Time to hard-sell Sri Lanka as an investment option: Vish Govindasamy

By Channa Fernandopulle 

Q: What is your view on the Sri Lankan macro-economic position?

A: Certainly there are many challenges that the country is facing but I’m personally very bullish about Sri Lanka. There seems to be a lot of turmoil internationally that we have been quite fortunate to have moved beyond. 

From a regional perspective, India has been growing at about 7% and I’m certain that that kind of growth can also create a lot of opportunities for Sri Lankan companies; therefore I’m very bullish. 

As the current Government lays its plans and puts forward its policies, we have to be patient. Rome was not built in a day so we need to allow them to set a roadmap and we may as citizens of Sri Lanka have to make smaller sacrifices. I think it’s important that we are all a part of that policy building process and that we are able to candidly voice our opinions on policymaking in order to influence it to bring about the best, most equitable results. 

There have been a lot of positive signals from the Government, especially in terms of infrastructure, tourism, attracting Foreign Direct Investments (FDIs) and the creation of a manufacturing base so young people will have employment going forward. Those are all positive steps. But in the short run there are a lot of residual problems and the Government’s revenue base really needs to be strengthened and increased. That is a serious challenge that needs to be fixed in order to make sure the Government has enough revenue. 

We also need to attract Sri Lankans living overseas, in order to find opportunities where they can make a contribution, because it is certainly clear that this diaspora can have a major impact on the growth trajectory of this country. However there is a lot that needs to be done in terms of offering them the kind of basic facilitates that they would be able to access overseas without a problem. 

We need to be looking at issues such as how diaspora Sri Lankans returning to the country will fare in terms of health insurance, while improving our road networks and public transportation systems and we need to ensure that they can easily find quality schooling for their children. 

Generally speaking: in the short-term yes there will be some sacrifices but in the long-term I believe we’re on the right track. 

Q: Sri Lanka has been enjoying a lengthy period of relatively low inflation. What do you believe are the driving factors behind this and what are some of the results this could have on the Sri Lankan economy? 

A: Inflation has largely been driven by a lull in world commodity prices and oil prices in particular. This in turn is driven by many other forces currently prevailing in the global economy. From a Sri Lankan perspective, while it is good to have low inflation going forward, this is not something that can be relied upon. We need to put more money into the people’s hands which means more job opportunities, more growth opportunities and more exports of our products. Then the inflation factor won’t have as large an influence as it currently does, even if we see greater fluctuations of inflation down the line. 

Q: In recent times we’ve seen a reduction of exports and an increase of imports to Sri Lanka. In that context what is your view on the country’s balance of payments? 

A: At present Sri Lanka is quite dependent on imports and I think we should work to change that balance. There are some measures I believe that can be taken that will help the country move in that direction, particularly with regards to the agriculture sector. One important step is to arrest and reduce post-harvest waste, especially in the case of locally grown vegetables. 

I think a special measure that can be taken in that regard is to follow the example of agricultural sectors in more developed economies. When they have massive harvests, they can the excess produce in order to preserve it and even add some value. Such practices aren’t really followed in Sri Lanka and I believe that if we do go down that route, it will create significant economic opportunities. 

Another commodity which Sri Lankans have typically imported and consumed in large numbers is canned fish. Being an island it seems strange that we import such large quantities of fish and I think there is potential to reverse this trend. I believe there are already plans underway to can fish locally and these are some straightforward, low hanging fruit that we quickly address to get achieve positive results. 

Q: What sectors should Sri Lanka be looking to place the most emphasis on in order to achieve a higher level of growth? 

A: Many believe that Sri Lanka needs to move away from an agriculture-based economy to one that focused on manufacturing and services. We’re dependant so much on our agri-based revenue and this consumes a lot of labour, so if we can move some of those people into more productive areas, we might achieve better results. 

In terms of manufacturing, I think we may find lack of raw materials to be a serious challenge, particularly in terms of heavy machinery and high-tech manufacture, but given Sri Lanka’s geographic location I think there is still very strong potential to assemble products in Sri Lanka for shipping to other regional economic hubs. That will require a strong talent pool. We need to develop our young people with the right skills for those kinds of jobs which in turn will require us to take a hard look at our education system. 

Q: Given the strong internet and mobile penetration in Sri Lanka at present, what do you think about the potential of Sri Lanka’s IT industry moving forward? 

A: The way the world is moving, IT is obviously going to control our lives and either we’ll be in it or not. I think we already lost out in terms of the IT boom that happened in the early 2000’s. Where many other Asian countries were building their capacity, we didn’t and I think that chasing behind cheaper work now is not going to get us anywhere. For a country like Sri Lanka, we need to focus on high-end niche products. We need to build a small, quality IT industry. In that context we already have world-class IT companies that were created in Sri Lanka and I think it’s reasonable to anticipate that Sri Lanka will produce more successful companies in future. 

Q: With regards to the financial services sector, what are some of the areas that can be improved from a policy perspective that will help create an environment more conducive to an international financial services hub in Sri Lanka? 

A: The Government has already announced that it will be establishing a global financial centre in Sri Lanka and the policy framework for that is already being done with a view to inviting some of the major companies on the international stage to set up here. I think that is a fantastic idea to come and invest here and work here. There’s great places to live, excellent weather, and seamless connectivity to the rest of the world. In that context I think that financial services would be one of the easiest sectors to build up and it holds the potential to employ a sizeable percentage of the labour force. So we really need to get the policy framework in place and market ourselves a lot better. 

Q: I understand that you recently led a Sri Lankan business delegation to India. What were some of your findings and what are the lessons for Sri Lanka? 

A: Yes that’s correct. The current Indian Prime Minister had recently invited companies from around the world to come and ‘Make in India’, meaning that he wants companies to come to India and utilise their infrastructure and massive talent pool to manufacture products and services. 

My role in this was to head the Sri Lankan delegation which included 15 delegates to see what opportunities they could find. Prime Minister Modi spoke of the fact India has approximately 350 million citizens under the age of 14 out of 1.5 billion, meaning that it is a young population. With such positive factors I’m confident that we can find significant opportunities for Sri Lankan companies but we can also learn a lesson from the Indian approach when marketing our own country. 

In terms of opportunities for Sri Lankan companies, rather than exporting from here, we should explore the feasibility of manufacturing our own products in India, particularly given that so much is being done to facilitate those kinds of investments. 

We can also learn from the success that India is having in attracting FDIs. While it may not be possible for us to follow the Indian approach exactly what we can learn from them is how to make the hard-sell on Sri Lanka. 

Q: Shifting our discussion to Sunshine Holdings, could you give our readers a brief overview of the Company and its performance in the last year? 

A: Sunshine Holdings is a group that is comprised of different business ranging from healthcare to agriculture – mainly tea, rubber, palm oil and dairy farms – to energy where we are working in mini hydro projects. 

We’re also in the packaging business. We have a FMCG range with tea brands and then there is our retail pharmaceutical business in Healthguard. So as you can see that we are a truly diversified business.

In terms of how we’ve been doing, over the last few years we’ve generally enjoyed reasonable growth as a holding company. One of our group’s greatest strengths is in the diversity of sectors in which we operate which allows us to mitigate challenges being faced by one segment with the success of another. Overall we’re very bullish on our FMCG branded business, we’re very bullish on our retail business and looking ahead a bit we aim to be a significant player in Sri Lanka’s energy sector moving forward. 

When it comes to the agriculture sector, it continues to be an important sector for Sunshine Holdings and also for Sri Lanka as a whole, particularly in terms of its impact on nation building. We employ almost 12,000 people in that sector and while the agri-business has its own challenges, it remains a cornerstone of the Sri Lankan economy and we are continuously looking for new ways to improve and expand it. 

Q: Could you give our readers an overview of your agri-business? 

A: When it comes to rubber we have a fairly small presence having placed greater emphasis on a shift towards greater palm oil production. We’re one of the two largest producers of palm oil in Sri Lanka. Our palm oil business is operated in partnership with our joint venture partners, Pyramid Wilmar through their investment in Watawala Plantation. 

Now that the Government of Sri Lanka too has come up with a policy to expand palm oil plantations from its current scope of 7,000 hectares up to 20,000 hectares in the future, we see scope to move forward in this sector and work towards acquiring suitable land to go in that direction and we are exploring our options with great interest. 

With regards to rubber, the world market is not faring well at the moment and the rubber we have as a group is also very little so this is not a priority area for us. Dairy is something we started as a pilot project over the last two years. Recently Watawala Plantations tied up with Duxton Asset Management, a Singapore-based international and boutique asset management firm, to set up Watawala Dairy Ltd. A sizeable dairy farm will be set up under this venture. 

Q: Are you speaking solely about large scale production or do you hope to move into production of consumer dairy products as well? 

A: Initially it will be a dairy farm to procure fresh milk and we will tie up with some of the larger current players to off-take this milk but later on, once we get that fully settled – because it’s a good 5 year program that we have envisioned, then certainly yes we will create some value addition at a later stage. 

Q: From a plantations point of view, could you tell us more about the tea segment of Sunshine Holdings? 

A: Tea is something that is very close to us. Our group company Watawala Plantations is very fortunate to have some of the best tea estates in Sri Lanka such as the award winning Kenilworth estate. The Waltrim estate is also doing well and has a factory that we built with a Rs. 300 million investment about 5 years ago 

Watawala Plantations tea is unique because it has tea that is grown in low, medium and high regions. With this exposure almost all our estates fetch very good prices at the Colombo Tea Auctions. As you know we have a world class partner in TATA, which owns Tetley, worlds’ largest global brand. 

These factors have helped us to maintain a positive performance however there are industry wide issues that remain unresolved. One of the main issues continues to be the question of productivity versus wages. This has been a continuous debate that we have to continue to work on. 

The tea industry as a whole is largely very labour intensive and flowing from this, there are multiple issues that need to be grappled with - not only as a Company, but as an industry and as a country – it is imperative that we find solutions to these complex problem and place this vital industry on the best possible footing for the future. 

There are some fundamental changes that need to be made and in that process we need to ask ourselves difficult questions with regards to the direction of the Sri Lankan tea industry. The debate about whether we should go for more production or try to fetch higher prices through quality improvements is one such question. What is important is that a policy is formed based on wide-spread consensus through comprehensive dialogue between the Government and the industry. 

Another area of concern is with regard to unproductive tea which is unfortunately consuming a lot of labour. There are some estates over the years have suffered from problems like soil erosion, and changes in weather patterns that have made certain regions that were once ideal for tea plantations become less viable. As a result there is a lot of resources being invested into planting tea in areas where the returns may no longer justify it. 

Q: It’s safe to say then that these are some very serious systemic issues but what do you feel could be done to move us towards a potential solution? 

A: Broadly speaking, the plantation business presents us with unique challenges. It’s clear that replanting continues to be a crucial to the viability of the tea industry moving forward but replanting costs are high, and this is in part due to the fact that labour costs are high which in return is caused by low productivity so it is in some ways a vicious cycle.

In the past, we were able to get some long term ADB funding for a period of about 15 years, which is why we were able to do what we did at that time: investing money into factories, roads and workers housing and so on. 

Unfortunately today there is no long-term funding mechanism, you can usually only secure funding for a period of 2-5 years where replanting needs a 10 year ROI and this challenge is yet to be resolved.

Q: What is the importance of brand building and how can it be leveraged to take Sri Lankan tea to international markets? 

A: Building a tea brand or really building a brand for any product is not an easy challenge and it requires a lot of funding. There are some good Sri Lankan brands that have achieved this already but I don’t think we have the muscle to go up against larger brands in established markets. 

Rather than chasing the traditional markets – such as the United Kingdom, Russia, the Middle-East and so on – we need to enter markets that are not traditionally tea-drinking markets where there is significant growth potential. One market of interest is the United States which has seen double digit growth in tea consumption. Sri Lanka needs to really work to become a big player in that market and other non-traditional markets like Africa and South America where we simply do not have a presence. 

We need to target markets like the United States and develop a 5-year plan that will allocate investment, and station a few embassy officers across the country to work on developing business together with the private sector. It will require investments and resources from both sides to make any real progress.