Tea exporters highlight industry woes

Want govt. to appoint committee to deregulate industry

While renewing its call for the liberalization of the country’s tea industry, the Tea Exporters’ Association (TEA) yesterday highlighted a number of issues plaguing the industry, urging the authorities for swift assistance to arrest the downfall of the 150-year-old industry.

The TEA pointed out although the decline in tea production last year and during the first quarter of this year is largely attributed to the adverse weather conditions prevailed in the country, the overall downward trend in the tea production is due to a number of other factors including aging tea bushes, non-availability of an alternate weedicide and low application of fertilizer. The TEA noted that while the global tea industry has grown steadily over the years, Sri Lanka’s tea industry has declined considerably.

“Sri Lanka crossed the 300-million kilogramme mark in tea production in the year 2000 and even after 16 years, the country has not been able to reach the 350-million kilogramme mark as yet,” the TEA said in a statement.

The members of the Tea Exporters’ Association (TEA) are concerned over the current status of the Sri Lanka tea industry as tea production is on a declining trend in the last few years due to many issues.

According to the Sri Lanka Tea Board (SLTB) statistics, the tea production has declined by 36 million kilogrammes or 11 percent last year compared to 2015. The tea crop figures registered for the first two months of 2017 also indicate a drop of eight million kilogrammes or 20 percent against the corresponding period in 2016.

Though the decline in tea production last year and during the first quarter of this year is largely attributed to the adverse weather conditions prevailed in the country, the overall downward trend in the tea production is due to a number of other factors such as aging tea bushes (on average over 80 years), non-availability of an alternate weedicide and low application of fertilizer, etc.

The tea producers are required to maintain a replanting level of 2 to 3 percent of the tea land extent annually but the actual replanting level is less than one percent. Most of the smallholder farmers do not replant their tea gardens and it is the plantation companies that undertake some replanting.

Sri Lanka crossed the 300 million kilogramme mark in tea production in the year 2000 and even after 16 years the country has not been able to reach the 350 million kilogramme mark as yet. Although the government provides a subsidy for replanting, most smallholders are reluctant to undertake replanting as they have to wait for about four years to harvest the tea.

However, the global tea production has increased steadily and recorded at 5.4 million metric tonnes or 5.4 billion kilogrammes in 2016. The Sri Lanka share in world tea production has now come down to 6 percent from 10.5 percent in 2000.

The tea export sector cannot grow beyond the available tea crop volume in Sri Lanka. The declining trend in the tea crop has restricted the growth in tea export volume and value. The tea production issue also affects the growth of Sri Lankan tea brands and also the processing of Global Tea Brands by Sri Lankan companies.

Since importation of tea is not allowed, the exporters are unable to improve their business and bring more revenue to the country. They are of the opinion that the tea sector will find it difficult to achieve the revenue target of US $ 5 billion by 2020 under the prevailing situation.

The decline in tea production has also led to increase in cost of production and deterioration of tea quality. The current high tea prices are mainly due to the crop shortage and not due to any enhanced demand for Ceylon Tea from consuming countries.

The exporters are of the view that the current prices are somewhat artificial and make Ceylon Tea noncompetitive in some tea importing countries. The country is losing foreign buyers and markets to India, Kenya and Vietnam, etc., due to crop shortage and high prices.

Once the foreign consumers get used to other origin teas, it would be difficult to regain these markets. In view of the current situation in the tea production front, the exporters strongly request the government to liberalize tea imports at least on a control basis to resolve the current tea production issue in the country.

The exporters have proposed for liberalization of tea imports more than 15 years ago. The TEA request was included in the 2016 government budget approved by the parliament. However, it was not implemented due to strong objections from some industry stakeholders.

The current policy discourages any major investment by tea companies in the tea sector that is needed for expansion of the economic growth in the country. Some exporters are unable to cater to certain market segments due to non-availability of suitable type of tea locally. It has a negative impact on the growth of brands. In most markets the importance of origin of tea is gradually phasing out to the strength of brands.

The exporters also believe that protection given to tea producers/ manufactures does not expose them to real competition. The producer segment will not make any serious effort to improve tea quality, reduce COP and improve management efficiency. They will continue to depend on government protection and subsidiaries that would be a burden on the entire economy.

The tea exporters are also concerned of the recent developments in Syria which may lead to a bigger military conflict in the Middle East. Approximately 52 percent of Sri Lanka tea exports reach the Middle Eastern countries and further escalation of military conflict in the region will have an adverse impact on the local tea industry.

Therefore, finding new markets for Ceylon Tea is more important now than before. However, Sri Lanka will not be able to expand its business to more secure Europe or the USA without having the right type of tea mix at competitive prices. The retail sale segment in these countries is controlled by hyper markets/ supermarkets and they maintain the retail prices without any change for six to 12 months. The high cost of production in Sri Lanka does not allow the Sri Lankan tea brands to get into the mass market segment controlled by supermarket chains.

The tea exporters are also worried about the long delay in launching the Global Ceylon Tea Campaign by Sri Lanka Tea Board. The need to introduce a Tea Promotion Levy arose when government was not allocating any funds for tea promotion activities from the tea cess.

In 2010, the then plantation industries minister proposed to introduce a levy of Rs.3.50 per kilogramme to be used only for tea promotion activities. The minister consulted the members of the TEA and got their consent to introduce a new levy with the assurance that it would be levied only for a period of five years but collection of levy continues indefinitely.

Since the establishment of the fund from November 2010 only a few useful promotional activities have been undertaken in foreign markets and as a result the accumulation of the fund has now reached Rs.6-7 billion. The TEA members strongly believe that further accumulation of funds may prompt the Treasury to force the SLTB to use the idling funds for recurrent expenditure or for other non-promotional activities.

The delay in implementation of the global Ceylon Tea campaign is not due to any fault of the tea exporters but due to strict government tender procedures and other regulations. In view of the current situation, the TEA has requested the SLTB to initiate action to suspend the tea promotion levy until the launch of Global Ceylon Tea Campaign is finalized and the accumulated funds are sufficiently utilized.

This would be a relief for the tea exporters who are undergoing a difficult period due to the turmoil in leading tea importing countries in CIS and the Middle East.

The tea exporters also complain of the high taxes imposed on the sector. The cess and promotion levy paid on export of value-added teas come to Rs.7.50 per kilogramme and about Rs.17.50 per kilogramme on export of bulk tea.

In addition, every exporter should renew his licence with the SLTB annually at a cost of Rs.500,000 for large and medium tea companies and Rs.50,000 for small companies. The income tax payment, economic service charge and other fees paid to the SLTB and other state organisations also add to the operational cost of tea exporters.

According to the Sri Lanka Custom data, over Rs.2 billion per annum is collected from tea exporters as cess on bulk and value-added tea exports. Further, Rs.1 billion is collected as tea promotion levy by the SLTB from the exporters. The total cess and tea promotion levy paid by the exporters’ amount to approximately 1.5 percent of the annual tea exports revenue. This may be the highest cess payments made by the tea exporters in a tea producing country.

The exporters are also worried about the slow implementation of budget proposals related to tea export sector. It has been proposed to abolish the Import and Export Control Department Fee of one percent of CIF value on import of tea for re-export purposes to support the tea industry through a more simplified tax and tariff structure in the 2017 budget.

In fact, the TEA had been lobbying for removal of this fee as tea exporters pay a licence fee of Rs.5 per kilogramme to the SLTB also when importing tea for re-exports. The dual taxation on tea import licences currently applicable for the import of Ctc/green and Specialty teas is negatively affecting the competitiveness of Sri Lanka tea brands. However, this proposal is yet to be implemented by the government.

Although the government has deferred the implementation of termination of Simplified Value Added Tax (SVAT) system, the exporters strongly urge the government to continue with the SVAT system to facilitate their cash flow requirement. The termination of SVAT will affect the competitiveness of Sri Lankan tea brands also as the exporters will have to borrow funds from banks at high interest rates which will naturally increase the cost of operation.

Tea is the most regulated export industry in the country. This has caused delays, increase in operational cost, etc., of the exporters. Therefore, the members of the TEA urge the government to appoint a committee to look into deregulating the tea industry to enhance its competitiveness.