SPOTLIGHT

•  Battle over flour

Prima vs UPFA

Prima's Colombo milling complex and The massive milling complex at Trincomalee

By Frederica Jansz 

One glaring feature that has emerged out of the row between Prima Ceylon Ltd., and the new United People's Freedom Alliance (UPFA) government is that Commerce and Consumer Affairs Minister, Jeyaraj Fernandopulle has not done his homework.

Spouting angry rhetoric and pointing fingers at the multinational giant, Fernandopulle, it is clear, is bluffing on a large scale and none other than Prima themselves may well call his bluff.

Fernandopulle insists that a demand by Prima for the government to pay an overdue amount in promised subsidy of Rs. 487 million is "outrageous" and that the government cannot and will not pay this amount until Prima can prove that this is the actual shortfall the company has incurred as a result of being forced to sell flour at a subsidised rate to Sri Lankan consumers.

Promised

The subsidy was promised during the former regime of the United National Front (UNF) government and in a letter to Prima on January 22, this year, Treasury Secretary, Charitha Ratwatte promised to pay whatever the shortfall Prima incurred due to the government taking a political decision not to increase flour and wheat prices, despite global prices having risen.

Fernandopulle argues that Ratwatte should never have pledged to pay any amount charged by the multinational flour giant before first making certain at what price Prima had originally purchased the grain. "These are multinational companies - they do not make purchases at the 11th hour. They maintain buffer stocks months in advance and this is why I am saying their request for this government to pay a subsidy of Rs. 487 million is totally unjustifiable."

The subsidy payment is for the months of February and March this year. The first payment of Rs. 200 million for January was paid by the former UNF government while the payment for February charged by Prima, Rs. 210 million and Rs. 277 million for March are the amounts presently in dispute with the new UPFA government.

"Let them first prove this is the short-fall they have incurred.." Fernandopulle charged, convinced the flour giants would have purchased stocks well before world market prices rose and are merely out to make quick profits based on a political decision by the former Sri Lankan government.

The merits and demerits of Charitha Ratwatte's letter is certainly a point for debate. But the issue is not unusual and successive governments in Sri Lanka have consistently pleaded with multinationals to cushion consumer rates while pledging multi million rupee subsidies. An identical situation is presently developing with the Indian Oil Company in Sri Lanka who have also been promised massive subsidy payments, which the Treasury battles to meet in a desperate bid to keep retail prices down until the conclusion of the provincial council election.

It would be interesting to see from where Fernandopulle will import flour and sell it to the consumer at a price less than Rs. 27.50 per kilo given that world market prices have shot up and a kilo of flour, according to Prima, should increase by at least Rs. 7.50.

Third party

And it is not just flour we are looking at here, but all flour based products as well. Fernandopulle would certainly be hard pressed to break the present monopoly enjoyed by Prima Ceylon Limited despite a fresh agreement in 2001 which effectively cancelled the monopoly and allowed the government to bring in a third party. This is why Serendib Mills were brought in, but the company is still in its infancy and cannot be counted upon to meet the massive demand in urban areas for flour, wheat and all flour based products.

For a third party to come in at this stage will be no mean feat and one that is virtually non existent at the moment. We are certain that Fernandopulle for all his bluster cannot import flour at a rate cheaper than that on offer by Prima. To even negotiate such a deal would take at least three to four months by which time Prima can seek arbitration and Sri Lanka would then indeed look sick.

Fernandopulle maintains that via the Indian Line of Credit "any private sector firm can use the credit line to import flour." He says he has promised that all concessions and facilities enjoyed by Prima at the moment will be granted to a third party as well.

No guarantee

Asked if there have been any takers so far, Fernandopulle had to admit that the government "has had no firm guarantees yet from any single party," but claims "we have had many inquiries." He claims the interested parties have maintained they can import and sell flour cheaper than Prima rates. And that is where this matter rests for the moment.

Fernandopulle meantime is all set for a fight with Prima Ceylon Limited challenging the flour milling giant by saying, "let them seek arbitration and let them prove in any court that the price they are asking us to pay is justifiable. then we will see." He adds, "We are in a free market economy so arbitration cannot tarnish our image. One thing is clear and that is we cannot allow Prima a monopoly of the flour industry in this country."

Fernandopulle is certainly nave if he believes that the row with Prima if taken to arbitration courts will be relegated only to retail and wholesale rates of wheat grain and flour.

What the Minister should also consider before throwing his gauntlet down and declaring war with Prima is the agreement, signed on behalf of the then People's Alliance (PA) government by Dr. P. B. Jayasundera and Mano Tittawela, which today serves as Prima's bible. This agreement brooks no argument that if blame is to be laid for the present situation at any door it can only be deposited fair and square at the steps of the People's Alliance and President Chandrika Kumaratunga.

It is the PA that by its agreement with Prima in April 2001 sold the flour milling complex consisting of 28 acres at Trincomalee and eight acres of crown land at Rajagiriya, Kotte to Prima for a paltry sum of US$ 65 million.

This was done at a time the PA government could well have called for tenders and negotiated for a third party to take over the flour milling complex at Trincomalee as well as the factory and bakery at Rajagiriya.

Unholy pact

Instead, Kumaratunga made an unholy pact with the flour milling giant and as a result Prima Ceylon Limited (PCL) on June 20, 2001 paid the PA government US$ 65 million for the sale and transfer of all movable assets of the flour milling complex at Trincomalee, which included the buildings, the wharf and jetty. For US$ 65 million the PA also sold to Prima the latter's office and bakery complex at Rajagiriya.

The flour milling complex consists of the whole complex of the flour mill at Trincomalee which includes factory and office premises, warehouses, store-rooms, laboratories, personal and family quarters. Also, storage tanks, flour bins and other structures. For US$ 65 million Prima also gained complete ownership of the plant, machinery, equipment, vehicles and vessels, instruments and tools, spare and component parts, utensils, fixtures, fittings and furniture and all articles in any way directly or indirectly involved in or connected with the establishment and construction, operating and maintenance of the flour mill.   

Prima deposited the US$ 65 million to account No: 0210-83514 held by the Central Bank of Sri Lanka at the Federal Reserve Bank in New York.

Prima Limited, pioneer of Singapore's first flour mill in the early 1960's pioneered Sri Lanka's first build, operate and transfer (BOT) project in 1977. The site of the Sri Lanka mill at Trincomalee was to become the world's largest integrated flour milling complex. Chosen for its excellent natural deep water harbour, which can handle grain carrier ships as large as 150,000 metric tonnes, Trincomalee and its residents rose to the occasion, resulting in the Prima Ceylon Limited factory being completed four months ahead of schedule.

The complex has a milling capacity of 3,400 Mt of wheat per day and is completely self sustained. Besides bunkering service to vessels, it has facilities for vessels loading and unloading grain/flour direct from ships docking at the company's wharf/jetty, a complete distribution network for flour by rail, road and ship from the complex and residences, a club house, clinic and other amenities for its employees.

The company has two local subsidiaries and in 1977 made the largest ever foreign investment in Sri Lanka of US$ 51 million. This investment was increased when it paid the People's Alliance government US$ 65 million to convert its operation to build, own and operate (BOO).

Passing the buck

Fernandopulle and the Freedom Alliance government are today trying to lay the blame of this sell-out to Prima at the door of the UNP. But the truth of the matter is that the agreement with Prima to enter Sri Lanka was originally negotiated and drafted by H. A. D. S. Gunasekera, who during the period 1970 to 1977 was secretary to then Prime Minister, the late Sirimavo Bandaranaike. Gunasekera as well as being a renowned economist was also Planning Ministry secretary at the time.

Gunasekera negotiated Prima's entry into Ceylon, but failed to sign the agreement when Bandaranaike's government suffered a massive defeat at the 1977 general election. As a result, the agreement with the multinational firm was sealed when former President J. R. Jayewardene was prime minister. It was the largest foreign investment in Ceylon.

Prima was granted extensive concessions and facilities by the J. R. Jayewardene government. Under the then new structural adjustment programmes (SAPs), which proposed changes in the country's policies intended to bring about rapid industrialisation and the transfer of technology through the availability of credit and foreign aid in the form of loans, grants and investment, the agreement with Prima was signed. The UNP government in fact bent over backwards to accommodate the foreign company, the first of its kind in Sri Lanka.

This agreement stood for over 20 years before it came up for renewal at the end of the year 2000. At this point according to the terms and conditions of the agreement which had been signed on a BOT basis, the PA government was in a position to take over the entire complex at Trincomalee and run it as a government concern or negotiate a fresh deal with another third party.

But Dr. P. B. Jayasundera at the time, Treasury Secretary, having consulted with President Chandrika Kumaratunga decided otherwise and renegotiated terms and conditions this time outright selling crown land and buildings to the multinational giant literally for a song.

Argument

Sold under the privatisation scheme of the Public Enterprise Reform Commission (PERC) it was like selling a tea factory to investors and Jayasundera obviously believed what he advocated and signed together with then PERC Chairman, Mano Tittawela was in the best interest of the country.

Former Commerce and Consumer Affairs Minister Ravi Karunanayake continues to argue that the agreement signed by the then Treasury Secretary, Dr. P. B. Jayasundera and CEO, Prima Ceylon, Chegn Chih Kwong Primus, in April 2001 created undue advantage to Prima.

The sale of the mill at Trincomalee for US$ 65 million signed with much fanfare in 2001 by the PA government raised eyebrows when it was announced. The original deal with Prima was to run out in 2005 and under the BOT agreement the mill would have come under government charge. But the PA chose to renegotiate this deal and went ahead with the sale opting to instead allow the flour mill to be owned and managed by Prima converting the deal from BOT to build, own and operate (BOO).

Advantage

The agreement makes sure that Prima gains a distinctive advantage over any other importer, while making certain that a third party will not in anyway serve to be discriminatory of the operations and functions of Prima Ceylon Limited. Karunanayake throughout his tenure as commerce and consumer affairs minister claimed that if wheat imports are liberalised, then a kilo of flour could go as cheap as Rs 19.50. The low price would be reflected in flour based products as well, he said.

But in similar vein to Lanka Indian Oil Company and Shell, local governments with its pig-headed style of bureaucracy have always adopted a pro westernised policy towards multi nationals.

Karunanayake and his successor Jeyaraj Fernandopulle may well bluster and mouth angry rhetoric, but the political reality of the situation is that even when the UNF took office despite much euphoria about re-negotiating the Emirates, Prima and NTT deals, the public saw little or no further action. The UNF in fact made a right royal mess of re-negotiating the Emirates deal until the matter was highlighted in the media and had to be placed before the Attorney General for further advice. While these deals are definitely a sell-out for this country, the hard reality is that they remain - bound securely in black and white, signed and sealed by political stooges.

President unmoved

The Marxist Janatha Vimukthi Peramuna (JVP) can scream till hoarse in the throat and red in the face, but Chandrika Kumaratunga frankly does not appear to give a damn. The President is only too aware of the investor potential for a developing country like Sri Lanka and when negotiating deals with foreign multi nationals she is not about to lay foreign investment on the alter of nationalism and patriotism.

And no sooner the provincial council poll is concluded and the winner declared, not just flour and wheat, but all petroleum and oil products will also be raised due to world market prices. This is the reality.

What Fernandopulle on the face of it at least appears to fail to understand is that since 1977 Sri Lanka has not revoked an international agreement and it is very unlikely this would happen now or in the future.

It would be well for Fernandopulle to first carefully read the fine print in the Prima agreement and seek proper advice, before embarking on a political journey that is clearly suicidal.

Twenty five years into its monopoly of the flour industry in Sri Lanka, Prima Ceylon Limited may well be considering a clause in the present agreement which allows for the company to seek arbitration in the case of dispute with the government at either 'The Hague' or arbitration courts in Singapore. Sources within the Singapore owned multi national firm maintain that they would seek arbitration if pushed, in Singapore.

If Kumaratunga fails to give her Commerce and Consumer Affairs Minister a good shake and drill some sense into him, arbitration with Prima would effectively be countdown time for  Sri Lanka as far as foreign investments are concerned. If Prima were to seek arbitration the issue would send red signals to the world that Sri Lanka is unsafe for foreign investment.

Having snowballed on the buffoonery that is part and parcel of Sri Lankan governments, Prima is not about to get derailed at this juncture all because a government minister is incapable of reading the fine print.

It maybe in Kumaratunga's best interest to jostle the memory of her Consumer Affairs Minister and remind him that in 2002 also Prime Ceylon Limited commenced investing US$ 30 million in Sri Lanka as part of a modernisation and expansion programme, which includes doubling the silo capacity to 200,000 tonnes, setting up an additional mill with the latest technology in the milling industry, improvement of the jetty and additional wharf facilities.

No choice

We may well be a rice eating nation, but the urban dweller consumes heavy quantities of flour, and if Prima were to pull out, other flour milling industries like Serendib could hardly be counted upon to cope with the massive demand - yet.

And the masses cannot be expected to eat cake while Fernandopulle jostles with flour import proposals and engages in a boxing match with Prima Ceylon Limited. The fight may well keep Fernandopulle on his toes, but the public will not forgive him for depriving them of their daily bread.

And the UPFA no doubt will certainly pay a heavy price come the next election for making decisions that are both rash and irrational. As for Jeyaraj Fernandopulle, he better watch what he says.