Lanka Transformers Ltd (LTL) in a letter to the Business Observer states that the COPE report that the CEB should have received Rs 7.1 billion instead of Rs 6.9 billion as dividends was completely wrong.
The statement in full:
This refers to the article under the heading ‘Theft, waste and inefficiency in State Enterprises’ that appeared in the Sunday Observer of January 20 written by Ravi Ratnasabapathy.
In the COPE report of 2016 quoted in the article, it is said that “The subsidiary companies (i.e. of Lanka Transformers Ltd - LTL) have paid dividends worth Rs. 14 bn to LTL. CEB should have received 7.1bn as its share, but only Rs. 6.9 bn was received…”.
This statement is completely false.
LTL is an engineering company with globalised operations. It is engaged in the production of transformers, galvanising, steel fabrication and power generation using thermal, hydro and wind resources.
All LTL’s power generation businesses in Sri Lanka are BOI ventures. It is a requirement of the BOI that its ventures should be single purpose companies. Thus, for each project, we had to establish a separate subsidiary.
LTL also operates in foreign countries in power projects which requires establishment of companies in those territories to do business. That is why, as COPE said, LTL has 15 subsidiaries.
All our subsidiaries are profitable ventures. They all declare dividends annually. Their finances are audited by Ernst & Young. The Ceylon Electricity Board (CEB) owns 63 percent of the shares of LTL, but it does not own any shares of the subsidiaries of LTL.
When the CEB does not own any shares of subsidiaries, it is not possible for the CEB to receive any dividends from subsidiaries. Subsidiaries pay dividends to LTL. Of the dividends declared by LTL, the CEB has been paid its due share of 63 percent without any deficit.
The COPE report statement that the CEB should have received Rs 7.1 billion instead of Rs 6.9 billion as dividends was completely wrong. Such calculation does not comply either with any accounting standard or any law.
When a company receives dividends from its subsidiary, it will be recorded as an income of that company; dividends will be declared out of the profits of that company. However, there is no requirement to declare all dividends received by a company in turn as its own dividend. COPE unfortunately has been misled by somebody in coming to this conclusion about corporate finance affairs in this instance.
The directors of LTL, which has five out of eight directors appointed by the CEB, decide on its annual dividends based on factors, such as liquidity position, future capex requirements and shareholders requirements.
Neither the Companies Act nor any Accounting Standard requires them to declare all its dividend income as its own dividend to shareholders.
For example, a company might have borrowed money to invest in a subsidiary; under such an instance that company will use dividends to pay interest cost of such borrowings without declaring dividends.
In the period analysed by COPE, LTL had declared Rs. 6,952 million as dividends for the CEB’s 63 percent stake. During the same period, LTL’s subsidiaries had declared varying amounts of dividends, which multiplied by the CEB’s indirect shareholding in LTL, amounted to Rs. 7,184 million. Thus, the COPE report statement that there is a difference of Rs. 232 million as a shortfall to the CEB, is inaccurate. We informed about this error in the COPE report to the CEB in 2016. The CEB confirmed by its letter dated October 31, 2016 to us that it received the due amounts of dividends from LTL and that there is no shortfall. We informed this to COPE and the Auditor General.
Your article further stated that COPE has opined on salaries and allowances of LTL. COPE did not make such comments with regard to LTL. That must have been a CEB matter in the COPE report inadvertently attributed to LTL in your article.
Your article was about inefficiency of State enterprises.
We are happy to say that the LTL Group is an exception to that rule.
This company started only with an investment of Rs. 97 million from the CEB and has grown to be a company worth over Rs. 25 billion. We have been profitable every year since the inception and provided thousands of people with employment in Sri Lanka and in foreign countries. We have paid billions as taxes to the government.
Your article said, “LTL supplies services and products to the CEB”. This is a more accurate description of us 35 years ago when LTL was set up to make transformers for the CEB. LTL made a decision long time ago to move away from depending on the CEB for its survival.
Therefore, we have diversified to many other areas and also serve many markets outside Sri Lanka. We export more transformers than what we supply to the CEB. We do more steel fabrication and galvanising to private sector than to the CEB. We have operations in Bangladesh, India, Singapore, Uganda, Tanzania, Nepal, Maldives, Kenya and Ethiopia.
We would not be able to survive in such markets if we are inefficient. At present, LTL’s revenue from the CEB related business is less than 15 percent out of its total revenue. We have a totally different management culture and work ethics from those in most state enterprises.
It is our view that no amount of supervision can turn loss-making state institutions into profitable entities if they do not have a right business model. We as a nation have tried and convincingly failed in the myth that controls will make state enterprises profitable. Unless we come out of the misconception of state sector mentality of controls, audits and regulations, our state enterprises will always remain a burden to our people.
Interestingly, the CEB is the biggest beneficiary of our treading a path different from the beaten track. The CEB has earned Rs. 13 billion in dividends from LTL against its investment of Rs. 97 million.