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Cablegate: Size Doesn't Matter: Sierra Leone Industries Face

VZCZCXRO9530
RR RUEHMA RUEHPA
DE RUEHFN #0401/01 2261252
ZNR UUUUU ZZH
R 131252Z AUG 08
FM AMEMBASSY FREETOWN
TO RUEHC/SECSTATE WASHDC 2113
INFO RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 02 FREETOWN 000401

SIPDIS

DEPARTMENT FOR AF/W

E.O. 12958: N/A
TAGS: EIND ECON EFIN SL
SUBJECT: SIZE DOESN'T MATTER: SIERRA LEONE INDUSTRIES FACE
SAME CHALLENGES

1. SUMMARY: On August 8, CDA, Poloff, and Economic Assistant
visited a textiles factory and a brewery. Though the
companies differ considerably in terms of size, capital
investment, and ownership, managers pointed to the same
challenges impeding growth and profitability. A subsequent
meeting with the Central Bank Governor helped identify
several areas in which the government could be more effective
in assisting local industry. END SUMMARY.

-------------------------
OVERVIEW: SAYENU AND SLBL
-------------------------

2. On August 8, CDA, Poloff, and Economic Assistant visited
Sayenu Industries and Sierra Leone Brewing Ltd. (SLBL).
Sayenu is the sole textile manufacturer in Sierra Leone,
assembling such items as uniforms, bedding, and hospital
scrubs using imported cloth. Sayenu can currently employ up
to 200 people on a contract-basis for shift work, and has a
handful of factory managers on salary. The company is owned
and operated by Mariama Sesay and family, who are still
struggling to rebuild their operation following the losses
incurred during the war.

3. Operating since 1961, SLBL makes Star Beer, Guiness, and
Maltina, and imports Heineken for the domestic market. In a
recent debt-for-equity arrangement, SLBL is now 83% owned by
Heineken (they held only 42.49% in FY2007), with Guiness
(8-9%) and Paterson Zochonis (3-4%) also owning shares. The
remaining shares are locally-held. Currently employing 120
staff and operating round-the-clock, SLBL produces 95,000
hectoliters per year, falling below their full capacity of
120,000 hectoliters. Considerable capital investment in
automated systems in recent years plunged the company deeply
in debt. The company has posted net losses for the past 3
years, SLBL lost Le 7 billion ($2,376,919) in FY2007 due to
debt servicing.

-------------------------------
CHALLENGES TO PROFIT AND GROWTH
-------------------------------

4. Sayenu and SLBL identified Sierra Leone's overall weak
economy as a principle challenge. Neither have tapped into
export markets, despite past attempts, and struggle to make
ends meet during economic downturns. Mrs. Sesay receives
contracts from the Government of Sierra Leone (GoSL),
schools, and private companies, but does not have enough
business to operate year-round. SLBL managers expressed
concern regarding the overall lack of discretionary income in
the country. Beyond this obvious challenge, Sayenu and SLBL
pointed to the lack of financial capital, transportation
difficulties, and the expense of raw materials and resources,
acquired locally or imported, as threats to the health of
their businesses.

-----------------
FINANCIAL CAPITAL
-----------------

5. The lack of financial capital as a huge impediment to
growth for both companies. Human capital is readily available
to Sayenu, with at least half of their contract staff having
more than 10 years experience, but the company has limited
access to needed investment capital to either expand the
factory, resume pre-war exports to Liberia and the Gambia, or
re-open a factory-run training school destroyed by rebels who
occupied the facility. While SLBL has support from its
European owners, managers still faced exorbitant interest
rates ranging from 25-29% that impeded further modernization
and growth. Debt servicing even at a much lower rate (8-9%)
from Heineken is an obstacle to SLBL's expansion.

6. In a subsequent meeting with Central Bank Governor Samura
Kamara on August 8, CDA raised the issue of debilitatingly
high interest rates. Kamara noted that the Bank is not active
in setting exchange or interest rates. When asked why the
interest rates are so high, he pointed to the creditors'
captive market in Sierra Leone. With little internal and
external competition, banks can afford to keep the rate high.
Further, they hold 60% of government debt, giving them
"cartel"-like powers. The government's own policy of not
insuring deposits but having a high reserve requirement
likely also contributes. Interestingly, the Governor cited
high operating costs, particularly electricity, as an element
that forced banks to set higher interest rates for consumers.
He believes that the GoSL focus on providing regular
electricity will thus have positive direct and indirect
impacts on manufacturers.


FREETOWN 00000401 002 OF 002


-------------
RAW MATERIALS
-------------

7. Sayenu and SLBL are import-dependent for raw materials.
Sayenu purchases cloth from China, India, the UK, and the
U.S., which can be very expensive depending on exchange rates
and other factors. SLBL receives its raw materials from
Heineken. Because the size of the shipments sent from Europe
are small relative to shipments for other ports, managers
stated that stops in Freetown are infrequent. This forces
SLBL to purchase large amounts of inputs and stock far in
advance, and buying on speculation contributes to the debt
SLBL carries. The huge excise duties that must be paid on
materials brought through the ports are also a cash-flow
hardship. Despite these negatives, for SLBL import-dependency
has also sparked innovation. To decrease the need for
imported barley, for example, SLBL increased the quantity of
locally-grown sorghum in their formulation. This supports
Sierra Leone's agricultural sector and decreases SLBL's
expenses. Sierra Leonean farmers will produce sufficient
sorghum to meet SLBL demand next year.

---------
RESOURCES
---------

8. Both Sayenu and SLBL indicated resource deficiency as a
strain on their businesses. While Freetown's electricity is
provided by the National Power Authority (NPA), outages
continue on a regular basis. SLBL, for example, only receives
25% of the electricity it needs from NPA. Running generators,
particularly with the high cost of fuel, is extremely
expensive. Lack of water in the city is also a significant
and expensive problem.

-------
COMMENT
-------

9. For an economy already weakened by the war, rocketing
commodities prices means continued vulnerability and limited
opportunities for growth. Sayenu and SLBL, despite their
differences in size, market-share, and financial backing,
share similar frustrations in grappling with Sierra Leone's
economic realities. In the face of these challenges, however,
managers for both companies displayed enthusiasm and
commitment to meeting their long-term objectives of
profitability and expansion. Heineken's considerable
investment in SLBL is also a sign that investors expect a
positive turnaround for Sierra Leone's economy. While the
importance of private investment in a country like Sierra
Leone cannot be understated, the GoSL has a role to play in
supporting local industries. Though the provision of
electricity has a beneficial effect within the manufacturing
sector, more immediate goals for the government to produce
tangible results could include reducing tariffs on raw
materials and encouraging banks to made credit more
affordable. END COMMENT.
FEDZER

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