Rejuvenating Sri Lanka’s Economy: The BCC Path

Vagisha Gunasekara, in lsland, 27 July 2020, where the title runs “Breathing new life into domestic production: BCC’s plan for the next hundred years”

The need to turn the current economic crisis that was pushed off the edge by the COVID-19 pandemic into an opportunity to reconfigure national economies is the topic of many policy discussions, both in Sri Lanka and elsewhere.

In June this year, addressing the 95th annual plenary session of the Indian Chamber of Commerce in Kolkata, Indian Prime Minister Narendra Modi said it is time to create an ‘Atmanirbhar Bharat’. Although ‘Atmanirbhar’ loosely translates into “self-sufficient”, the Indian PM was not at all channelling Import Substitution policies in the 1960s and 70s. He was not referring to throwing out foreign companies from operating in India or large-scale nationalisation of industries.

While Atmanirbhar entails a strong push to become self-sufficient in food, water and defense needs, the concept underlies the realization that a country cannot survive or economically thrive in isolation. It does not mean closing doors and borders to the world. Rather, it is an open-door policy that encourages foreign investment and goods to be manufactured in India and exported to the rest of the world and for products made in India to be sold in the global market. In other words, the aim of atmanirbhar is for India to become the next manufacturing hub of Asia and the rest of the world. The Government of India is already exploring various modalities with domestic and foreign investors and governments on how to redesign their economy in line with the spirit of atmanirbhar, and opening their economy in a much bigger way to the rest of the world.

Here at home, there is still hesitation among some circles about whether a small developing island nation like Sri Lanka can compete in the global market without the “economies of scale” advantage that larger markets like India have. But there is optimism around producing specific items that Sri Lanka may have an advantage in the global market, solely based on the quality of the product. Coconut oil is a case in point. In the past 10 years, the global demand for skyrocketed by 500% as it was identified as a “superfood” in the West.

To be specific, this demand is primarily for two products – virgin coconut oil and coconut water. In the United States alone, coconut water is now an 800-million-dollar industry. Globally, the coconut water industry is estimated to be worth around 2.2 billion dollars. The demand for coconut water is expected to increase by 27% by 2020. Similarly, the global industry value of virgin coconut oil was 2.1 billion dollars in 2016, and it is expected to be 4.2-billion-dollar industry in 2024. In the past five-six years, there is a steadily expanding niche market for coconut-based products such as coconut flour, coconut sugar and desiccated coconut. Furthermore, as Goldstein Research finds, the global beauty care industry, which is currently worth more than 10.3 billion dollars is gradually shifting to organic ingredients and coconut oil extracts in particular. Among the top five coconut consuming countries is the Philippines, United States, India, Indonesia and Vietnam (Export Development Board 2017).

In Sri Lanka, export earnings from coconut-based products has been increasing in recent years and much of it is attributed to industries surrounding virgin coconut oil (VCO), fresh king coconut, coconut cream and coconut milk. In 2017, the total revenue generated by exporting coconut-based products was 598 million dollars, which was a 3% increase from 2016 (Coconut Research Institute 2018).

 

BCC Lanka Ltd is currently exploring an interesting modality to increase the production of coconut oil for cooking, wellness and other purposes both for domestic consumption and exportation. BCC is a household name in Sri Lanka. The company has a history that dates back to 1830s. According to the early records of the company, E. Price & Co. of the United Kingdom acquired patent rights for the technique of separating coconut oil into its solid and liquid parts. However, due to the irregular supply of raw material, the company set up crushing mills at Hultsdorf to separate oil directly from the kernels. The mills were set up in 1835 under a company set up in London called Hultsdorf Mills Co. (Ceylon) Ltd. The ownership of the mills changed hands between its inception and the World War I period and companies such as Wilson Richie & Co., G &W Leechman, and Freudenberg steering its operations.

 

In 1918, a powerful European syndicate operating in India tendered to purchase Hultsdorf Mills and it became British Ceylon Corporation (BCC). Since then, BCC operated in Sri Lanka, together with its fully owned subsidiaries such as British Ceylon Milling Company Ltd and Ceylon Extraction Company Ltd. Of the subsidiaries, in 1976 Ceylon Extraction Company Ltd ceased operations due to the lack of raw material that was required to sustain its minimum production capacity. In the period that followed, as a result of liberalisation reforms and changing political administrations, the company went through a period of decline, and this culminated in the sale of its most lucrative arm – Orient Co Lanka Ltd, which had the license for foreign liquor. In 1988, BCC Lanka was incorporated with the issue of 10,000,000 shares (held by the Treasury). Under the Conversion of Public Corporations and Government Owned Business Undertakings into Public Companies Act No. 23 of 1987. In order to trim the BCC workforce, a Voluntary Retirement Scheme was offered to its employees in 1991.

Following more privatisations in the 1990s and the lack of vision, leadership, government support and poor management resulted in further curtailment of the BCC operations and its workforce. However, when government policy shifted from a pro-privatisation position to one that was not in favour of selling off state enterprises, BCC Lanka commenced operations with minimum staff capacity in September 2006 and continues to produce and sell its number one product – refined coconut oil, both locally and internationally, along with a range of other products such as bath and laundry soap, washing powder, dish washing detergent and disinfectant.

 

The company appears to have received a new lease of life under the current policy trend of strengthening the viability of domestic industries. As the situation triggered by the COVID-19 pandemic has renewed interest in increasing the capacity of domestic production, BCC seems to be making plans to get back into business in a bigger and better way. During a recent visit to the BCC premises at Meeraniya Street, Colombo 12, the management revealed its plan to expand it operations and increase its competitiveness in the domestic and international market. Currently, BCC produces roughly 250 metric tonnes of refined coconut oil and 160 metric tonnes of soap and other items in a year. This, however, is well below the maximum production capacity of the company. The new strategy to increase coconut oil production is aimed at making productive use of BCC’s underutilised machinery and storage facilities, and also will carve out revenue prospects for the collaborating partner companies.

The most notable component of BCC Lanka’s new strategy is the consolidation of their supply chain for the production of coconut oil. The company is launching a partnership among BCC and three state-owned enterprises – National Livestock Development Board (NLDB), Kurunegala Plantation Ltd., and Chilaw Plantation Ltd., – and the Mahaweli B zone in order to ensure an uninterrupted supply of green coconuts in order to produce refined coconut oil. NLDB is one of the largest semi-government organisations whose core business is dairy farming. In addition to dairy and other poultry-related ventures, NLDB owns and maintains 4,545 hectares of coconut estates in the island’s “coconut-triangle”. Chilaw Plantations Ltd is a government-owned company managed by the Public Enterprise Development Ministry. Currently, they own 3,825 hectares of coconut plantations. Kurunegala Plantations Ltd is also a government-owned company with 5,244 hectares of coconut plantations. Its core business activities include cultivation, production, processing, and sale of coconuts. BCC Lanka will serve as the Original Equipment Manufacturer (OEM) and undertake downstream activities in producing edible oil. The strategic alliance among the four companies and the Mahaweli B zone is expected to ensure an uninterrupted supply of coconuts. Green coconuts collected from all four supply hubs will be transported to a central oil mill, where the initial production will take place. The central oil milling facility is a new investment proposed under the current strategic plan. Thereafter, the base coconut oil will be delivered to BCC’s refinery unit, where the value-addition process will take place. From that point onwards, BCC will take over downstream operations such as labelling, packaging, marketing, and sales. The intention is for these products to enter domestic retail markets, online shopping platforms and the export market through direct dealers, distributing agents and strategic sales partners. Given the expanding trend of the global market for coconut oil and other coconut-based products, increasing the production, marketing and sales of coconut oil and reviving state-owned companies like the BCC and its partners is a welcome move by the Ministry of Small & Medium Business and Enterprise Development, Industries and Supply Chain Management.

The second component of BCC’s strategic plan is to develop a modern, 7-storey multi-purpose commercial centre using a 6-acre portion of BCC’s current premises in Meeraniya Street. The compensation funds that BCC will obtain from giving up a parcel of their current premises to construct a court complex will be directed to the construction of the new commercial centre. Furthermore, the current management of BCC has plans to restore the original Chairman’s bungalow (located in Colombo 12) which is currently in a dilapidated state into a commercialised heritage establishment. The colonial charm of the bungalow and BCC’s collection of old machinery that were used during the colonial period is sufficient basis for this venture and a tasteful transformation of this site into a tourist attraction will undoubtedly add aesthetic and commercial value to what the currently has to offer.

BCC’s new strategic plan and its renewed motivation to strengthen its capacity, operations and relevance both nationally and internationally is a refreshing step, particularly given the sad situation of Sri Lanka’s state-owned enterprises. Currently, Sri Lanka has over 400 SOEs, employing over a million employees, however, running on an aggregate annual loss of USD 27 billion. SOEs are seen by ordinary citizens as employment- not service providers that consume an extraordinary amount of public resources and assets. Political interference, corruption, inefficient recruitment and management practices, low productivity and the lack of autonomy in decision-making have long been identified as constraints to developing SOEs. Like BCC, the Valachchenai paper mill and the Paranthan chemical factory also seem to have risen from the ashes given the renewed interest in strengthening domestic industrial production. Acknowledging BCC’s strategic plan which carries the objective of securing its presence and relevance for the next 100 years, and the resumption of activities in Valachchenai and Paranthan factories, it would be timely for BCC and for other SOEs to set up sound governance practices, accountability mechanisms, and performance-based incentive structures and focus on improving productivity and efficiency, financial discipline, transparent and effective treasury management and credit control and technological advancement. Lastly, the management and the overall leadership must keep in mind that politicisation of SOEs has long been identified as a curse that has eventually run these enterprises to the ground. As this is ingrained in Sri Lanka’s political culture, it might be challenging to change the status quo. However, if the leadership is keen that local industries remain active and relevant for another 100 years, such structural issues must not go unaddressed.

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