Ceylon Tea securing the first beverage globally
Rohantha ATHUKORALA
FT Quote: “Whilst focusing on the demand side of the industry
with such concepts like Tea hubs, we must also focus on the supply chain
issues of this treasured Industry in Sri Lanka. The million dollar
question is which comes first?”
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 first tea beverage globally
to be certified 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,
when operationalised will be the first in the world of Tea and in fact
an eye opener to the booming tourism Industry of Sri Lanka.
God’s worry
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 should be the culture that we
must foster in the country especially as a top 11 economy of the world.
But the fact remains that Ceylon Tea that 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 an 8.8% share on global production and only a 18.8% export
share. Whilst the numbers may be alarming to be honest, this numbers are
acceptable given that Sri Lanka’s supply capability is at 300-325
million kilograms of tea per annum and the 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 that we operate in.
This entails strong policy decisions on the supply chain end and from
the demand side of the business in line the changing market conditions.
Whilst from a demand side whilst perusing the viability of the Tea Hub
concept from a supply side, I see a huge gap unfolding. Let me throw
more light to this concept and why it has become a God’s worry of Sri
Lanka.
If one tracks back at some media reports that we saw of this industry
was where some analyst’s theming 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 percent
increase on the earlier rate of Rs.405/- whilst on the demand side the
Middle Eastern and North African uprising had resulted in a decline in
auction prices by almost rupees twenty which resulted in the industry
going down to the wire on continuity.
Whilst some may 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 non viable like what has happened today.
Why privatisation
Rohantha Athukorala |
If we go back to the history of the corporate tea sector of Sri Lanka
we see that in the 1970’s large extents of plantation lands were
acquired by the Government of Sri Lanka and vested under state
institutions, the Janatha Estates 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 was government owned, the JEDB and SLSPC sought for
government assistance to offset the mounting operational losses that had
increased to almost 1.5 billion rupees 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 privatization of
the sector in 1992 which led the Sri Lankan tea industry to witness one
of the most significant structural changes in the history of its
industry. Incidentally, the tea industry was the first to undergo the
privatization process in the country. In 1992, when the state opted to
privatize 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 RPC’s, 100% ownership was
retained by the government, whilst the respective RPCs were initially
assigned lease-hold rights 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 been absorbed by the
private sector corporations, during the post-privatization period. The
RPC’s turned around the rupees 1.5 billion loss making venture into
profitability that signalled that privatization process had worked.
Tea bushes
If we analayse this point in 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 TRI stated that the current volume of approximately a 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 terms
of volume, 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 9.9 billion
rupees.
The TRI has outlined a scheme for a replanting programme to be
implemented. The issue however is that for 1 hectare acre of Tea to be
planted 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 a low ebb of only 0.67% of the total tea
extent when the norm as per the Tea Research Institute (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 small holder 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 a 210 million kilograms and last year it had reported only a
188 million kilograms of tea and once again the core reason 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. Which means that
their only livelihood is this business and if replanting is to be done
how will that farmer live during the 3-4 year gestation period is the
million dollar question even if funding for replanting is given by the
state.
Emerging trends
Hence it is clear that unless some serious policy decisions are taken
not only from the demand side whilst perusing interesting concepts like
the Tea hub, Ceylon Tea is heading to rough waters is my view.
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 sparodic new thinking coming to play like the
Tea Hub without addressing the more important core issues of the
Industry.
But I will be failing in my duty if 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, MBA and currently
reading for a doctorate in business administration. He is an alumni of
Harvard University, USA. The thoughts expressed are his own, based on
his doctoral research studies and not the views of the organizations he
serves in Sri Lanka or overseas. |