The dangers of the Online Safety Bill

By Dhananath Fernando

Originally appeared on the Morning

The Online Safety Bill is scheduled to be taken up for debate at its second reading in Parliament on 23 and 24 January. Unfortunately, this bill is going to make our current economic situation a bit more difficult in the short run and as well as the long run.  

The Asia Internet Coalition (AIC), where tech platform giants such as Google, Meta, and Amazon are partners, twice brought up the danger this bill could pose to the digital economy.  

Economy is beyond just supply and demand of rupees and cents. Economies are mainly the ideas that solve a problem of fellow humans and an exchange of those products and services with scarcity of resources. 

Problem-solving for humans comes with the freedom to think and with freedom of speech and dissemination of information. All attempts to restrict our freedom of expression, speech, and dissemination of information will backfire on the country and the economy. 

Sadly, the Online Safety Bill seems to be doing just that.

Self-censorship kills ideas for prosperity 

The bill has left significant room for vagueness in many clauses and definitions. According to the proposed bill, the commission appointed by the Constitutional Council has the powers to determine whether some facts are true or false and take follow-up actions. 

One example to showcase the impractical nature of this approach is the case of the Government decision on cremation of Covid-infected bodies, claiming that viruses could leak into the waterbed and cause contamination. This decision was highly debated on social media platforms and even scientists were divided on the decision. 

So if someone complains based on the Online Safety Bill, how does the committee decide on what is true and what is untrue when even scientists are unsure? Later the Government withdrew its decision and changed its initial stance. What was perceived as truth at one point was proved to be wrong at another point. What could have been the outcome if the Online Safety Bill had been enacted by then and if legal proceedings had been taken forward for those who commented for and against cremation of Covid deaths?

Looking at lessons from history, Galileo was killed for bringing an alternative view of the perceived truth on the shelving of the solar system. This act in this form takes us back to the repression faced by Galileo. It is severely problematic when the arbiter of ‘truths’ of fringe politics can also hand out punishments.

Generally when there is uncertainty, for their own safety, people engage in self-censorship. Self-censorship restricts the flow of ideas and minimises the ability of the economy to solve the problem. 

Let’s imagine that the Online Safety Bill had been enacted before 2021. During that time many analysts and economists on all social media platforms warned the Central Bank that excessive money printing could lead to inflation. The Central Bank was of the view that there was no relationship between money printing and inflation. So if the Central Bank complained to the Online Safety Commision on the opinions on the matter, most of the economists would have been punished by the bill by the time inflation was hitting 72%.

If the Central Bank says inflation has no relationship to money supply, there would have been no other way the commission could establish what was true or what was false at that point of time. The other possibility is that most of the economists would have self-censored knowing the repercussions of the bill, which could have caused greater harm to society.

If this bill creates a culture of self-censorship, our ability to hold the State accountable, ability to innovate, and ability to create would be quenched, leading to a stagnant economy. 

Impact on SMEs

The business models of tech giants are very cost effective. They do not have offices in every country, nor staff to monitor all content. Most of that is done through algorithms. They regulate harmful content through technology (algorithms) and very strict community guidelines are adhered to.

Anyone can read how comprehensive the guidelines of these tech platforms are on safety and trust and how effective they are on responding to these platforms’ community guidelines. Tech firms have refined algorithms to an extent that not a single photo falling under nudity can be found as the algorithm restricts them automatically. In that sense the tech companies have done a fantastic job compared to what a government tries to do with a bill in a market-based system.

Platforms such as TikTok are not only concerned about human rights but also about human safety, where drone shots with a risk of accidents are eliminated due to very high community standards.

If the Online Safety Bill becomes too much of a burden for these tech companies, with a response time of 24 hours for inquiries by the commision as per the bill, they will tune their algorithms to be very strict, which will have an impact on SME businesses run on social media. Simply, the competitors can complain on certain pages featuring products with various claims and pose an unnecessary burden to SMEs. 

Our tourism industry, where we have a long-tail SME sector, especially uses these platforms for room reservations. The reviews coming in the form of discrimination will fall under this and the booking sites will also fall under that purview, so they are likely to react to the online safety regulation, which will have an impact on our dollar-earning tourism industry.

The AIC has already twice highlighted its displeasure in diplomatic language, claiming as follows in a statement: “The proposed legislation, in its present form, poses significant challenges that, if not addressed comprehensively, could undermine the potential growth of Sri Lanka’s digital economy.”

Wrong signals to markets 

The Online Safety Bill also provides wrong signals to the market, including the International Monetary Fund (IMF) and our creditors. The IMF has provided a governance diagnostic where many other pieces of legislation, including the SOE Holding Company Act and Procurement Law, are among the top 16 priorities. Sadly our Government has brought a bill on Online Safety Bill, for which no stakeholder group which assisted Sri Lanka during the economic crisis has shown any interest other than highlighting its problematic nature, which ultimately impacts economic growth. 

Since actions speak louder than words, this will provide the wrong messaging to our creditors, bilateral and multilateral partners, and investors that our Government’s priority is not the economic crisis.

From the point of view of the investor, this will also have a serious impact on attracting FDI and key players with the potential to transform our economy. For instance, one company which has shown interest in investing in Government shares of Sri Lanka Telecom is Jio, where a majority share is with Reliance Group in India. Meta, Google, Intel, and the Saudi Arabia Wealth Fund are a few other strategic partners and shareholders of Jio. Can we expect a tech company to provide a positive referral to its main shareholder in an investment decision when its own platforms are under risk through an Online Safety Bill in Sri Lanka?

This bill is beyond repair and just plastering over its shortcomings will not make it any better. If this goes through Parliament, the risks on freedom and signalling for investors will be quite negative. Importantly, in an environment where freedom does not prevail, economic growth and prosperity will fail drastically. The only solution left for this bill is to repeal it.

Can industry-specific ministers fix this issue?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

---

By Dhananath Fernando

The appointment of cabinet ministers and state ministers is still a topic at dinner tables, especially on the state ministerial portfolios. This is mostly because specific industries or fields have been provided for state ministers. There is general criticism surrounding ministers being appointed to micro sectors of the industries while the general expectation from a minister is to serve a broader mandate, and do justice to taxpayers’ money by formulating and implementing policies.

Many critics question the role a minister could play in a comparatively small industry where the designing, production, marketing, and distribution are mainly done by the micro-entrepreneurs themselves. For example, the state ministerial portfolio for Batik, Handloom Fabrics, and Local Apparel Products has been a topic of discussion since the appointments. Another state ministry that is being widely discussed is that of Cane, Brass, Clay Furniture, and Rural Industry Promotion.

The counterargument is that previous state minister portfolios were just token positions with no decision-making power. It is argued that in this case, ministers have been provided a specific role, scope, and focus, and people can directly hold them accountable for their industries and industry-related concerns. At the same time, a measurable key performance indicator (KPI) can be easily implemented and the respective and relevant institutions can be assigned to each minister. According to a recent TV interview by President’s Secretary Dr. P.B. Jayasundera, state ministers and their teams led by the ministry secretary have been given the decision-making power in that respective industry. According to Dr. Jayasundera, it is a scientific way of structuring and utilising taxpayer money without just appointing state ministers for the sake of doing so.

I believe there is truth to both arguments on the method of assigning the ministerial portfolio. The ground-level reality is that most of these assigned domestic industries are run by micro, small, and medium entrepreneurs (MSMEs) or businessmen who represent the private sector. It is important to remember that these small businesses are still part of the private sector and not the Government. The Government’s role is more to regulate some industries and facilitate the business processes because micro and small enterprises have industry-specific challenges as well as common challenges in running their daily operations. The minister’s role is to work with these sectors and assist them with reducing regulatory barriers for the sector to perform to its full potential.

Common challenges

According to the Advocata Institute’s report “Barriers to Micro and Small Enterprises” in Sri Lanka, one main bottleneck across all industries is access to finance. Access to finance has multiple dimensions extending to the banking and financing sector, but it starts from the fundamental point of business registration.

Over the years, we have underestimated the potential of micro and small enterprises (leaving the medium enterprises aside). We have provided step-motherly treatment to the MSME industry to the extent of not even focusing on their ability to register their businesses.

According to the Advocata report, sole proprietorships comprise about 61% of total businesses in Sri Lanka and provide 27% of national employment. Interestingly, about 25% of the establishments are run by women and contribution from women-led enterprises increases up to 35% in rural areas.

While the whole country focuses on the big picture of revamping the entire domestic and specialised sectors such as batik, local apparels, handlooms, pottery, rattan, etc., our research has revealed that about 45% of micro-enterprises and 10% of small enterprises have not even obtained a basic business registration. The meaning of not having a business registration is that they do not have access to finance or any Government-sponsored programme or project.

Poor enthusiasm for business registration is mainly a result of the horrendous process of registering a proprietorship or partnership. A proprietorship or a partnership can be registered under the Business Names Ordinance Act No. 7 of 1987, which is under the authority of each provincial council and provides room for each provincial council to run their own procedure on registration of a proprietorship or partnership.

So even though a specific minister may have been given scope and specific task of revamping micro, small, and local enterprises, the minister may still face challenges due to common regulatory barriers starting from the business registration process, which is the entry ticket, to finance and markets, and even for relief schemes during Covid-19 brought in by the Government.

The good news is the Government and Department of Census and Statistics (DCS) have initiated an e- registry platform for registering micro and small enterprises. According to Advocata statistics, 97% of micro-businesses and 85% of small businesses are registered as sole proprietorships. This e-registration system is indeed a move in the right direction. Then, the authorities must also ensure that the e-registration process will be simple and not a replication where the same documents are just submitted online. A system of just submitting documents such as deeds, rent agreements, etc. online would add an additional burden for budding entrepreneurs; to scan and submit documents online in addition to the time they spend getting grama sevaka certificates, rent agreements, and a list of other documentation. Advocata has recommended the New Zealand model and a South Korean model where there is a three-step business registration process, while in Sri Lanka the current process has seven steps.

Daily survivors vs. entrepreneurs

Having a simplified business registration process is the first step of addressing the problem of access to finance and providing government assistance and accessing markets. Having a simple business registration process will ensure an effective tax collection system where businesses can grow and expand.

One other reason for the poor enthusiasm pertaining to registering a business is in the fear of paying taxes. As a result, most of these micro-businesses limit themselves to being “daily survivors” as opposed to them becoming real micro and small “entrepreneurs’’.

There is a significant difference between someone who just runs a small business for daily survival and someone who takes a risk in the form of money, property, time, or any form for entrepreneurship.

What Sri Lanka requires is for micro and small entrepreneurs to migrate from “daily survivors” to micro-entrepreneurs. The Government can facilitate the process by having a conducive environment for businesses, and the new state ministers can take this lead.

Industry-specific challenges

While the micro and small enterprises have been oppressed at the registration level, at the same time, there are industry-specific regulatory issues.

Most of these industries require a license for their sourcing and a license or a government authorisation that has to be taken at each touchpoint. In most industries, sourcing of raw material and transportation of raw materials both require licences. Some of the regulations are placed with good intentions, but most of it has ended up with extra bureaucracy burdening the industry and opening doors to corruption. All licences have just ended up being another hurdle for these entrepreneurs to cross. Additionally, these licences are also an opportunity for regulatory officials to earn extra money in the way of corruption and by providing preferential treatment to the affluent and higher classes of business that have networked with local political power centres.

The new industry-specific ministers’ primary mandate when developing these industries has to be a facilitatory role and not an interventionist role. The prosperity of micro and small enterprises will depend on this. The new ministers have to ensure that they do not apply the “brakes” by introducing more regulatory barriers; rather, they should remove those barriers in each sector for sustainable growth.

At the same time, they should not push the accelerator in the wrong direction to create market distortions which will impact other more productive sectors while bureaucratic powers work only thinking about their sector at the expense of others.

Sri Lankans are more than capable of competing at the global level and “daily surviving micro and small businesses” will jump to the seat of “micro and small entrepreneurs” if we facilitate and provide a more simple regulatory scheme.

We should never underestimate the common man’s skill and the ability of micro and small enterprises, which at present are already contributing more than 30% of our national employment.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The myth: Self-sufficiency guarantees food security

Covered in the Daily Mirror, Ada derana and Colombo Telegraph

By Sathya Karunarathne

The novel coronavirus which drove cities and countries into lockdown has now sparked anxiety over a possible food crisis given the increase in export and import bans and disruption of global food supply chains. 

This uncertainty has left the Sri Lankan government to question whether these disruptions would affect food security in the near future and if ensuring self-sufficiency is the absolute and undisputed solution to this conundrum. In this attempt to achieve self-sufficiency in food the government has resorted to import substitution to strengthen domestic production.

Keeping in line with these protectionist policies the government has indefinitely extended import controls that were initially introduced on the 22nd of May for three months “to be in effect till further notice”. Import controls in this degree and nature have not been seen since the 1970s and this has led policymakers and public debate to be heavily inclined towards the possibility of revisiting and reconsidering the socialist policies adopted by the Bandaranaike government.

How credible is the popular narrative?

The renewed vigor attached to closed economic policies and food protectionism through public discourse is perhaps understandable. Amidst a foreign exchange crisis in April, the government imposed import restrictions on 156 categories of products including essential food items such as rice, flour, and sugar. 

Although import restrictions on most of the essential food items have been removed, temporary restrictions have been extended indefinitely on grains, stainless steel tankers and bowsers needed for the distribution of milk and blast freezers needed for preserving poultry meat. While these restrictions have been put in place with the motive of protecting the depreciating rupee it carries a massive potential to further harm the domestic distribution and storage of food which is already in a fragile state.  

Moreover, the latest Climate and Food Security Monitoring bulletin of WFP (United Nations World Food Programme) raises concerns of food security among vulnerable parts in Sri Lanka as a result of the impact and control response of the COVID-19 outbreak. The report further elaborated that weather-related shocks combined with poor hygienic and sanitation conditions could result in an increase of acute malnutrition in the island.  

In response to these growing anxieties in the wake of the COVID 19 pandemic, the government put in place programs and policies to ensure self-sufficiency in food within the island. On the 28th of May, the government approved the importation of 2,500 dairy cows from Australia. The motive behind this decision as stated by the cabinet spokesman is to ensure Sri Lanka’s self-sufficiency in milk by 2025, even though this measure failed just over a year ago with the death of 500 imported heifers that were ill-suited to Sri Lanka’s climate.

Furthermore, restrictions on maize imports that were imposed with the intention of strengthening domestic production has resulted in a lack of maize as feed for chicken. Available alternative feed is not as nutritious for poultry and has affected the quality and production of eggs. Egg production has fallen from 200-300 eggs per year from chicken to 200-240 eggs per year.  With the fall of production, prices have picked up.

On the 3rd of July, Senaka Samarasinghe, Managing Director of Harischandra Mills PLC stated to Ada Derana that import restrictions imposed on agricultural products such as ulundu, black-eyed pea, big onion, red onion, green gram, peanut, corn, and dried chili have affected manufacturers adversely resulting in a massive drop of production. 

These import restrictions have severely affected manufacturers who rely on ulundu as a raw material to produce products such as papadam, flour, thosai, wadai and dhal. Given the lack of raw materials, Harischandra Mills PLC has had to reduce their production by a staggering 90 per cent. Sri Lanka’s domestic ulundu requirement per year is about 12,000 metric tonnes (mt). The production of ulundu domestically has reduced to 5000 mt due to the drought. External factors that affect the domestic supply of food such as these calls for imports to fill the output gap. 

These import restrictions have adversely affected Sri Lanka’s already fragile export sector as well, as manufacturers have failed to meet the demand of international markets for products such as thosai mix. Harischandra PLC exports 15 per cent of its thosai mix to markets in Europe, North America, Asia, and Australia. These protectionist policies that aim to protect the domestic producer and to strengthen their production, have resulted in achieving the very opposite of its intentions as small scale producers of ulundu have opted to close down resulting in reduced shop sales. Moreover, the ban has affected the production of kurakkan flour with producers resorting to completely stopping or reducing production. This fibre-rich alternative to wheat flour is widely consumed by diabetic patients and is an important part of their medically recommended diet. 

It is no doubt that the pandemic has brought to light the extreme vulnerability of Sri Lanka’s domestic food supply to external shocks. These policies have a demonstrated history of achieving quite the opposite of their intentions. The ’70s “produce or perish” economy is an excruciating reminder of this fact as bug-infested flour, hardly edible bread, and stone infiltrated rice was every Sri Lankan’s staple. Therefore the popular narrative that promotes restrictive policies has zero credibility as it will only tighten the already constrained food supply by repeating the mistakes of the past. Long term policy solutions to the crisis, therefore,  should focus on the sustainability and practicality of isolating the island from global trade and food supply chains and producing the bulk of our dietary needs domestically.

Sustainable approach to attaining food security: Lessons from Singapore

The Global Food Security Index (GFSI)  ranks countries’ food security based on food affordability, availability,  quality as well as an adjustment for natural resources and resilience.  Singapore was able to secure the title as the most food-secure nation for two consecutive years, with a high rank in all three core pillars. 

Singapore’s success is attributed to the government’s continued commitment to stay connected to global food supply chains and to strengthen local production. Singapore diversified its food import sources from 140 countries in 2004 to more than 170 countries and regions in 2019  making the country’s food supply chain more resilient and has set a “30 by 30” goal to produce 30 per cent of the country’s nutritional needs by 2030. Diversifying food imports and making the country’s food supply chain more resilient are two sustainable policy solutions through which Sri Lanka can ensure long term food security. 

The Food and Agriculture Association of the United Nations (FAO) states that the crisis we are facing is a global problem that requires a global response.  This calls for governments to collaborate to avoid further disruptions to food supply chains. Import diversification in the context of food security refers to increasing the number of countries from which we import food. 
This ensures an undisrupted inflow of food supply into the country ensuring both physical availability and choice of food in crisis situations. Import diversification is effective even in ordinary situations as loss in the harvest of one exporting country will not threaten the availability or supply of that particular product/produce for the importing country. Singapore imports over 90 per cent of their consumption needs with only 13 per cent of vegetables and 9 per cent of fish being produced locally.  

Moreover, in order to avoid disruptions to the supply chain that may occur by depending on a single major import supplier Singapore has resorted to promoting frozen and powdered product alternatives. Sri Lanka cannot resort to these options by restricting the importation of freezers, tankers, and bowsers that are necessary for such alternatives.

The world is highly globalized and so are food supply chains. Isolating from this interconnected food supply chain will only exacerbate Sri Lanka’s food insecurity. This was evident in the 2007-2008 global food price crisis when export restrictions put in place by exporting countries to increase food security domestically led to serious disturbance in the world food market resulting in price spikes and increased price volatility. In a more local context, this was evident when the government banned the importation of turmeric along with other non-essential goods which led to a scarcity and the available being sold for an exorbitant price ranging from Rs 300-350/- per 100 g despite a maximum retail price of Rs.75 per 100 g. 

Eradicating weaknesses and inefficiencies in the domestic food supply chain is essential to ensuring food security within a country. This is referred to as building a resilient food system domestically. The Food and Agriculture Organisation of the United Nations (FAO) defines food security as follows: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences ”.  The abrupt lockdown and curfew COVID-19 brought revealed that our domestic food supply chain does not offer economic or physical access to nutritious food. This was painfully apparent when people desperate to eat set off a stampede during a cash handout held in celebration of Eid, leaving eight injured and three killed. 

This is an obvious cautionary alarm to the government to fix the inefficiencies of the domestic food system and to enhance emergency food assistance to the vulnerable communities, who most often end up bearing the brunt of such inefficiencies. Every crisis presents an opportunity to focus on rebuilding through a novel lens. This presents an opportunity for Sri Lanka to rethink its approach to food security and to branch out our policy solutions to more sustainable and timely options.

Solution 

This crisis has proved that import restrictions and heavy gravitation towards self-sufficiency cannot solve the myriad of issues plaguing the country’s food supply system. Closed economic policies to achieve self-sufficiency, do not guarantee all citizen’s economic and physical access to nutritious food nor do they guarantee a resilient domestic food supply chain. 

Investing in cold storages and strengthened logistics networks, shifting towards climate-smart agriculture, ensuring the supply of raw materials and agricultural equipment by making the eligibility verification process for tax exemptions less complicated and improving ease of doing business, removing import restrictions on veterinary medicine, chemical fertilizer, and other inputs,  relaxing restrictions on the cultivation of crops, strengthening emergency food assistance to vulnerable communities with linkages to local and provincial governments can be stated as policy priorities that can address the inefficiencies of the domestic food supply chain.

The way forward to ensuring the island’s food security is in improving internal inefficiencies while recognizing the extreme and timely importance of staying connected to global food supply chains through relaxing import restrictions and multiplying our food and raw material import sources. 

Sathya Karunarathne is a Research Executive at the Advocata Institute and can be contacted at sathya@advocata.org or @SathyaKarunara1 on twitter. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Import controls - out of control?

Covered in the Colombo Telegraph

By Erandi de Silva

As the COVID-19 virus forced much of the world into lockdown, the scale of interdependence and reliance on trade across nations was apparent by the global urgency to re-open economies as soon as possible. The shortage of goods and loss of income experienced due to the disruption of supply chains helped some nations realize that a country typically stands to lose more than it may gain by being shut out from the global market. Sri Lanka continually increasing import controls and locking itself out of trading networks then begs the question, why are we punishing ourselves? 

A common justification in people’s minds may be that difficult times call for difficult measures; curbing imports may seem inevitable amidst the current health crisis caused by a contagious virus and the financial threat of a depreciating currency. However, as elections are approaching, it appears these decisions are primarily driven by political and not economic motives. Given that Sri Lanka’s exchange rate became a key campaign topic in the last election, the current rise in import controls seems to be an attempt at artificially maintaining a “strong” currency prior to elections after the excessive money-printing in March this year. 

Furthermore, such decisions should also be recognised as far more than precautionary policies due to the pandemic, and rather, a projection of the national tendency to revert to protectionism. The ban placed on maize imports in mid-January (prior to when the first case of coronavirus was reported in Sri Lanka) indicates this predisposition. Sri Lanka exhibits a recurrent desire - often fueled by nationalistic rhetoric - to boost domestic production or even become self-sufficient across various sectors and industries, sometimes in complete ignorance of comparative advantage and practicalities. This is evidenced in the aftermath of importing 5,000 milk cows in order to boost local dairy production in 2017 which led to many farmers accruing debt whilst over 400 cows died due to poor living conditions. Not only did it result in Sri Lanka still importing; this method was more expensive because now money had to be spent to feed and care for the cows in the absence of their natural habitat. Despite this result, the new Government again approved a proposal to import 2,500 cattle from Australia on the 1st of June this year in the hope of curbing milk product imports to Sri Lanka.

In the case of import controls and such protectionist actions, problems tend to manifest regardless of the intentions behind the implementation of such policies. For example, the maize embargo which was imposed with the intent of accelerating domestic production and protecting local farmers has led to several adversities - now including a shortage of supply. It is important to note that the brunt of the outcome was faced by a vulnerable stakeholder that the Government aims to protect: small-scale poultry farmers. As the main consumers of maize (because it is needed for chicken feed), poultry farmers were initially forced to pay higher prices to obtain maize and were at the mercy of Sri Lanka’s oligopoly of grain collectors. The problem was exacerbated as domestic stocks of maize withered away and suppliers could not import to fill the deficit. According to the Export Development Board, Sri Lanka imported 102,461.175 metric tonnes of maize in 2019 despite domestic production for the year being at 245,647 metric tonnes. This clearly reflects that the local demand for maize is far greater than the domestic capacity for maize production. Another example of unintended consequences can be extracted from the confectionery industry which recently expressed concern regarding the inability to access imported raw materials that are necessary for cost-effective local production. The 340% special commodity levy on block fat and margarine imports which was introduced this month has led to significant strain and job-insecurity within the industry. 

The new administration recently reiterated their pledge made under the ‘Saubhagya Dekma’ policy statement of turning Sri Lanka into a “people-centric production economy”. Despite his claim that limiting imports has “paved the way” for a production economy, it is necessary to understand that even most local businesses require imported materials in order to produce. The latest statistics from the World Bank indicate that 38.19% of our total merchandise imports are intermediate goods that are used locally as inputs for production. Regardless of our ambitions, Sri Lanka’s economy requires imports for growth. Many of our consumables are imported and local businesses, including key exporters such as the textile industry, use imported raw materials. Curbing imports will impede the ability of local businesses to cost-effectively grow.

If the Government fails to readjust its policy on import controls and continues down the path of increasing protectionism post-COVID-19, Sri Lanka may continue to face economic instability and revenue loss within the sectors that are affected by these constraints. Ultimately, despite the rhetoric and propaganda of “saving local businesses” and creating a brand of “made in Sri Lanka” that enamours the public during political campaigns, it is often the most vulnerable within local businesses that stand to lose the most from the enactment of protectionist policies. As poultry farmers struggle to maintain their income and employees within the confectionery industry remain anxious about the status of their jobs, the question remains: why are we punishing ourselves?

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Reform for our micro and small businesses

Covered in the Daily FT and Daily Mirror

By Aneetha Warusavitarana

Last Saturday was the UN World Micro, Small, and Medium Enterprises Day, and in light of that, focus should be given to Sri Lanka’s small businesses and the challenges they face. 

Sri Lankan micro and small enterprises form a substantial part of our economy. Sole proprietorships account for 63.1% of all businesses in the country, and account for 27.1% of national employment (Department of Census and Statistics). However, they face a myriad of challenges and this focus on improving their business environment is welcome. As highlighted in a study conducted by the Advocata Institute on the regulatory barriers faced by micro and small enterprises, the three main challenges faced are access to finance, labour, and rent.

In addition, 45% of micro-enterprises and 10% of small enterprises remain unregistered, exacerbating these problems. Unregistered businesses are excluded from formal sources of finance, business networks, and do not qualify for Government assistance. 

In early March this year, the Cabinet approved the establishment of ‘one-stop shops’ for micro and small businesses in Sri Lanka. This project is now moving forward, with the Government working with the EU to set up these ‘one-stop shops’ in each district; with the aim of streamlining the registration process and providing assistance on issues of access to technology, quality control and access to markets. However, what else is there to be done? 

The problem of registration

Registering a business in Sri Lanka has always been a long, tedious process; one that discouraged businesses and negatively impacted our ease of doing business ranking. However, in 2018, Sri Lanka was witness to some welcome reform with the launch of ‘E-RoC portal’, which streamlined registration, and brought the process completely online. This success in reform was reflected in the country’s ranking on the ease of doing business ranking and was hailed as a reform success. 

However, the E-RoC portal is only applicable to the registration of private companies. 

In Sri Lanka, the registration of private companies is governed by the Companies Act No 07 of 2007, while the registration of sole proprietorships and partnerships are governed by Business Names Ordinance No 06 of 1918. As a result, the E-RoC could not be broadened to include the sole proprietors and partnerships. 

97% of micro-businesses in Sri Lanka and 85% of small businesses have registered their business as sole proprietorships, with only 3% of the businesses surveyed having registered themselves as a partnership, and 2% registering themselves as a Private Limited Company.4 In other words, for the vast majority of micro and small businesses in Sri Lanka, their registration process is long, tedious and unnecessarily convoluted.

How does business registration work for sole proprietors and partnerships?

The process of registration is implemented by the Divisional Secretariats. At best, the country currently has nine different regulatory processes for the registration of sole proprietors and partnerships. The process of registering a sole proprietorship or a partnership in Sri Lanka is a time consuming, complicated task, with the main steps detailed below: 

1. Visit the Divisional Secretariat and collect form and instructions

2. Fill out the application

3. Provide documentation

   • Proof of ownership of business premises

   • Original Deed and notarised copy or

   • Original Rent agreement and notarised copy, or

   • No Objection letter from the owner of the premises

   • NIC copy

   • Tax assessment notification for the premises

   • Copy of the partnership business agreement

   4. Visit the Grama Niladhari and get the application and attached documents approved

   5. Receive additional approvals depending on the business type e.g.: PHI approval

   6. Hand over completed application to the Divisional Secretariat.

A majority of provinces do not have the application for business registration or the instructions sheet available for download from the Divisional Secretariat or Provincial Council website, and the instruction form is not always available in all three languages. 

This is in comparison to much simpler processes that have become standard internationally, and have also been replicated in Sri Lanka, as was seen with the E-RoC reform for private companies. 

Address the problem at hand

According to the island-wide survey conducted by the Advocata Institute, over 80% of respondents found the Grama Niladhari and the Divisional Secretariat to be an effective touch point. This would indicate that improving service at this point may not be an immediate requirement. Instead, focus should be placed on reforming the registration process for micro and small enterprises. 

Sri Lanka’s micro and small enterprises will have faced significant economic fallout during the curfew period. The Government has recognised this and responded with policy action like the debt moratorium to help ease some financial pressure. However, this is unlikely to be sufficient. These policies would only apply to entities that have registered their business and would leave the segment of unregistered businesses without support. It is vital that the registration process is streamlined, making it easier for these businesses to enter the formal sector and reap the benefits for formal sources of finance, and better access to markets that come with formalisation. There is a window for reform that exists, and we hope that the Government takes advantage of this to bring about some much-needed change. 

Empowering Our SMEs

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

---

By Sajani Ramanayake

In recent months, there has been extensive debate around the topic of making Sri Lanka a hub for technology and innovation. Across the globe, small and medium enterprises (SMEs), particularly start-ups, have been proven as critical to fostering a culture of disruption and innovation. In Sri Lanka, SMEs are already an integral part of the economy and hold significant potential for achieving our economic vision. Despite this, many of these businesses continue to face debilitating obstacles to growth due to an unfriendly regulatory environment.

Why are SMEs important?

Contributing to 45% of domestic employment and 52% of Sri Lanka’s gross domestic product (GDP), the role SMEs play in the Sri Lankan economy should not be underestimated. While these businesses do form the backbone of the economy, there is potential for growth that should be explored.

The National Export Strategy of Sri Lanka (2018-2022) acknowledges the need to “strengthen Sri Lankan exporters’ market entry capacities” and support “the integration of SMEs from across Sri Lanka into the export value chain”, as this would help increase the overall generation of income in the country. Currently, Sri Lanka lags behind other Asian countries in terms of export figures, and the expansion of SMEs is a good way to facilitate much-needed growth. If SMEs are provided with adequate resources and opportunity, they can plug into global value chains, capitalise on international markets, and drive innovation.

Currently, Sri Lanka’s export portfolio is relatively limited, with a small amount of companies accounting for a majority of export revenue, with SMEs providing a very minor contribution. This lack of export diversification in Sri Lanka’s portfolio thereby makes it particularly vulnerable to the external economic environment and reduces national economic stability. Strengthening SMEs and their access to the export market could thereby present a viable solution to reducing these risks, while improving export earnings, diversifying our export portfolio, and transitioning Sri Lanka into a more complex economy.

What is stopping SMEs from growing?

A lack of finance has been identified as a key constraint by 59% of SMEs in Sri Lanka. SMEs lack the collateral that many lending organisations insist on and often cannot afford to pay the high interest rates charged on loans. Unavailability of accounts and financial information due to the inability to maintain proper accounting records and lack of know-how on business plan creation, also makes it difficult for SMEs to be eligible for loans.

Another problem that SMEs face is the sheer number of regulatory barriers. The clearing of imports and exports through customs as well as high credit periods can be challenging to small businesses. Taxes on imported raw material and capital goods also increase costs and reduce profits. There are also many licenses and permits that need to be obtained before obtaining state lands for business purposes, such as clearances from the Central Environmental Authority, Forest Department, and Department of Archaeology, depending on the nature of the business. This makes obtaining land difficult for SMEs, and deters potential entrepreneurs.

The lack of information and guidance for entrepreneurs about how to set up and expand their businesses is also a major hurdle. In a study conducted by the Ministry of Industry and Commerce, in conjunction with Ernst & Young and GiZ, about the institutional and regulatory framework relating to the SME sector in Sri Lanka, SMEs expressed a lack of understanding about potential export markets and opportunities, a lack of clarity on the process to obtain grants and lease agreements for state-owned lands for business purposes, and low awareness on applicable taxes and the benefits of registering for taxes.

What is being done to help SMEs?

One initiative that has recently been put in place is the establishment of “Empower” by the Colombo Stock Exchange (CSE) and Securities and Exchange Commission of Sri Lanka (SEC). Empower is a board dedicated to attracting SMEs to the CSE and seeks to improve access to finance for SMEs while also providing them with the opportunity to build credibility through the disclosure of information and by making governance standards more balanced. This not only helps attract investors, but also helps improve business visibility for the SME. The board allows SMEs to sell equity in order to raise capital – a major obstacle to growth for a large number of SMEs – essentially functioning as a miniature stock market for these enterprises. Listed companies receive guidance both during and after the listing process, and have access to one-on-one meetings, awareness sessions, and public consultations.

There are also other initiatives like export credit facilities provided by several banks seeking to ease the burden of pre and post-shipment financing, the Enterprise Sri Lanka credit programme which offers a range of loan schemes to SMEs, and workshops carried out by private sector companies such as Microsoft to help address a myriad of barriers faced by these businesses. Despite these initiatives, which are a positive step in the right direction, more needs to be done to help Sri Lanka cultivate a holistic ecosystem for SME growth.

One way to do this is by improving infrastructure facilities such as roads and highways to improve connectivity. This would assist in reducing regional differences in the setting up and operation of SMEs, as people and capital become more mobile. Sri Lanka also needs to streamline its regulatory mechanisms if it wants to help SMEs reach their full potential. Currently, there are at least 43 different institutions affiliated with SME governance in Sri Lanka, resulting in a climate of fragmented governance and poor information. Other potential solutions could include the creation of a dedicated export-import bank to ease access to finance and the establishment of an advisory board comprising exporters, academic experts, bankers, and professionals to enhance the ability of SMEs to formulate strategies and products that meet client expectations and emerging market needs.

If Sri Lanka wants to improve economic growth in the country, it is crucial that concrete strategies to improve productivity and increase export volumes are implemented. If Sri Lanka is to remain competitive on the world stage, SME growth is crucial.

---