment has to focus on how to meet demand. Sri Lanka still only produces milk to meet 40% of demand, and therefore needs to import milk and other dairy products. If there are concerns about imports, then upgrading testing and other facilities is necessary, rather than villainising all imports, which could be used to increase competitiveness and provide consumers with products at accessible prices. Given overall economic trends and demographic changes, it will be extremely challenging to make dairy a competitive industry capable of exports in Sri Lanka. But it is worth turning around Milco as it does have a market reputation for quality products. Yet at some point denuding public funds must stop.