Storm in the Tea cup

Estates failing: exports lowest since 2002:

By Sunday Observer Economy Unit

A slump in demand which began with the global economic crisis in 2008 has been exacerbated by unrest in the Middle East and Russia which consume 60% of Sri Lanka's tea exports.

(Pic: by Ranga S. Udugama)

Last month, export volumes for tea declined to 21 million kilograms, the lowest figure in 14 years and total tea production is likely to fall under the 300 million ton mark in 2016 - back to levels seen around the year 2000.

As production and exports have fallen, costs have risen with the amount the plantations have to pay for labour, transport and fertilizer having increased steeply over the past 5 years.

Since mid-2015 the price of tea on the Colombo tea auction has fallen by over 20% - with a kilo of tea now trading between Rs 60-80 lower than a year ago. In dollar terms the decline has been even steeper with the past two years seeing prices fall by over 35%.

Across the sector tea plantations are reporting losses and reducing production at a time when production in rival producers such as Kenya and India has stabilized and begun to increase.

The present situation represents the most severe crisis in Sri Lanka's plantation sector since privatization in 1992. The role of tea plantations in our economy cannot be overstated. Tea generates over 1.8 billion dollars of revenue (the nation's second largest source of export revenue) and the tea industry supports over 2 million people or near 10% of the total population.

Given the vital importance of tea, the Sunday Observer spoke to a range of stakeholders to ascertain a way forward for the industry, particularly, the RPCs which dominate the industry but now find themselves struggling to stay afloat.

What is an RPC?

The Regional Plantation Companies (RPC) were formed in 1992, the result of efforts by Presidents JR Jayawardene and Ranasinghe Premadasa who moved to privatize the vast majority of the estates the state had nationalized in the 70s under the land reform program.

Driven by SLFP governments in the 70s all plantations greater than 50 acres in extent were taken over by the state - however, the state lacked the capability to effectively manage the plantations and most estates were severely mismanaged and loss-making following nationalization.

President Jayawardene reorganized the state's plantation holdings into 22 Regional Plantation Companies with each company comprising several estates. They were then sold to the private sector via a bidding process and the RPCs listed on the Colombo Stock Exchange.

In many cases control of the RPCs passed to conglomerates, e.g. Hayleys, Aitken Spence, Richard Pieris, John Keells all acquired controlling stakes. Today, there are 20 privately held and 3 state controlled RPCs.

The creation of private sector driven RPCs reversed a sharp decline in estate productivity and the government no longer has to bear the cost of loss making estates. As of 2016 the RPCs produce approximately 40% of the country's tea (and rubber)and directly support 200, 000 workers with a total of 1 million plantation residents - making RPCs a key part of the plantation system and broader economy.

RPCs: A failed experiment?

Despite being an obvious success in terms of stemming state losses and extricating the state from direct management of thousands of acres of land, the privatized RPC system has long faced criticism from experts and stakeholders.

It is alleged, in many cases, privatized estates failed to live up to their potential as their new owners, while effecting an initial turn-around, soon began draining profits from the RPCs as management fees and failed to reinvest sufficiently in the estates.

As proof, critics point to low yields and productivity in many plantations and a low rate of replanting.

"Two % of the extent of a plantation should be replanted every year, but this never happened," said Lalin De Silva a former planter and retired editor of the Plantation Society Bulletin. He added: "In many estates tea bushes are nearly 100 years old and can't produce high yields. They (RPCs) say they can't invest now because prices are bad. But, what happened when prices were good, there were years when production and prices were excellent - why didn't they make investments in productivity?"

There have been allegations of outright asset stripping with the management of some plantations accused of felling timber, selling livestock and other assets to make profits.

"They under-invested", said Muthusivalingam, Head of the Ceylon Workers' Congress Union (CWC) - the largest union of plantation workers. "Living and social conditions in the plantations were neglected, they can't just blame workers for lack of productivity when they didn't invest sufficiently in roads, and facilities."

The case for RPCs

While there is criticism of RPCs - a number of plantation experts and representatives of the plantation companies argue that the RPC system has been a success and helped revive Sri Lanka's tea industry.

"Overall their performance has been fair,"said Romesh Dias Bandaranayake, economist and former head of the Plantation Management Monitoring Division. "Given the [loss-making] condition they were in, in 1992, we've seen the RPCs make a positive contribution to the economy and government revenue."

Mr Dias explained that the RPCs have contributed Rs. 7 billion to the government in terms of lease renewal payments alone, and further contributed in terms of taxes, EPF payments dividends and re-investment.

"Contrast this to the remaining government run plantations - the Janatha Estate Development Board, which consumes over a billion rupees of state funds annually. Overall, the RPCs have increased production and revenue - of course not all the estates have performed equally well but the strategy of privatization via listing on the stock exchange has proved successful and robust."

From1992 to 2002 there was a demonstrable increase in tea production from 200 million to 300 million metric tons.

"We have reinvested far more into plantations than we have taken out," said Roshan Rajadurai, Chairman, Planters' Association, which represents the management of all RPCs. "Despite claims by critics, over 60% of the acreage in our tea plantations have been replanted , according to Plantation Ministry statistics, so that claims of mismanagement are simply false."

Even critics of RPCs management agree that a return of the estates to state control is not desirable. "The workers are worse off in the state run plantations than the RPCs, so we are not in favour of a return to state control," said Muthusivalingam CWC President.

A 150 year old model

But, there's no denying that yields on Sri Lanka's tea planttions are low and avenues for value addition and mechanization have not been sufficiently explored.

"If you look at the average yield of a Sri Lankan tea plantation it is around 1,700 tons per hectare while in Kenya and better run estates in India, the figure is well above 2,000 kilos per hectare- even though we have good climatic and soil conditions. This is hard for plantation companies to explain" said Janen Fernando of Verite Research.

The government has also accused the RPCs of mismanagement. Last year, former Minister of Plantations Lakshman Kiriella insisted the RPCs raise wages or face action from the government.

Sri Lanka's RPCs have also failed to diversify with the potential for the production of spices, rearing livestock and dairy production, not being sufficiently explored. Plantations remain reliant on a 150 year old labour model where workers spend a lifetime plucking tea for low wages. "The RPCs need to provide opportunities for the youth on the plantations, they need avenues for advancement and training - it must be possible for them to become managers and rise out of poverty," said Harin Fernando Minister of Telecommunications and Digital Infrastructure and long-time campaigner for plantation rights.

The wage issue

Sri Lanka's tea estates depend on the manual labour of hundreds of thousands of low-wage workers.

As the cost of living has risen, unions are demanding an increase in wages and a government directive stipulating a Rs 2,500 (per month) salary increase for every worker has put pressure on the plantations to increase salaries. However, given the diminished revenues, RPCs claim they are in no position to raise salaries.

Since 1992, representatives of RPCs and trade unions have met biannually to negotiate standard wages for plantation workers, known as the Collective Agreement (CA) which fixes wages for a 48 month period. A new CA is due to be negotiated this year.

The RPCs insist they are willing to consider an overall wage increase in line with or even exceeding the government directive if productivity and not simply attendance is made the basis for payment.

At present, the bulk of a plantation worker's wage is calculated on the number of days he or she reports to work - not on the basis of work done or the weight of tea plucked.

All stakeholders contacted by the Sunday Observer agreed that productivity based pay is essential in terms of increasing yields and securing the future of the estate sector.

They point out that rival tea producers like Kenya and India have now adopted productivity based wage formulas which reward workers for plucking more tea. However, both sides failed to agree on how a new productivity based wage formula would be structured.

"We cannot just increase wages - we are struggling, in the past we have increased wages by as much as 40%, but without in increased productivity it threatens the whole industry," said Rajadurai.

Union officials on the other hand argue, estates must do more to enable workers to be more productive.

"We are willing to accept a move to productivity based pay but it must allow workers to earn a fair wage - which means at least Rs 2,500 or more a month, and RPCs must provide the conditions - maintenance, sufficient workings days, etc.," said CWC Leader Muthusivalingam.

[Experts say]

The Sunday Observer spoke to stakeholders from across the plantation industry - below are a summary of their suggestions for the overall improvement of the RPCs and the broader tea plantation sector

Productivity-focused

The movement to productivity rather than attendance based wage is critical in the long term survival of the industry. Emphasizing productivity will boost yields, however, any new mechanism must allow workers to earn a fair wage and must also take into account the work they do on the plantation that isn't connected to plucking, e.g. maintenance, weeding etc.

Checks and Balances

Given a history of serious mismanagement on government run plantations direct government intervention across the sector is undesirable, however, government oversight is needed as a check on RPCs.The Plantation Management Monitoring Division of the Ministry of Plantations was established to allow the state a mechanism for regulating and monitoring the RPCs. The Division has been largely inactive over the past decade but a revived PMMD constituting qualified state officials and retired senior RPC managers could play a role in ensuring RPCs fulfil their social and economic mandate.

A board with clear powers could devise an assessment methodology with annual reviews and rankings of the RPCs and then take action against those found under performing.

The RPCs must be allowed to function as businesses, albeit with a social responsibility, while the primary role for caring for estate populations must fall on the state. When plantations were established more than a century ago they were entirely responsible for the communities who lived within them. Health, education and services to plantation villages were provided by the companies. Today, plantation communities must be integrated with mainstream society. Clinics and schools within the plantations are the responsibilities of the state but the roles for both parties must be clearly delineated.

Training and opportunities for youth

Accessible colleges for technical training must be established allowing youth on plantations options for progressing into managerial roles within the tea industry and avenues to seek skilled jobs outside the plantation sector. The government, RPCs, NGOs and the Private sector must work together to establish training centres for plantation youth.

Stronger welfare

An expanded welfare scheme operated primarily by the government but in concert with RPCs and unions is important for ensuring an adequate quality of life for workers. Bolstered pension, welfare and insurance support will keep workers from poverty. Today, the injured, sick and elderly workers struggle to make ends meet.

Value addition

The vast majority of RPC income is derived from the sale of bulk tea on Colombo's tea auction. RPC must encouraged to emphasize value addition with companies packaging and directly exporting a greater proportion of their tea. Tax and loan concessions can be given for the import of packaging machinery accompanied by targets for value added exports.

Gender equality

The disparity in pay between men and women where men currently earn significantly more than women for a day's labour must be rectified as women typically work longer hours than men and act as primary caregivers spending the entirety of their income to support their families.