RPCs hope to raise funds through tea bonds

By Chandani Jayatilleke

Regional Plantations Companies (RPCs) and the Asian Development Bank (ADB) are discussing the raising of funds by selling US dollar-denominated ‘tea bonds’ to foreign investors.

The ADB has come forward to assist the industry hit hard by the long slump in tea prices and heavy debts, a senior tea industry representative said.

The Government has asked the ADB to support the modernisation of the plantation sector by issuing tea bonds to help fund the capital expenditure needed to modernise RPC tea and rubber production.

These offshore US dollar bonds will also improve the access of Sri Lankan companies to international capital markets, according to Ministry of Plantation Industries officials.

The ADB has approved a grant of US$ 510,000 from its Financial Sector Development Partnership Special Fund to study the feasibility of issuing tea bonds. The study aims to identify the 10-year capital expenditure needs of the RPCs for tea and rubber production.

Plantation Industries Ministry officials said the RPCs were finding it difficult to continue domestic borrowings while government budget constraints prevented further subsidised loans or bank guarantees as done in previous years when the industry ran into difficulty. “Therefore, a different mechanism is needed to meet the RPCs’ long-term capital investments,” an official said.

Most RPCs have been making losses in recent years due to low auction prices and high costs. The RPCs posted a collective loss of Rs. 3.4 billion in 2014, according to The Planters’ Association, and had made operating losses in 2015 too.

The PA has said its members are struggling to cope as earnings have fallen while costs remain high, especially wage costs, and labour productivity far below that of other competitor tea-exporting nations.

Sri Lanka’s tea export earnings have fallen in recent years because of lower oil prices and currency depreciation which resulted in lower demand from the main markets such as the Middle East and Russia. Rubber prices have also remained low for several years. The support for RPCs is considered important as tea and rubber exports play a key role in the economy, with tea exports alone crossing the $1.3 billion mark in foreign exchange earnings last year, accounting for 12.8% of exports and about 1.6% of the Gross Domestic Product.

Plantation Industries Ministry officials said tea bonds issued by RPCs would partly have a “natural foreign currency hedge”.