Peace dividend
With the 26-year-old civil war coming to an end in Sri Lanka, India Inc. is on the threshold of a never-like-before opportunity to do business with the island nation.
The celebrations that broke out in May after the Sri Lankan army announced the killing of LTTE chief V. Prabhakaran, at the end of a long and tumultuous civil war, were not restricted to just the streets of Colombo. There was considerable excitement in the corner offices of many Indian companies—an excitement that was born out of the opportunities that a peaceful Sri Lanka offers. Strategy meetings soon followed to garner a good share of the “soon to boom” Sri Lankan consumer goods market and/or the reconstruction (in the north and east) pie.
After one such meeting, an Indian cement company (which did not wish to be identified) has set its sights on the government-owned Kankesanturai cement plant, one of the two integrated cement plants in the island. It may be in ruins—but it sits on huge limestone deposits.
| Airtel, Ashok Leyland, IOC, LIC, Maruti, Bajaj Auto are among the major Indian companies in Sri Lanka |
| All of them expect business to grow faster with the end of the civil war |
| Many new companies are looking to enter the country |
| Cement, infrastructure development, steel and dairy farming are the most promising sectors |
With Sri Lanka being cement-deficit and considering the extent of reconstruction work that needs to be done in the north/east, many Indian players are busy exploring the possibility of setting up fresh capacities. At present, UltraTech Cement, Gujarat Ambuja and a few others export cement to Sri Lanka.
Commercial vehicle major Ashok Leyland is also on the move. It is already a market leader in Sri Lanka, through its JV with Lanka Ashok Leyland (LAL), in the bus and truck segment, in which it has a 65 per cent share. LAL has begun upgrading its service network in Jaffna, Trincomalee and Vavuniya.
Commercial vehicle sales increased every time hostilities ended and the highways connecting north and south reopened. LAL’s sales touched a high of 3,600 units in 2005-06 period after the ceasefire agreement between LTTE and the Sri Lankan government. Last year (2008-09), it dropped to 1,200 units in the wake of the war. “We expect sales to pick up now that peace is set to return,” says Rajinder Malhan, ED, International Operations, Ashok Leyland.
Agrees Mayank Parekh, Managing Executive Officer (Marketing and Sales), Maruti Suzuki: “Overall demand should pick up now that the war has ended. We expect demand for small cars to rise sharply. We are prepared.” Maruti is the market leader in the new car segment.
The war and the liquidity squeeze that the global meltdown brought about has shrunk consumption in Sri Lanka. “On an average 1.80 lakh two-wheelers and 45,000 threewheelers were sold annually. But these numbers have come down by 30 per cent. We expect these figures to increase as the year progresses. When that happens, we will get our share,” says H.S. Goindi, President, Marketing, TVS Motor.
Life Insurance Corporation’s Sri Lankan arm—Lanka LIC—is already in the process of identifying agents for the north and eastern provinces. It has 22 branches across the island nation. “Indian parentage will definitely help in the north/eastern provinces,” says M. Jagannath, CEO& MD, LIC (Lanka) Ltd.
| LANKA BECKONS Big bucks await Indian companies in select sectors. |
| Cement: Lanka is cement-deficit while India has a surplus. A lot of cement would be needed for reconstructing the north and east. Some Indian companies are also eyeing the state-owned cement plant at Kankesanthurai near Jaffna, now in ruins but with rich limestone reserves. |
| Infrastructure: Northern Lanka is in a shambles, East is relatively better. Huge infrastructure development needs to be done—be it roads, bridges, telecommunication, ports, airports, drinking water supply, power generation, schools and hospitals. |
| Corporate farming: Government is looking to corporates to introduce high-yielding seeds and modern agri-practices to return vast areas of land in the north and east to its glorious agricultural past. |
| Steel: Export of steel (port logistics permitting) to the neighbouring nation should see an upswing considering the proximity and extent of reconstruction work. |
| Tourism: Peace after 26 years of war will mean huge boost to tourism. Investments would be needed not only in the north and east but southern Lanka as well. |
| Dairy sector: Sri Lanka imports 74% of its milk requirements. It is looking at attaining self-sufficiency in the near term. |
| Auto + FMCG: Unlike India, Sri Lanka —with its per capita income double that of India and better purchasing power—is a highervalue market with scope for better margins. Peace in Sri Lanka could translate into higher demand for two-wheelers, three-wheelers, cars, trucks and FMCG products. |
Value Market
Under normal circumstances, a country which is half the size of Tamil Nadu and with a third of the southern state’s population, should not generate so much of interest as Sri Lanka does. But with a per capita income of $2,014 which is almost double that of India ($1,043) and the consequent higher purchasing power, the island nation presents itself as a premium market where margins can be quite high. Also, 68 per cent of its 20.21 million population is in the economically active 15-64 age group.
“Sri Lankans want quality products and they don’t mind paying a premium for it,” says K.R. Suresh Kumar, Managing Director, Lanka IOC, which is a subsidiary of Indian Oil Corporation. For instance, Lanka IOC’s premium petrol today accounts for 30 per cent of the sales despite the fact that it was launched less than a year ago. The company, which has 150 fuel outlets and a 25 per cent market share, has sought Sri Lankan government’s nod to add another 300 petrol stations.
According to D. Rajappa, President, Everest Brand Solutions, who has worked in the island nation, “Indian products are well-received in Sri Lanka. Maruti and IOC’s Servo lubricants are good examples. Having been exposed to global standards, what people look for is quality. Lower price is definitely not the selling point.”
More importantly, Sri Lankan economy (which grew at 6 per cent in 2008) has come to a historically important juncture. “The ending of the three-decades long conflict, resulting in greater integration of the northern and eastern provinces with the rest of the country…would place the country on a better platform to move along a higher growth path,” says the Central Bank in its just released annual report for 2008. The northern province, in 2007, accounted for just 2.9 per cent of the overall GDP.
The Reconstruction
Apart from the pent-up demand for products and higher margins, reconstruction of the northern and eastern provinces (accounting for a third of Sri Lanka’s 65,610 sq. km land mass) offers another set of opportunities for India Inc. According to the Central Bank, the prolonged conflict has damaged basic infrastructure, badly affected educational institutions, weakened banking facilities, destroyed productive assets and disrupted major economic activities in agriculture, livestock, fisheries, small industries, etc.
Roads, bridges, water supply network, power generation, sanitation, ports, airports, housing and hospitals have to be rebuilt from scratch. Livelihood-generating activities such as agriculture, dairy farming and fisheries need to be revived. Conservative estimates put the reconstruction cost for both eastern and northern provinces at around $6 billion (Rs 30,000 crore).
The Central Bank has also called for private-sector participation in financing and operation of major infrastructure facilities as funding these projects entirely by the government would lead to higher fiscal burden.
Sri Lanka’s Board of Investment has already called for foreign investments in agriculture, tourism, dairy farming, aquaculture, education, housing projects and SEZs in northern and eastern provinces. It has offered attractive sops, too.
Southern Sri Lanka, too, is in need of infrastructure development. At 1.8 km road length for every square kilometre, the road network in Sri Lanka is good but inadequate to cater to the rapidly growing demand. The government is looking at several road projects to address this issue. Efforts are also on to improve the railway operations, which account for just five per cent of the total passenger transportation and one per cent of the goods. Sri Lanka Railways is plagued by shortage of passenger coaches and locomotives. Around 75 per cent of the 98 engines it has are over 30 years old and prone to breakdowns. The signalling and communication systems, bridges and railway tracks need improvement.
Indian Railways is involved in the upgradation, though in a small way. “There is a limited aid embargo on Sri Lanka by western donors (albeit unofficial) as reflected in the indefinite postponement of IMF credit facility.
Because of this, foreign investments from these countries would be restricted. Emerging economies such as India could fill in the vacuum left by aid and investment from developed countries. It is up to the Indian companies to proactively tap the emerging market opportunities in Sri Lanka,” says Muttukrishna Sarvananthan, a leading Sri Lankan economist.
China Factor
Considering the expertise and knowledge of the terrain, Indian companies are well placed to do the reconstruction work. But they may face stiff competition from China. In fact, it was China which bagged the order for supplying 100 coaches and 15 diesel multiple units to Sri Lanka Railways under a concessional loan last year.
Political influence is expected to play a part in awarding of contracts, too. “It is China and Pakistan who supplied arms and ammunitions at a crucial juncture, which helped Sri Lanka defeat LTTE. They will get some reward for it. China is already building a huge port at Hambantota in the south coast and setting up a power plant. More projects could go their way,” says Sumi Hazari, former President, India-ASEAN-Sri Lanka Chamber of Commerce.
Ideally, history and geography should favour Indian companies. But if that were indeed the case, Sri Lanka would not be importing milk powder at a very high cost from far-away New Zealand (when India is milk surplus) to feed its population.
