Ceylon Tea is a brand that commands recognition and demand globally. It all began in 1867 when James Taylor planted the first tea bushes on the Loolecondera Estate in Kandy. Over the next century, Ceylon Tea grew from a mere 19 acres to over 200,000 hectares, making Sri Lanka one of the world’s leading tea exporters by 1960.

The tea industry stands on the backs of generations of estate workers, and destitute migrants from India who lived and worked in harsh conditions with limited access to healthcare, housing, and education. While Sri Lanka gained independence from British rule in 1948, the estate community remained stateless until 2003!

The nationalization of estates in the 1970s aimed to improve worker welfare but instead led to mismanagement and declining productivity. It wasn’t until the privatization of the industry in 1992 that a true transformation began.

Today, the Regional Plantation Companies (RPCs) that manage the estates have invested in infrastructure, quality control, and worker welfare. Socio-economic conditions have improved over the years but are not ideal.

Politicians from estate communities have long enjoyed king-maker status, often bagging a cabinet position in any government. The communities they serve are captive sources to ensure continuous elections to parliament and the perks of joining whatever government is in power. The people in the communities get little, if not nothing, in return, except the ability to unionize and compel plantation managements to cede to their wage demands or sway governments to intervene in their favour.

Since its introduction in 1995 during the privatization of Regional Plantation Companies (RPCs), Sri Lanka’s tea industry minimum wage has seen regular increases, according to Advocata Institute, a think tank.

In 2013, a collective bargaining agreement set the daily minimum wage at Rs450, later raised to Rs500 in 2016 and Rs700 in 2019, alongside additional benefits like productivity incentives. In 2021, when negotiations failed, the Wages Board of the Department of Labour mandated a new minimum wage of Rs1,000 per day, effective from March 5, 2021. Now the government proposes daily wages to increase to Rs1,700.  Currently, plantation workers receive Rs 1000 basic wage plus EPF/ETF and after plucking the set target, they are paid an additional Rs. 40 a kilo.

Plantation managers have opposed the government’s May 2024 decision to hike minimum wages for tea and rubber workers by 70%, warning it will undermine productivity-linked wages and cripple the industries.

The Planters’ Association of Ceylon (PA) says the wage increase will force cost-cutting in investments, leading to a 45% rise in tea production costs, rendering Sri Lanka’s exports uncompetitive globally. The PA argues the move will burden Regional Plantation Companies with an annual increase of over $100 million and threaten worker livelihoods.

It urges a shift to productivity-linked wages to ensure fair and sustainable pay. “The decision, made without consultation, threatens to cripple the entire plantation sector,” the PA stated, warning it violates IMF bailout terms and damages investor confidence. The industry has long advocated a revenue-share model aligning worker pay with productivity and earnings. Managers say the current attendance-based minimum wage is outdated and disrupts production quality. “We urge policymakers to prioritize long-term stability over short-sighted decisions and consider our proposals for a productivity-linked wage model,” the PA said.

The Wages-Productivity Problem

Sri Lanka’s tea industry is a vital component of the country’s economy, contributing significantly to export earnings and employment. However, a recent report by Advocata has highlighted the industry’s struggle to maintain its competitiveness in the global tea market.

The report, titled “Market Competitiveness of the Tea Industry of Sri Lanka,” examines the key factors threatening its position in the highly competitive world tea market. The report’s findings suggest that while Ceylon Tea still enjoys a prestigious brand reputation, the industry faces several challenges.

One of the primary issues identified in the report is the labour market challenges faced by the tea industry. The section on “Labour Productivity, Welfare, and the Minimum Wage in Tea Plantations” highlights the key factors impacting the industry’s ability to improve labour productivity and ensure adequate worker welfare.

Sri Lankan tea pluckers constitute over 60% of the estate workforce, field workers 20%, and factory workers about 15%. Comparatively, the labour share of total production costs in Sri Lanka’s tea industry is significantly higher than in other major tea-producing countries, at over 60%. In Kenya, labour costs are about 50% at the green leaf stage and 20% at the processing stage, while in India, labour costs range from 40-50% at the green leaf stage and under 5% at the processing stage.

The attendance-based minimum wage significantly increases production costs in the Sri Lankan tea industry, making labour costs disproportionately higher and making Sri Lanka the highest-cost producer among major black tea-producing countries.

Moreover, the attendance-based wage system prevents employers from optimizing workforce allocation. They cannot reduce staff to maintain production levels each time the minimum wage increases. This static relationship between labour costs and wage rates means that wage hikes do not correspond to increased labour productivity, further exacerbating production costs.

Tea pluckers, most field workers, and factory workers in the Sri Lankan tea industry are paid the daily minimum wage based on attendance if they meet a predetermined daily target, such as plucking 18 kilograms of green leaf, which varies seasonally. However, discussions with employers and workers reveal that these targets are flexible; pluckers may still receive the daily minimum wage even if they do not meet the 18-kilogram target, provided they have a reasonable excuse.

To address the wages-productivity problem, Advocata advocates for better worker welfare, a living wage and decent working conditions to attract and retain skilled labour, ultimately boosting productivity and competitiveness. “These are not just moral imperatives, but also essential for the long-term sustainability and competitiveness of the tea industry,” the think tank argues.

Adopting alternative wage models like the revenue-sharing system can help achieve these goals. One of the primary issues identified in the report is the industry’s reliance on an attendance-based minimum wage system, which accounts for a significant portion of the industry’s production costs: around 65% to 75% at the green-leaf stage in Regional Plantation Companies (RPCs). On top of that, this attendance-based system, which focuses solely on worker attendance rather than performance, severely limits productivity incentives for workers.

The report advocates for the industry to consider alternative models that are more market-driven and focused on rewarding productivity rather than just attendance, from passing on costs to consumers to foster ethical labour to out-grower schemes or mechanization.

One such model Advocata proposes is the revenue-sharing system, which aligns workers’ incentives with the quantity and quality of tea leaves produced. This revenue-sharing approach departs from the weight-based remuneration of the out-grower model and aims to create a sense of ownership and responsibility in workers. By prioritizing quality over quantity, the model can drive workers to adopt best practices in plucking and processing, leading to superior-grade teas and improved market prices.

However, Advocata acknowledges the implementation of alternative wage models, such as the revenue-sharing system, is challenging. Establishing a transparent mechanism for revenue calculation, distribution and negotiating fair revenue-sharing percentages can present administrative hurdles for the industry.

Additionally, the report notes that the success of these alternative models may be influenced by contextual nuances, requiring careful consideration and adaptation to the specific needs and dynamics of the Sri Lankan tea industry. “However, the potential benefits in improved labour productivity, worker welfare, and industry competitiveness make it a worthwhile endeavour to explore,” Advocata argues.

Not Just Labour

Labour productivity is just one problem confronting the tea industry. Advocata also highlights the industry’s struggle to attract sufficient capital investment. The tea industry in Sri Lanka is highly fragmented. There are many small-scale producers while access to financing is limited, hindering the industry’s ability to invest in modern equipment, technology, and infrastructure, essential ingredients for improving productivity and efficiency.

For instance, Advocata notes that data from RPCs show that the replanting rate in the Sri Lankan tea industry is alarmingly low, far below expert recommendations. Experts advise replanting 2.5% to 4% of tea cultivation annually to maintain crop yields and avoid over-reliance on ageing tea bushes. However, in recent years, RPCs have replanted less than 1% of the total tea cultivation. No RPC met the minimum recommended replanting rate of 2.5% per year, and some have gone years without any replanting.

“The consequences of ignoring the need for long-term capital investment in the tea lands, however, have already manifested. Sri Lanka’s average yield is one of the lowest among large tea-producing countries, and the lowest among large exporters of black tea, contributing to Sri Lanka’s growing cost of production, while the severe labour shortage is in part responsible for the low yield at RPCs,” the Advocata report points out.

Another challenge is the industry’s limited ability to add value to its tea products and maintain consistent quality. Sri Lanka has struggled to diversify its tea product offerings and move up the value chain, relying heavily on the export of bulk tea, thereby limiting the industry’s ability to capture a larger share of the global tea market, which increasingly demands higher-value specialty tea products. The industry must also improve quality control measures to ensure consistent product quality in the face of growing competition from other tea-producing countries that increasingly focus on quality and product differentiation.

Despite the challenges, Ceylon Tea is not short of growth potential. If the industry had enhanced its product composition, Sri Lanka could have maintained or even increased its market share in destinations like Russia, Kuwait, Japan, Turkey, Germany, Australia, the USA, and India. Additionally, the report identifies potential growth markets for Ceylon Tea, such as Azerbaijan, Iran, the UK, and Libya, where the industry has room to become more competitive. However, the tea industry has to overhaul its entire business model, not just the wage-productivity dynamic, and we encourage our readers to read Advocata’s comprehensive report, of which, we’ve barely touched here.