Sri Lanka tea industry to get back withheld funds; objections to new cess

April 30, 2007 (LBO) - The Sri Lankan government has agreed to release all funds owed to the tea industry from the export cess but key stakeholders are opposing a proposal to further increase the cess. Tea Board Chairman Lalith Hettiarachchi told LBO the Cabinet had agreed to release all funds of the tea export cess, including last year's arrears of 233 million rupees, totaling 1.2 billion rupees. Delays in releasing the cess funds by the Treasury affected not only the Board's promotional work but also re-planting and factory modernization by small holders and corporate sector plantations firms, the industry had complained earlier. The tea industry maintained that it was illegal for the government to withhold funds owed to them from the cess. Such monies must be ploughed back to benefit the industry from which it is collected, unlike a tax which the government can take. The cess on exports of Ceylon tea was increased in April 2006 by 1.50 rupees to four rupees per kilo, meant specifically for re-planting and factory modernisation.

The government has now proposed increasing it by another two rupees to six rupees per kilo to subsidise fertiliser for both small holders and regional plantations companies (RPCs). Hettiarachchi said the Board is to have talks with stakeholders such as the Planters Association, Ceylon Tea Traders Association and exporters who were yet to agree to the increase.
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The Planters Association, which represents the RPCs, is against the idea. "If the Cabinet has agreed to release the funds, that's fine. But we're opposed to a further increase in the cess," Malin Goonetileke, secretary general of the Planters Association, told LBO. "We have not seen the colour of it, although the government promised us funds for replanting of tea and factory upgrading to meet international food safety standards. "The funds were meant specifically for that - when we wanted money for factory development and to replant tea of old vintage, which is very costly.

The cess was increased for that by 450 million rupees but we did not get the required support. Now they want to further increase the cess. How can we agree?" Critics also point out that it does not make economic sense to subsidize an increase in production at the beginning of the value chain from a cess charged at the end of it. Over the long-term, a cess for a fertilizer subsidy would result in the players at the end of the value chain paying less for the tea that they buy, resulting in producers eventually getting a price less the cess. Small holders however are likely to benefit if the subsidy is only given to them, with the large plantations paying for it in economic terms. Critics point out that cess funds should be used for capital expenditure and other long-term productive improvements that give exponential returns over time, and not to defray day-to-day expenses at different points in the value chain, in a kind of money circulation game. Hettiarchchi said the increased cess was proposed to raise funds for producers faced with exorbitant fertilizer prices in an effort to improve output and quality to make up for the drop in crop caused by last year's strike. He said he hopes increased fertiliser application could help tea production recover to last year's level of 315 million kg.

"We're making a lot of effort to encourage people to apply fertilizer, especially small holders whose production is improving. They find it difficult because fertilizer prices are exorbitant." .