Treasury in talks with ADB to structure donor backed bonds for plantations

August 14 (LBO) - Sri Lanka is in talks with the Asian Development Bank to structure donor backed bonds to encourage private investment into the plantation sector, top officials said Monday. "We are talking to the Asian Development Bank to see if long term bonds guaranteed by foreign funding can be worked out for the plantation agriculture sector," Dr. P B Jayasundera, Treasury Secretary told a workshop on public-private partnerships for infrastructure development. Talks are still at early stages with no terms worked out, Jayasundera said, but would encourage crop diversification or even use of marginal lands for projects like tourism. The bonds, possibly underwritten by the ADB, would allow the government to shoulder some of the investment risk and encourage investors to put in money for the longer term. Sri Lanka has 270,000 hectares under tea, rubber and coconut  also among Sri Lanka's top revenue earners for the country- with about 20 privately owned plantation companies. The ADB has been funding the sector since 1968, disbursing just over 400 million dollars until now and of that, about 60 million dollars since privatisation in 1992.

But the bank has said it will exit the sector from 2008. The pace of projects and the take up of donor funds has been slow, with companies complaining of negative cash flows and an inability to put up counterpart funding. An ongoing ADB and Japan Bank funded Plantation Development Project (PDP) is one of the last for the sector, with funding for estate worker welfare, housing and other social projects. While a 10 million dollar credit component has been fully committed, just 20 percent of the 20 million dollars available for worker welfare, has been disbursed since 2003. The project requires 30 percent in counterpart funding from companies to draw on the concessionary donor aid, though companies have been reluctant to do so, Raja Premadasa, Project Director of the PDP told LBO. The ADB has decided to divert 6.5 million dollars of the credit line to develop state roads within the estates instead, with the Treasury putting up 40 percent in counterpart funds. Plantation companies say margins are low, with banks already over-exposed to the sector and not willing to lend as easily due to a lack of collateral.

Loans taken under earlier development projects are also falling due now, Premadasa said, with companies beginning to pay it back, which takes about ten to 15 years. Donors have also insisted however, that companies in the project cap high management fees about 30-40 percent charged on profits to about 10 percent by 2008, to free up funds for development.
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The management fees are a legacy of an earlier privatization process, where the management fees were used as a mechanism to pay off loans taken to purchase the plantations. Sri Lanka is one of the largest suppliers of tea in the world, producing about 300 million kilos a year. But it is still largely a bulk supplier with little value addition or branding.