Sri Lanka - Tree crops strategy

Reportl No. 12356-CE Sri Lanka Tree Crops Strategy July 5, 1994 Agriculture Operations Division Country Department IlIl South Asia Region FOR OFFICIAL USE ONLY ,E~Ml, Documwnt of the World Bank This document has as restricted distribution and may be used by recipients aonly in theperformance of thei official duties. Its contert; may not otherwise be disclosed without World Bank authorization  CURRNICY EQ1IYALE (as of September 24, 1993) Currency Unit = Sri Lanka Rupee (SL Rs) US$1.00 = SL Rs. 4f.10 MEASURES Hectare (ha) = 2.47 acres ABBREVIATIONS AN1 ACRONYMS ADB Asian Development Bank APCC Asia & Pacific Coconut Community CDA Coconut Development Authority COLA Cost of Living Adjustment COP Cost of Production CTC Cut Tear & Curl Tea DC Desiccated Coconut DRC Domestic Resource Cost EC Economic Community EE Eastern Europe FAO Food and Agriculture Organization FOB Free on Board FSU Former Soviet Union FTCP Fourth Tree Crop Project GDP Gross Domestic product GOSL Government of Sri Lanka HLE Hypodermic Latex Extraction IDA International Development Association IFAD International Fund for Agriculture Development INRA International Natural Rubber Agreement INRO International Rubber Organization JEDB Janata State Development Board LMIC Low and Middle Income Countries MT Me ric Ton MTIP Medium Term Investment Program NAFTA North American Free Trade Agreement NSA National Sales Average OECD Organization for Economic Cooperation & Development RAPA Regional Office for Asia & the Pacific, FAO SAR Staff Appraisal Report SER Shadow Exchange Rate SLSPC Sri Lanka State Plantation Corporation SPC State Plantation Corporation SWOT Strength, Weakness, Opportunity, Threat SWR Shadow Wage Rate  FOR OFFICIAL USE ONLY FOREWORD This study was undertaken to update and consolidate information on tree crops development in Sri Lanka up to the early part of 1993. It was preceded, in December 1992, by a Mission to Sri Lanka to review the activities of the subsector after the dissolution of the two state corporations and the beginning of management by private firms. The Mission had consulted with the Asian Development Bank in December 1992, and with the FAO and IFAD in January 1993, on various issues regarding the subsector development. The results of these discussions in Manila, Colombo and Rome are reflected throughout this strategy paper. A second follow-up Mission to Sri Lanka in October-November 1993 has updated the findings. The Perspective of the Study The study looks at the tree crops in Sri Lanka from a historical perspective, that takes into account current development and outlook for growth. The main focus is on domestic policies and external factors that have shaped the development of tree crops industries (tea, rubber and coconut), and the future strategies necessary to realize their potential as major contributors to Sri Lanka's GDP and export earnings. Macroeconomic, sectoral and institutional policies, which have profound impacts on subsector performance, are analyzed. Finally, strategic options needed for conversion of the industries to modem, self-sufficient and productive enterprises are examined. This docur nt has a restricted disutio nd may be used by recipiec only in the peromamef thdr official duties. Its content ms not ot_wise be disclosed vithout World Bank l  SRI LANKA TREE CROPS STRATEGY ECRCTIV SaARstEQ I. TREE CROPS IN SRI LANKA 1.1. Nationaliion in the 1970's 1 1.2. The Decline of the 1970s and 1980s 1 1.3. The Effect on revenue Eaning 3 1.4. Restruing ofthe State Sector 4 1.5. The Extenal Factors 4 1.6. The Intemal Factors 5 1T. THE TEA INDUSTRY IN SRI LANKA InduakY Skuch 2.1. Reorganization in 1992 7 2.2. .Performance in 1992 8 2.3. Inftational Competitiveness 9 24. Productivity: Domestic & International Compason 9 2.5. Profitability I1 2.6. Factors Affecig Cost of Production 12 This report draws on the extemive work done by the Plantaion Restructuing Unit (PRU) in the Ministry of Finance, supported in patcular by Coopes and Lybrnd and Crown Agents, dumg the rcen retru g ofthe planttions sb_-c. It is also based on ADB's Crop Production Incentive Study and the s Iub wock done by Bak Staff and Consultants in the course of pepaig the since shelved Tree Crops Restcturi Credit. Additional information was col1ected during missions to Sri Lanka in December 1992/January 1993 and October/November 1993. The report was prpared by Yusuf Choudbry (Consultant), workng with Dougls Listr (Task Maager) and Rashid Faruqee.  2.7. Taxes and Subsidies 14 2.8. The Intemational Price of Tea 15 2.9. Marketing Margins 16 2.10. Industry Prospects 16 1i. THE RUBBER INDUSTRY The Indus= Structure 3.1. Production 18 3.2. Export 19 oani;v and Compeitiveness2 3.3. Productivity 20 3A. Cost of Production and Profitability 21 3.5. Iterational Competitiveness 22 3.6. Factors Affecting Profitability 23 3.7. Industry Prospects 23 IV. THE COCONUT INDUSTRY Idxty Structure 4.1. Production 24 4.2. The Domestic Market 25 4.3. The Export Maiket 26 Ptftaiiy n bmWime _ 4.4. Productivity 27 4.5. The Cost of Production & Profitability 28 4.6. Intemational Competitiveness 28 4.7. Productivity Enhancement 29 4.8. The Subsidy Scheme 29 4.9. The Credit System 29 4.10. Technology Improvements 29 4.11. Industry Prospects 29 V. FUTURE STRATEGY ii  5.1. Economic Environent 30 5.2. lolitical Enviromnent: Policy Objectives 30 5.3. TheNational Policy for Tea 31 bbc=OWcives .Wfale 5.4. Piincipal O3jectives & Sttegies 31 S.S. Ilstitutions 33 5.6. Fiscal Environment 33 5.7. Production and Marketing 33 5.8. Employment and Labor Market 34 Adon Plan 5.9. Issues And Options 34 T:he Futur 5.10. Conclusion 56 Annexes Anne I: Tea Import & Export by Countries I Annex H1: World Output of Tree Crops VI Annex III: Cost of Production of Tea & DRC Ratios VIII Annex IV: Cost of Production of Rubber & DRC Ratios XIV Annex V: Cost of Production of Coconut & DRC Ratios XVII Annex Vl: Effects of Direct and Indirect protection XX Annex VII: Effects of wage Increase on Competitiveness XXX Annex VI: Development Budget: Hayley Plantation Company XXXV Annex IX Tea Production & Export XXXVII Annex X: SWOT Analyses XXXIX iii  Exzuive Summary The tree crops subsector in Sri Lanka has underperformed for more than 20 years, causing a loss of national income and absorbing scarce resources. Piecemeal efforts in the past by government to revitalize the subsector were unsuccessful. This study analyzes the operating environment and performance of the subsector in the past 10 years, in the context of global markets. It draws specific conclusions about the reasons for the decline and develops a strategic plan for addressing the fundamental problems. The plan addresses the long-term and the medium-and short-term needs of the subsector, and lays the groundwork for a better performance. It calls for inputs and support from both the public and private sector to achieve the defned goals. I. THE PROBLEMS I. Declining Export and World Market Share Ten years ago, tea, rubber and coconut provided almost a quarter of Sri Lanka's national revenue and more than half its total export. Since then, their share of revenue has declined to a twentieth and of exports to one quarter. Perhaps, the more critical was the loss of export markets. Sri Lanka's share of world tea exports fell from 22 percent in 1982 to 19 percent in 1991, losing to new comers such as Kenya, which increased its production nearly nine fold to reach almost the same level as Sri Laka's. Similarly, Sri Lanka lost its share of the rubber market in the same period, when Thailand almost doubled its share. Because of huge internal demand, Sri Lanka is not a major supplier of coconut products to the international market. Coconut is important, however, as a domestic food product. 2. Sta_nan Production, Declining Productivitv and Rsi gCs Between 1982 and 1991, world production of tea increased by 30 precent, but output fiom Sri Lanka's state plantations, which account for two-thirds of the national production, fell 33 percent. There was a modest expansion in exports but only because of the phenomenal growth (119%) by private smallholders. Similarly, Sri Lanka's rubber production dipped 20 percent in 1980-92, while world output increased by 25 percent. One of the main reasons behind the decline of tree crops in Sri Lanka is low productivity. Tea yields are lower than India, Kenya, Indonesia, and Malawi and the growth in yields is about half that of Kenya and Indonesia. The silver lining is that Sri Lanka's private smallholders have not only outperformed the state tea sector (by a margin of 100% in yield per hectare) but have also outperformed some of the major competitors. The private sector has lagged behind in rubber production, however, mainly because it does not have the best rubber growing land and lacks institutional support. Even so, yields have improved steadily in the past 10 years. i  The cost of tea production in Sri Lanka is about 25 percent higher than in South India and Kenya, but costs of private smallholders are slightly lower than the state sector, partly because they have control over wages. In rubber, smallholders have done even better in controlling production costs, which are about 49 percent lower than e state sector. II. THE CAUSES OF DECLINE Many of the factors that caused stagnation in the tree crops subsector in Sri Lanka were external. But, the real causes of the decline and loss of competitiveness ill world markets were internal problems created by government. The Extemnal factors * World tea and rubber prices have fallen since 1980, because of decreasing demand and increasing production. Global recession and the economic setback from the breaking up of former socialist repub1Ucs in Europe has reduced the demand for tea. * Strong competition from new entrants, like Kenya, has shifted the world market skare for tea away from traditional exporters, such as Sri Lanka and India.