Over 50% of Sri Lanka tea exports are in bulk form which ends up in multi origin blends at the importing country, says TEA
Rationale for liberalisation of tea imports
World tea production registered a growth rate of 47% in the last 10-year period (2005-2015) and reached 5.2 billion kg in 2015. If China is excluded, the world growth rate was 14%. However tea production in Sri Lanka has been stagnating at around 340 million kg a year for some time. This is the uppermost limit the tea export industry can grow to, under the current strict regime of import restrictions.
Since the re-planting process is taking place at a slower rate mainly due to the dependence on State subsidies, the country cannot have much hope of expanding export at the current pace. Had the country maintained an annual growth rate of 5 % YOY, tea production would have reached 515 million kg by now. The liberalisation of tea imports will help to fill this gap in tea production and reach a much higher level of exports in terms of volume and value.
Over 50% of Sri Lanka tea exports are in bulk form which ends up in multi origin blends at the importing country. These brands then pose a severe competition to the Pure Ceylon Tea brands exported by our companies. This unhealthy situation weakens the progress of local brands. Further, value addition to part of this volume can be done locally with imported tea.
In 1981, the importation of CTC tea, green tea and some specialty teas were allowed for value addition mainly in the form of tea bags. This has brought positive results for the industry and today Sri Lanka exports approx. 28 million kg of tea bags registering highest FOB prices for the category. It has also supported the prices of CTC tea, dust tea, etc. manufactured locally. The situation for green tea is also the same. The free imports of tea would support the expansion of other categories as well.
Sri Lanka is not the only supplier of tea to the world. Our brands have to compete with international brands, which are offered at much more competitive prices.
Liberalisation will expose the tea manufactures to real competition. They will be compelled to improve quality, reduce cost, improve management efficiency and earn good prices etc. This would lead to reducing their reliance on government subsidies.
Exporters striving to expand the global market share are unable to cater to some market segments due to non-availability of value for price teas locally and comparatively high prices of average type Ceylon tea. This has a negative impact on the growth of a brand across all segments of the market shelves.
The cost of production in Sri Lanka is going up every year and currently the highest in the world. We cannot expect our buyers to support this production cost increase indefinitely as they have to compete with products coming from other origins at much more competitive prices. The liberalisation would help to soften this cost factor to some extent.
A number of international tea brands have moved away from Sri Lanka due to the current policy and country has lost a substantial amount of foreign exchange, employment opportunities and capital investment in infrastructure and modern machinery. The opening of tea imports would enable local brands to grow significantly whilst attracting the other brand owners to do the value addition here and earn more foreign exchange.
Sri Lanka lost some markets such as Pakistan and Egypt as we were unable to offer competitively priced tea to these markets. It may be possible to regain some of the lost markets with the offering of multi origin teas at competitive prices.
The growth in use of tea bags due to convenience factor will reduce the demand for leaf tea even in traditional Middle Eastern markets. The tea liquor characters will be more important than appearance of tea. This would be the driving factor in tea marketing in the future and multi origin blends will help Sri Lankan brands to adapt to this market requirement
Sri Lanka has the most efficient and advanced tea packaging factories among the tea producing countries. The liberalisation of imports would help to attract foreign buyers to do the packing of their brands in Sri Lanka. The increase of tea export volume with the liberalisation will also support the expansion of other industries and service sectors such as banking, packaging, insurance, warehousing, transportation etc. and create more employment opportunities.
1.Expand the current import scheme
Under the 1981 Tea Imports for Re-export scheme, tea exporters are allowed to import CTC, green tea and other specialty teas duty free for re-export purposes and tea imports are allowed to be taken into their respective factories for processing. The scheme does not allow importation of orthodox black tea. The scheme is monitored by SLTB and Customs to ensure that imported tea does not get into the local market. This scheme can be expanded to include orthodox black tea as well for blending and re-export purposes.
Since the exporters can operate from the existing factories, it may not be necessary to invest in new packing plants thus saving money for exporters. However, monitoring of the scheme may be difficult as the operation is not confined to a particular area or zone. Since all registered tea exporter would be eligible to import tea there exists a risk of imported orthodox tea getting into local market. Further, this may not help to explore the full potential of the tea hub concept.
2.Allow selected tea exporters to import tea for re-exports
SLTB may select reputed tea exporting companies who have state of the art tea packaging factories, currently engaged in brand marketing, etc. and grant permission to import tea for blending and re-export purposes subject to strict supervision by SLTB and Customs. The past track record of the company and potential for expansion should be considered when selecting the companies. Since only a few tea companies would be initially chosen for the scheme, the monitoring of the process may not be difficult. Subject to the success of the scheme, it can be expanded in stages to include a more number of exporters.
3.Establishment of an exclusive Free Zone/bonded warehouse
Government can demarcate an area for the Tea Hub with basic infrastructure facilities and both SLTB and Customs can place their officials in the zone. (Similar to BOI operation) This would facilitate easy monitoring as all companies would be located in one place. The selected tea companies will have to set up their own factories for the blending and packaging operation. The Zone should be close to Colombo as most tea exporting companies and support service industries are located in and around Colombo. All imported tea should be brought into the zone direct from port. The packaging materials too should be brought into the zone under Customs supervision.
The disadvantage of this option is that all companies will have to invest in new blending and packing facilities but on the other hand the same factor may prevent all and sundry coming in to the free zone.
4.Establishment of a logistics centre similar to DTTC
A centre similar to Dubai Tea Trading Centre in Jebel Ali Free Zone in UAE can be established here by a consortium of businessmen or any other investor which should operate under the SLTB and Customs supervision. The logistic centre should have all machinery in place with experienced personnel in charge of manufacturing. The selected exporters can use the facility at a fee depending on the usage.
The imported tea can go direct to the centre for storage under the exporter’s name. The Ceylon Tea component required for blending with imported tea and packaging materials can be sent to the centre under SLTB and Customs supervision. The finished product should be re- exported directly from the centre.
This model will save money for exporters as all facilities would be available at the centre and precautions could be taken to maintain confidentiality of the clients’ data from being leaked out. One of the main advantages is that SLTB and Customs will find it easy to monitor the scheme as all activities will take place under one roof.