Every business entity, irrespective of its size, is exposed to various types of risks. A company that is fully aware of this universal truth takes steps to be prepared for and mitigate these various risks.

Risks to a business entity may emerge from a variety of sources including the market, credit, liquidity and interest rates. SLT has put in place systems, policies and procedures in all of its major areas of operation in order to identify, measure and monitor risks in a systematic way. Through these systems, the Company hopes to standardise its risk interpretation procedure. In addition, the Company hopes to achieve better coordination between the process of quantifying risk and their management. In essence, these systems and procedures will ensure that SLT takes well-calculated risks, attempting to eliminate certain types of risks altogether and minimising the impact of others. The Board of Directors of SLT are kept well informed of implementation and any changes to risk management systems by the senior management through frequent reports. Risk management at SLT is a dynamic process warranted by the frequently-changing business environment the Company operates in. As such, its adequacy and efficacy is constantly monitored and modified.

Market Risks
The market risk associated with SLT is the risk of increasing competition. The telecommunications policy of the Sri Lankan Government favours fierce competition in the sector. This increases the market risk of the Company.

Commanding a share of about 77%, SLT is the clear market leader in the fixed-line business. Nevertheless, competition has intensified with the introduction of fixed wireless services in 2005. In order to cope with this heightened competition, SLT has adopted a threepronged approach. It has diversified its lines of businesses and sources of revenue, continuously upgrades its technology and network, and has developed high standards of customer service. Mobitel, the fully-owned subsidiary of SLT, also faces intense competition, in addition to being vulnerable to the vagaries of consumer sentiment and market forces. Although the wireless telecommunications services market of Sri Lanka is expected to show strong growth, SLT's ability to capitalise on this development is limited by its weak market position. It only commands a share of about 16% in the modest-sized but growing wireless telecommunications market of about 2 million subscribers. Some strategies SLT might need to adopt in the future might be aggressive pricing policies and attractive promotional campaigns.

Mobitel was not fully transferred with the initial frequency allocated to provide GSM services. However, the GSM phase II roll out in the 900MHz spectrum, which is the correct bandwidth, will be completed by August 2006. This will enable Mobitel to improve its coverage more than two-fold from its current position. Such an improvement in coverage will provide Mobitel a definitive advantage in its drive to capitalise on the strong growth expected in Sri Lanka's mobile telecommunications services market.

Regulatory Risks
Not only with regard to licensing and competition, SLT's telecommunications business is subject to governmental regulation even with regard to its costs and arrangements pertaining to interconnection and tariffs. As such, any changes in governmental policy have the potential to affect the financial status and operational results of the Company. Any decision taken by the regulatory authorities to amend and/or revoke the Company's telecommunications licences could adversely affect the Company.

SLT, being the dominant fixed-line operator in Sri Lanka, is required to subject its tariff structures for the prior approval of the Telecommunications Regulatory Commission of Sri Lanka (TRC). However, the other fixed line operators who are in competition with SLT are not subject to this procedure. Their tariff structures could be set up and amended without notice to the TRC. SLT's tariffs also come under the purview of the Consumer Affairs Authority.

Currently, there is some uncertainty on SLT's fixed-line tariff as a result of a reversal by the Court of Appeal of a tariff revision that was implemented in September 2003. SLT has lodged an appeal, which will be heard by the Supreme Court in March 2006. Pending the hearing of the appeal, the tariff remains unchanged. It also remains unclear if SLT will receive a fund of the International Operators' Levy amounting to two-thirds of the levy for the development of its network in rural areas, pending these regulatory changes. Nevertheless in order to minimise the risk, SLT has recognised the entire levy in its accounts and has not accounted for any benefits that might accrue to the Company from the possible refunds.

SLT's continued profitability is threatened by the absence of a 'level playing field'. There might also be potentially adverse repercussions on SLT's profitability from possible external controls or influences on the Company's tariffs. At SLT, efficient systems and procedures are in place to ensure strict compliance with the standards laid down by the TRC. Steps have also being taken to develop the Company's capacity to work with the TRC, in order to optimise the regulatory framework.

Labour Relations
As industrial harmony is a much valued tenet at SLT, the senior management team of the Company strives always to maintain extremely good relations with its employees. It has continued to succeed in its endeavours over the years.

The privatisation process at SLT was completed with fair success. Among the benefits it has delivered to the employees are: better working conditions and facilities, better job realignment, better training and efforts at improving their self worth and personal development.

Almost the entire executive and non-executive cadre of the Company is unionised.

Reforms such as those pertaining to labour, privatisation of Stateowned utilities and civil service reforms have always been and socially sensitive and remain so today. In Sri Lanka, such reforms have prompted many public debates, protests and opposition from political groups and trade unions. Although so far SLT has not been embroiled in such debate and opposition, this remains a potential area of risk. Any labour unrest and resulting work disruptions could have an adverse impact on the Company.

Another risk pertaining to labour is SLT's heavy reliance on its skills base. The telecommunications industry is technologically driven and skilled staff are in great demand. With the expansion of services, SLT has a greater need for highly-skilled staff but may face insufficient supply in a rapidly-growing telecommunications market.

Disaster Recovery
SLT's businesses are dependent on their ability to transfer substantial volumes of data speedily and without interruption. Risk to the Company of any significant failure or interruption to such data transfer is significant. In order to mitigate these risks, measures such as comprehensive fire protection systems and other emergency response mechanisms are implemented.

Financial Risks
The high expected growth in the wireless market in Sri Lanka will ensure high investment needs for SLT. In particular, SLT's planned rollout of the network to cover the entire country will demand significant investment.

Exchange Rate Risk
The Group generates cash flows in foreign and local currency, and its main foreign currency exposures are long-term debt denominated in foreign currencies and import-related transactions.

In order to manage the exchange rate risk, SLT has adopted a currency hedging policy. This policy demands that any cash flows from international revenues be first used to service debts denominated in foreign currencies. At SLT, all foreign currency inflows are maintained in foreign currency accounts.

A sinking fund to be used for the bullet redemption of bonds and debentures was also created in order to manage the exchange rate risk of the Company.

Interest Rate Risk
In a volatile interest rate environment, high exposure to either long-term or short-term debt instruments is inadvisable. As such, Group debt is maintained in a mix of fixed and variable interest rate instruments. This is expected to mitigate the negative financial impact that could result due to the volatility of capital markets.

Liquidity Risk
This is the risk that the Company will not be able to meet its financial commitments when due without incurring unacceptable losses. In order to manage this risk, the Group employs regular planning and monitoring systems. Maintenance of sufficient cash is a top priority at SLT as is the preparation of regular cash flow projections in line with business movements.

Credit Risk
Credit risk to the Company is managed by taking initial customer deposits, pre-paid sales and by operating comprehensive systems to monitor SLT's debtors and recoveries.