On the final day of the 2025 Budget debate, President Anura Kumara Dissanayake disclosed the nation’s largest loss-making State-Owned Enterprises (SOEs). He revealed that Milco, the State-owned dairy producer, carried a total debt of Rs. 15,090 million.
However, authorities maintain that Milco is undergoing positive improvements, with plans to significantly expand production targets within the next five years.
Significant progress at Milco
Speaking to The Sunday Morning, Deputy Minister of Agriculture and Livestock Namal Karunaratne stated that the Government had made significant progress at Milco, despite inheriting a financially unstable situation from the previous administration.
Milco operates 97 milk collection centres and five factories located in Colombo, Polonnaruwa, Badalgama, Ambewela, and Kandy.
“The previous Government had formulated plans to sell all these assets, along with other agricultural facilities, to Amul. Only the signing of the agreement remained. In light of this, we worked diligently to retain these facilities as national assets, following extensive protests. Although decisions had been made previously to sell Milco or the National Livestock Development Board (NLDB), we did not proceed with these decisions,” he said.
The Deputy Minister claimed that prior decisions regarding the sale of Milco had led to losses within the organisation, thereby reinforcing the perceived need for privatisation and resulting in Milco becoming a significant loss-making SOE.
“The Government took over Milco in this condition. Since then, considerable improvements have been made. Upon assuming control, Milco was receiving only 68,000 litres of milk, a figure that has now increased to 100,000 litres. Furthermore, Milco was indebted to farmers by over Rs. 250 million, an amount that has now been settled. The company also owed money to milk suppliers, the majority of which has already been disbursed,” he added.
He further emphasised that Milco had been allowed to accumulate substantial losses and become heavily indebted. The SOE has been significantly improved from this situation, with only a certain amount of loans remaining to be settled. Additionally, outstanding payments to farmers have been rectified and Milco is now paying farmer salaries on time, on a bimonthly basis.
Furthermore, Karunaratne noted that many farmers had ceased supplying milk to the company due to previous inefficiencies, a trend that was currently being reversed.
“We have uplifted the facilities and are hopeful of further improvements in the future. This entity will continue to operate as a national asset and the existing inefficiencies will be addressed, transforming Milco into a successful SOE,” he asserted.
Challenges facing Milco
The proposed agreement with Amul detailed a 99-year lease of Milco and NLDB farms to Amul. According to the plan, an evaluation placed the combined value of Milco and NLDB assets at Rs. 90 billion, with the Highland brand name assessed separately at Rs. 2 billion.
Under the terms of the lease, the intended ownership structure of the venture was to have Amul holding a 52% stake, while Sri Lankan stakeholders would possess the remaining 48%.
Meanwhile, speaking to The Sunday Morning, Milco Chairman H. Gotabhaya outlined the challenges confronting the State-owned dairy enterprise and detailed forthcoming development plans for its facilities.
He stated that the company’s machinery and infrastructure were in need of upgrades, necessitating a substantial investment that Milco was currently unable to undertake due to financial constraints that had contributed to production difficulties.
Furthermore, he explained that the company had incurred consistent losses stemming from past management issues and other factors. As of October 2024, the outstanding loan amount stood at approximately Rs. 3 billion, with nearly 50% now settled.
Gotabhaya also noted that certain policy decisions made by the previous Government, particularly those concerning the potential liquidation of Milco and subsequent Cabinet decisions such as recruitment restrictions, had contributed to the resulting inefficiencies.
Forthcoming developments
Regarding the continued operation of Milco as a national asset, Gotabhaya highlighted the significant opportunity presented by the Highland brand, which remains a popular and highly valued product range among Sri Lankan consumers.
“We are exploring further product differentiation, diversification, and entirely new product development initiatives. The implementation of 500 Milco-based outlets is currently underway and is projected to be completed within the next three months, which will address existing concerns regarding product availability,” he noted.
He elaborated that as an enterprise entirely reliant on local milk production, Milco faced challenges due to insufficient milk supply to operate its factories at full capacity. Currently, there are over 20 factories in the processing industry, with 14 operating at a larger scale. The high demand for raw milk has driven up its price, which, while beneficial for farmers, contributes to increased costs for consumers.
According to Gotabhaya, Milco commenced construction of a new factory in Badalgama in 2014, but work was halted in 2022 due to the company’s financial difficulties. He explained that approximately Rs. 15 billion had already been invested in the project, with an additional Rs. 3-4 billion required for its completion.
“We are currently in discussions with construction companies regarding the terms, working on potential solutions, and are hopeful that this project can be completed within the next one to two years.
“Labour shortages are also apparent, with skill gaps even among existing employees. Over the past 15 years, the absence of proper career guidelines has led to structural salary issues and discrepancies,” he pointed out.
Consequently, due to these primary factors, among others, a significant skill gap exists within Milco’s middle management level and efforts are underway to address this issue promptly to ensure the continuity of operations.
Furthermore, the Milco Chairman stated that the proposed Amul venture had been halted due to several issues and project delays. He outlined that the terms of the project stipulated that even after a substantial asset takeover, only 0.5% of the asset value would be paid as annual remittance after a period of 10 years. This arrangement would translate to a significant financial loss, as these assets have been developed using public funds.
“Theoretically, Milco should not be incurring losses, especially considering that its capital assets originate from the Government, making the reasons for current operational costs unclear,” Gotabhaya said.
He revealed that several investigations had already been initiated to examine financial inefficiencies. Some of the identified reasons are aligned with mismanagement.
“In terms of targets, Milco aims to achieve a profit level of at least Rs. 1 billion for 2025. This objective does not entail an increase in product pricing; instead, Milco is currently focused on reducing production costs and enhancing efficiency. Within the next five-year period, our aspiration is to become the largest dairy company in Sri Lanka,” he said.
He also stressed the importance of the principle of maintaining Milco as a national asset.
“Milco is more than just a business entity, as it plays a crucial role in determining fresh milk prices for farmers, effectively setting the base price that other milk companies use as a benchmark for their pricing decisions.
“During peak production periods, Milco disburses approximately Rs. 1 billion per month to farmers. Furthermore, the prices of other processed milk products are maintained at current levels due to Milco’s pricing structure,” he stated.
In conclusion, Gotabhaya noted the national imperative to increase the country’s overall milk production and maintain consistent supply, particularly addressing the lean production periods experienced during certain months when output fell below the required levels.
National milk production to be increased
Regarding national milk production targets, NLDB Chairman Dr. B.C.S. Perera stated that the board was planning to expand the country’s milk production in accordance with Government objectives.
He explained that the Government had outlined several strategies to increase milk production and that the NLDB was actively working towards implementing these strategies. Current daily milk production stands at approximately one million litres and the Government aims to elevate this to three million litres within the next five years. This year, the board anticipates Sri Lanka’s milk production to reach 1.6 million litres.
The NLDB possesses livestock farms spanning over 28,000 acres, encompassing 33 livestock farms nationwide, of which over 20 are involved in dairy activities, with 14 exclusively dedicated to dairy production.
However, Dr. Perera noted that currently, 85% of the nation’s milk supply originated from micro and small-scale dairy farmers, each producing less than 12 litres of milk per day.
The NLDB aims to facilitate these small-scale farmers in reaching a medium-scale production level of around 40-100 litres. The primary objective is to enhance the production level and capacity of small-scale dairy farmers by providing support and guidance on expansion based on established development plans.
Profitability readily achievable
Commenting on Milco’s economic status and its implications, University of Peradeniya (UOP) Department of Economics and Statistics Professor Ariyarathna Herath asserted that managing a company like Milco profitably was achievable given the nature of the enterprise, viewing the decision to refrain from privatisation as a positive step.
“Considering the substantial domestic demand for Milco products, there is no necessity to sell to international entities if this demand can be effectively managed. Given its quality standards, Milco could eventually engage in exports with a degree of diversification, an avenue that might be foreclosed if the company was sold,” he said.
Prof. Herath suggested adapting the board structure to incorporate a solid governance framework, ensuring a diverse and consistent composition of directors. He further proposed that the structure should emulate private sector management practices, with a clear focus on profit generation.