Are we getting the Port City Right?

Originally appeared on The Morning, Daily News, Lanka Business, Daily FT

By H. Dabarera and K.D. Vimanga

The Supreme Court determination on the Colombo Port City Economic Commission Bill will be announced by the Speaker to Parliament today (18) and the Bill will be debated in Parliament tomorrow (19) and Thursday (20).

Over the last few weeks, Sri Lankans have contemplated if the proposed Colombo Port City is the messiah that will rescue the country’s economy or whether it is another Trojan Horse that will throw firewood into the already smouldering regional geopolitical furnace. 

The Port City as a model has the potential to be a driver of growth. For that, it must be governed well within a globally accepted, transparent and accountable regulatory framework. The project can bring in much needed foreign investment and kickstart growth especially at a time when the state of public finance is weak with a looming risk of default of debt. 

The major part of the investment for the Colombo Port City is already made, hence there’s no option other than making use of it and making it work. However, it must be done in a manner that does not compromise the best interests of Sri Lanka and our regional partners. 

The proposed bill aspires to have a financial centre within the proposed “special economic zone” in the likes of financial centres such as Singapore, London and New York. Then it is crucial that such a centre maintains a separate legal and regulatory framework that is unhindered by the delays and loopholes in the local court system and is established in accordance with international norms and practices. If implemented correctly, a financial centre can open up opportunities in investment banking, insurance, off-shore financial services, hedge funds, institutional investors, clearing houses, etc. A financial centre combined with international living standards and financing options can also be attractive for tech startups especially those aspiring to operate in the South Asian region. This creates opportunities for ambitious Sri Lankans for jobs they have to now go overseas. 

However, this is a process that is protracted over a longer period of time and is dependent on the confidence and trust that the project invokes for investors. The key to building trust and confidence is dependent on two main factors. One, having a sound financial regulatory system. Two, having global recognition and acceptance for the governing law. As a matter of fact, most financial centres resort to a framework based on English Common Law. 

Challenges 

The comparative advantage Sri Lanka has compared to regional financial centre’s such as Dubai, Mauritius, Singapore, Hong Kong, etc. is limited in its strategic location, hence attracting investors to bypass established financial centres will take significant effort. The comparative advantage Sri Lanka offers must be unique to attract the global investor! 

The island’s geographic proximity to the sub-continent and the present geopolitical landscape of securing friends and off-shore assets by the regional super powers makes a compelling case for many to develop the Colombo Port City as a regional hub to manage money from the heavy rollers in the region. 

However, becoming such a magnet for investment can only be done by building bridges with our regional partners. But the question is, is that simply enough? One might argue yes, as Sri Lanka’s economy is only a shade above $ 80 billion. However, the question arises if the global financial elite such as HSBC, Deutsche Bank, Citibank, Bank of China, IOB, JP Morgan etc, will enter Colombo Port City to do business. 

Is providing tax concessions simply going to bring in these reputed banks? Observing the behaviour of these banks simply illustrate that a vast majority of these banks make big investment decisions such as opening onshore operations by assessing a whole range of factors including the regulatory environment, especially in the case of emerging markets. 

So, is the proposed financial regulatory arrangement sufficient? At present the act vests power onto the proposed commission to regulate and monitor and steer banking operations within the area of the Colombo Port City with the concurrence of the identified national bodies such as the Minister of Finance and the Monetary Board. Therefore, the bill lacks a regulatory framework conforms with international best practices set out by institutions such as the Basel Committee on Banking Supervision and the Financial Action Task Force (FATF). This is done in order to facilitate such capital flows due to the serious concerns on money laundering. So, it is vital that this issue of a lack of a supervised financial regulatory system is addressed, if the Port City is to be operated as a productive financial centre. 

A second serious drawback of the drafted bill is the lack of an accepted global recognised governing framework such as English Law. If we are going to benchmark ourselves with established financial centres such as Singapore and Dubai, the said financial centre must be framed around English Common Law. The rationale for this stems from the fact that, English Common Law underpins the legal systems of the world’s four top international financial centres – London, Hong Kong and Singapore. This is further exemplified by how the Dubai financial centre functions as an independent jurisdiction governed by an English Common Law framework which is distinct from the rest of the UAE. Such a framework will bring in operational and cross jurisdictional mobility. This is because the global financial sector already functions on an English Common Law dominated platform. Moving to complaint jurisdiction with the same legal norms is the standard best practice. 

In fact, Sri Lanka ranks poorly in the World Bank’s Doing Business Indicator (99 out of 190 countries), due to the country’s fledgling legal system related issues and has fallen behind regional peers such as Nepal and India. 

So to attract the global banking elite such a framework is preferable and will not only open the core financial sectors such as banking, securities and derivatives, but also related sectors such as insurance, shipping, international trade, commodities and logistics. 

The legal framework for settlement of disputes 

For resolution of disputes the Commission is expected to establish an “International Commercial Dispute Resolution Centre.” Any dispute that arises within the Port City between the Commission and other entities within Port City shall be resolved by way of arbitration. Further, all agreements made by every authorised person with the Commission should have a provision on mandatory reference to arbitration for any dispute that arises within Port City. The International Arbitration Centre shall be the sole authority to hear all such disputes within the Port City. 

However, with regards to disputes that authorised persons within Port City can face over business activities carried out with other entities from all over the world, they will have the discretion to resort to any form of conflict resolution; litigation or any form of Alternative Dispute Resolution (ADR) mechanism in any jurisdiction of the world. Hence, the reputation of our International Arbitration Centre will matter immensely. Especially if we are to ensure that these disputes can even be heard within the Port City in the form of ADR. This will bring in much needed business to the arbitration centre while reducing the cost to the investors within the Port City as other centres such as London, New York, Singapore, Hong Kong, Dubai, etc. will be a costlier option than Colombo. 

International Arbitration Centres in Singapore and Hong Kong have gained worldwide recognition as leading arbitration hubs. They have made a significant contribution to the economic growth of these countries and helped them attract international business, trade and FDI. Thus, if strategically utilised, an international arbitration centre can be complementary to the growth of international business within the country. However, in order to ensure such results, it is essential that the International Arbitration Centre has in place a proper set of rules and principles to ensure swift resolution of disputes and ease through predictability and consistency to the business community. 

The current International Arbitration Centre in Sri Lanka, despite being based upon the UNCITRAL model law of Arbitration, has ultimately failed in winning over the confidence of the public and investors due to the arbitration proceedings dragging too long (as long as three years in certain instances). In the world of finance, time is money as money never sleeps. So special emphasis must be placed on maximising efficiency within the arbitration centre. Additionally, constant political instability in the country and the failure of the judiciary to uphold rule of law has also acted as hindrances to propel Sri Lanka as a global hub for International Arbitration. 

Drawing from these failures, it is evident that if the Port City is to become like Singapore or Hong Kong as an International Arbitration Centre it needs to introduce sound principles that are able to win over the confidence of the business community. 

A case for legal neutrality and jurisdictional independence 

It is also important for the International Arbitration Centre at the Colombo Port City to establish legal neutrality in the eyes of international stakeholders. Legal neutrality is of utmost importance for a financial centre as impartiality is key to attract investors and reputed financial institutions. Hence, ‘trust’ in resolving disputes impartially and transparently will be a deal maker for the Colombo Port City to become a success. Especially as it will be competing with financial centres in the region, of the likes of Dubai and Singapore who enjoy reputational synergies due to the merits of maintaining neutrality and also efficiency. This further makes a serious case for the Colombo Port City to be an independent jurisdiction within an English Common Law framework. 

An International Arbitration Centre, manned by local expertise may not deliver the credibility investors seek from a virgin financial zone that has to compete with established facilities that operate with a proven track record on efficiency, transparency and infrastructure. Hence, the International Arbitration Centre can be opened to accommodate foreign professionals with a proven track in arbitration. The addition of such provisions to the existing Bill can make the International Arbitration Centre at the Colombo Port City attractive and marketable to become an alternative financial centre for the South Asian region. Further the inclusion of English Common Law which the international financial markets are very well versed in can bring in significant benefits when functioning as a financial centre. If this fundamental issue is not addressed the Colombo Port City will yet again be a case of missing the bus yet again. 

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.

Sri Lanka state fails in the core business: administration of justice

Originally appeared on the Economy Next

By Prof. Rohan Samarajiva

In a previous column I stated that “no political or economic theorist would argue that the state should not be engaged in the provision of law and order. . . even extreme libertarians would see a role for the state in law and order.”

Sri Lanka presents a façade of a functioning legal system. Justices and judges get appointed; ceremonial sittings are held. Funds from World Bank loans are expended; buildings are constructed. Lawyers walk around briskly in court premises; many of them live well.

But it is rare to see a modern state fail so badly in this core function.

Evidence of failure

The President’s Counsel currently serving as Minister of Justice presented the evidence in a speech to the 47th Annual Convocation of the Bar Association of Sri Lanka:

– the average time to enforce a contract in Sri Lanka is 1,318 days

– We have been ranked 161 out of 189 countries for the enforcement of contracts

– Our legal system is ranked 5th out of 8 in South Asia.

– Land, Partition and Testamentary cases on average take a generation to be settled.

– A criminal trial takes on average 9½ years to conclude in the High Court.

– A criminal matter on average will take a year to be fixed for appeal and 3-4 years for the said appeal to be completed.

But this is not all. From 1978, we have had justiciable fundamental rights. Fundamental is defined as “forming a necessary base or core; of central importance.” Therefore, one would expect fundamental rights cases to be given higher priority than the cases listed above.

But that is not the case. It took the Supreme Court until 2021 February to issue a decision on a fundamental rights case, Kurukulasuriya v Sri Lanka Rupavahini Corporation (SC FR Application No. 556/2008 & SC FR Application No. 557/2008), notwithstanding the unequivocal language of Article 126(5) of the Constitution: “The Supreme Court shall hear and finally dispose of any petition or reference under this Article within two months of the filing of such petition . . ..” Instead of two months, it took 145 months.

It is said that justice delayed is justice denied. Can it be said that justiciable fundamental rights exist in Sri Lanka?

Then let us look beyond law’s delays, at egregious injustice. At qualitatively bad decisions. We had a Chief Justice who publicly admitted that he absolved the current Prime Minister in the Helping Hambantota case on political grounds.

But this man’s unjust decisions were many, as I documented in an article published in the Financial Times of 27th November 2008. A bench headed by this Chief Justice decided on the 21st of July 2008 (CS/FR 209/2007) a matter that only came up for argument on the 27th of November 2008 before a different bench. That’s right. The case was to come up in November, but the decision was given four months earlier.

The bench headed by the Chief Justice ruled on the tax exemption in July: “The tax relief granted to JKH was not permissible under the existing Regulations and JKH got an amendment tailor made for its purpose and secured the tax exemption” (CS/FR 209/2007, pp. 60-61). Yet, the respondents in the case that came up for argument in November, including the then BOI Chairman Dhammika Perera, the BOI Chairman when the tax exemption was granted Arjuna Mahendran, and former Commissioner General of Inland Revenue A.A. Wijepala, all needed to determine the legality of the exemption, were not among those noticed in CS/FR 209/2007.

By initiating a separate case that was taken up for argument on 27th November and serving notice on the above individuals, the plaintiffs of CS/FR 209/2007 conceded that the tax matter was not part of that case. Yet, the Chief Justice issued a ruling, violating natural justice.

Was the former Chief Justice the only malefactor? What about the other justices on that bench? What about the counsel? I purposely published my indictment on 27th November 2008, the day the tax-exemption case was to be taken up.

It would have been difficult to miss because the editors had put a black border around it and stated that they were not responsible for the content.

Did anyone in the judiciary or the legal profession do anything about it? Was an inquiry initiated? No. Is it unreasonable to conclude that the rot in the legal system was not limited to one out-of-control Chief Justice?

Has the Attorney General’s Department, which wields enormous power, been insulated from the rot? Does it exercise prosecutorial discretion in a fair and reasonable manner? The large number of prosecutions dropped when governments change raise legitimate doubt.

Does the Legal Draftsman’s Department do its job in a professional manner? How could a Constitutional Amendment that sets a quorum of three for an Elections Commission with a membership of three have been cleared by that Department?

How could it have neglected to include the Consolidated Fund as a continuing source of revenue for the Fund of the Disaster Management Council in the Disaster Management Act, No. 13 of 2005?

What is being done?

The current Minister of Justice is striking the right notes:

“It is vital that we look at a complete structural change from end to end and roll it out in a targeted and efficient way. We have to stop looking at the legal profession as one which exists solely for the sustenance of its members, but as one which plays a much more important role as a public centric body which is driving the justice system forward – one which is ready to innovate, to evolve and to take the right decisions at the right time to create a paradigm shift in the administration of justice.”

Even if done in a way that was not quite proper, the Minister has increased the number of judges in the superior courts. Funds have been allocated for court automation. It is hoped that the foundation laid by the comprehensive study completed in 2017 and the extensive consultations the ICT Agency conducted with the judges of the superior courts in 2019 will be built upon.

The above actions will, if adapted from a working system in another country, carefully piloted and scaled up, and supported with the necessary technical personnel, fix the dysfunctions in the “registry” part of the court system, which involves, or should involve, low discretion. If the system is transparent to lawyers, litigants and the public and is hardened to resist malicious attacks and manipulation, a key piece of the solution will be in place. But this will not, by itself, yield the desired outcomes.

The procedures and rules must be redesigned placing the needs of the litigants at the center, and not those of the lawyers and the judges. Even if it is a monopoly buttressed by archaic and arbitrary contempt-of-court rules, what the courts do is supply a service.

The litigants want a service, and they pay for it, either directly or through their taxes. They should be treated with respect and provided the services they seek at high levels of quality.

Decisions, even against those charged for criminal offenses should be of high quality in that they have been reached based on the relevant procedure, and are based on the best possible evidence. High quality also means not having to live in limbo for years, while lawyers and judges take their own cool time.

Unless procedures are reformed to put the litigants at the center, law’s delays will continue. Judges must work reasonable hours and they must impose discipline on lawyers by refusing frivolous requests for postponements. Section 63(2) of the Colombo Port City Economic Commission bill illustrates the dysfunctions of the current system:

“In order to foster international investor confidence in the ease of doing business and in the enforcement of contracts, in the national interest and in the interest of the advancement of the national economy, the inability of a particular attorney-at-law to appear before the Court on a particular date for personal reasons (including engagement to appear on that date in any other court or tribunal) shall not be a ground for postponement of commencement or continuation of the trial or be regarded as an exceptional ground warranting such postponements.”

For cases involving companies registered with the Port City Commission, the conventional rules that privilege the convenience of the lawyers are not to apply. But the rest of us will not only have to continue to put our lives on hold for the convenience of the lawyers and judges; we will also have to suffer the indignity of the fast-track litigants from the Port City cutting in front of us in the queue.

Simply reforming the rules will not suffice. The overall quality of legal education must be improved with a greater openness to innovation. The lowering of the protectionist barriers erected to safeguard the earning potential of members of the legal profession is a necessary condition. In recent debates around bilateral agreements dealing with trade in services, activist engineers told me that they need the kinds of protections the lawyers had erected for themselves against foreign competition.

Innovation requires the transfer of tacit knowledge possible only by day-to-day interactions. It is energized by competition. It is only when the legal profession becomes open to innovation that the judges who are drawn from it can become innovative and responsive.

All professions are protective of the pecuniary interests of their members. They fight back when those interests are threatened in any way. Lawyers are fearsome adversaries. Even the most astute and committed politicians approach legal reform with trepidation. They understand that the reform will take the form of trench warfare unlikely to yield results within the political cycle. They devise workarounds.

Politicians can at least try. System-level workarounds are unavailable to ordinary citizens and businesses. Their workarounds are petty and, in some cases, illegal. They limit transactions to trusted parties, knowing unenforceable contracts are meaningless. They seek the services of thugs to enforce contracts. They keep buildings that can be rented for revenue empty.
Workarounds

The proposed Colombo Port City Commission is a workaround.

Legal-system-related factors are a main reason Sri Lanka is ranked 99th out of 190 countries in the Ease of Doing Business Indicator. Even Nepal is ahead of us; Pakistan is about to catch up. Poor performance in resolving insolvency and enforcing contracts are major contributors to Sri Lanka’s low rank. On enforcing contracts, the country is ranked 164th.

It is unlikely that high-profile financial and service businesses will want to locate offices in Sri Lanka in these circumstances. Despairing that the legal system can be improved, the drafters of the Port City Commission Bill propose to make arbitration by the International Commercial Dispute Resolution Center that is to be established within the Port City mandatory for disputes arising within its area of authority. They also propose a fast-track, exemplified by section 63(2) quoted above, for engagement with the Sri Lankan courts if required.

Despite all the talk of how bad bypassing the Sri Lankan legal system is, this has been going on for a long time.

The disputes between several international banks and the Ceylon Petroleum Corporation over hedging contracts entered in 2008 in the first Mahinda Rajapaksa government were not resolved by the Sri Lankan courts. Arbitrations on the contracts with Standard Chartered and Citibank commenced, respectively, before the English High Court and the London Court of International Arbitration.

Deutsche Bank’s arbitral proceedings against Sri Lanka for the actions of the CPC, Central Bank and the Supreme Court in relation to the failure to perform the hedging agreement were at the International Centre for Settlement of Investment Disputes (ICSID), an organization established by the 1965 Convention for Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention).

The CPC lost the cases. They also bore the considerable costs of participation in expensive cities.

The legal agreements governing the Sri Lanka Telecom privatization by the first Kumaratunga government in 1998 did not give rise to a need for dispute resolution. But had such arisen, the arbitration would have been in Singapore under that country’s laws.

In this context, it is unlikely that commercial disputes where referral to the Dispute Settlement Center within the Port City is not mandatory will come to the Sri Lankan courts. They will go to Singapore, London, Geneva, or Washington DC. They will bypass the Sri Lankan legal system, understandably. At least the International Commercial Dispute Resolution Center will be on Sri Lankan soil and the lawyers need not be paid per diems.

Effects of workarounds

The petty workarounds of the citizen and the businessperson yield no good results. They simply overburden other parts of the system and let resources lie fallow.

We like to teach the Coase Theorem which describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem postulates that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property.

But with a dysfunctional legal system, the condition of properly defined property rights does not exist. Coasean bargaining is limited to the classroom. We are compelled to fall back on the command-and-control capabilities of the state, overburdening it further.

The system-level workaround of the Port City Commission Law could be a holding action until we improve our legal system and associated processes of relevance to investors and service industries that are to be attracted to the Port City.

In the same way that the Greater Colombo Economic Commission (GCEC) was to be a holding action until we improved the provision of planning, utility and related services throughout the country, there could be a plan to gradually bring the enclave within the general legal system which has been improved in the meanwhile. The doing business indicator measures good governance in the country as a whole (though for some components they focus on the capital), not in special enclaves.

It would be good if that were the case. But looking at the situation in the zones managed by the Board of Investment as the successor to the GCEC, we can see that the transition has not been completed even some 40 years later.

Even today, the services offered by the BOI in the zones are superior to those outside. We in Sri Lanka appear to be content with running superior systems and single windows for foreigners (and Sri Lankan who achieve such status) while letting the rest of the country suffer under second-rate systems and multiple windows.

The hope, always, is that the island of good governance will catalyze and drive reforms in the surrounding ocean of bad governance; that the land will take over the sea. We keep hoping.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Budget 2021 : A good or bad kettle?

Originally appeared on The Morning

By Dhananath Fernando

Then school principal of my alma mater, late Rev. Fr. Bonnie Fernandopulle used to mentor students through the use of anecdotes and examples. One of his favourite questions for students he was mentoring was: “Do you know the difference between a ‘good kettle’ and a ‘bad kettle’? They both look the same. They both sound the same. They both serve the same purpose of boiling water. But only time will tell which one is which.” He used to say: “It is not the ‘term-end exams’ nor the ‘semester-end test’ that are the difficult tests of life. The ‘test of time’ is a test that you, as students, should train yourselves to face.” I hold this advice dear and remember it up to date.

One year into a global pandemic calls for a litmus test on the effectiveness of our economic policies and the presented “Budget 2021”. This will help one evaluate where Sri Lanka stands in the “test of time’ metric. 

The Annual Report of the Central Bank of Sri Lanka (CBSL) for 2020 provides some statistical insight for evaluation. Our economy has contracted by about 3.6%. Our debt-to-GDP ratio has increased above 101%. Government revenue has shrunk from about half a trillion rupees. Revenue as a percentage of GDP has shrunk to 9.3% from 12.6% in 2019. The present revenue-to-GDP ratio is among the lowest for countries at our level of development. This would induce us to print more money in the near future, while additionally we have printed about Rs. 650 billion. By contrast, in the year 2019, Sri Lanka printed only about Rs. 4 billion. The two lockdowns and the mounting economic woes that the island has been facing for decades have led us to where we stand now. These figures do not come as a surprise. The end of 2020 left all of us with severe concerns and reasonable estimations of the country’s sorrowful performance of the year.

The 2021 Budget presented Sri Lanka with a good opportunity to take necessary measures to curb the approaching economic downturn. Looking back at the Budget, five months later, it is somewhat evident that we could have done better in certain policy areas.

This column previously highlighted two main loopholes in the 2021 Budget. One was the inadequate allocation of resources and the lack of a solid plan for healthcare services to combat Covid-19. The second was a credible action plan on debt servicing challenges for Sri Lanka. It was evident that without combating Covid-19, mitigating the impact on the economy will be difficult. Some sentiments expressed by members in Parliament questioned the need for the resources for vaccines which were produced by some other countries and highlighted the need for making Sri Lankans guinea pigs for vaccines by multinational pharma corporations. It was personally alarming for me to watch business leaders speaking at budget discussion forums with excessive emphasis on their respective businesses with no regard extended to the larger economic adversity at hand.

As a result of these poor policies and mitigating strategies, we are now in the midst of a raging third wave of the virus. This continues to affect the economy, proposed budget promises, and businesses adversely. Simultaneously, the global demand for vaccines has skyrocketed. Therefore, it is evident that Sri Lanka will have to wait for some time to receive the required amount of vaccines.

The 2021 Budget did not successfully address Sri Lanka’s problem of debt servicing. The only thing concealing the severity of this issue is the burden placed on the country’s healthcare sector at the moment. 

Moreover, Sri Lanka faced international pressure in terms of human rights violations coupled with geopolitical tensions which brings its own economic constraints and impact. As stated by the Central Bank Annual Report 2020, the destinations of more than 60% of our exports are the US, India, Japan, Australia, and the European Union (EU). All these nations have expressed concerns over Sri Lanka’s reconciliation efforts. 

Unlike the first-time shocker of the Covid-19 pandemic, after one year, some countries have made progress even with gigantic challenges. So from the perspective of investor sentiment and businesses, over time, the innovators and early adaptors, who are good to do business in the region and globally, are getting noticed. The attention and priority we received in the initial Covid-19 wave from investors, businesses, local donors, international donor agencies, and the rest of the world may not return during this new wave. Especially if our  policy decisions lack foresight and common sense. The current story published on PublicFinance.lk is that only 6% has been spent from the Yuthukama fund which was set up for Covid management and the availability of Rs. 1.7 billion remaining as the balance is just one example. The fund was supported by many Sri Lankans, and now, local and international companies may doubt the seriousness of our efforts.

We are between two hard choices which will have equally bad negative consequences. Minimising the mobility of people impacts our economic activity but increasing the mobility affects the Covid-19 spread which hits back again on the economy and people’s livelihoods. We need vaccines to control the spread of the virus but we should be able to get the vaccines first, while also balancing our foreign exchange. Economic policy formulation and execution is a team sport. It is not only the right policy but also the execution that matters. Even if we have a good execution team, if we are implementing the wrong policy prescription, the results won’t stand the test of the time. Unfortunately, five months after the Budget 2021 none of our policies nor our policy execution was able to stand the test of time. It is not only the Budget for 2021; the previous budgets and our economic policy over the years have failed to make a positive impact. We should pause for a moment and think about which sort of kettle we are. Are we a good one or a bad one? We should ask ourselves: “Have we been able to stand the ‘test of time’ with the economic policy we have been practicing?”

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.

Fertiliser ban is flawed

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The Cabinet Paper banning fertiliser, pesticide, and weedicide imports with immediate effect that was rubber-stamped last week without discussion constitutes a sea change in Sri Lanka’s agriculture policy. Its implications for consumers, for the livelihoods of farmers, and for those who have invested in agriculture and related sectors are vast. 

Despite the 20th Amendment, it is wrong to marginalise Parliament and to ignore State agencies with expertise. Because agriculture is a devolved subject, officials in the Provincial Councils should be consulted even in the absence of elected Council members. Given the expropriatory effects on the private property of those whose investments are affected, the authority of the Courts as the guardians of fundamental rights and as the upholders of equity is likely to be invoked.

No mandate for change

The Cabinet Paper is rather unusual. The entire justification for the proposed actions is anchored on the President’s election manifesto. No references are provided to studies, committee reports, etc.

It is foolhardy to build national policy on the weak foundation of manifesto promises. Each manifesto contains a multiplicity of promises. Was the vote a considered approval for each of those promises? 

The primary purpose of a manifesto is to convince citizens to vote for the candidate or political party presenting it. The secondary purpose is to gain legitimacy for specific actions. Manifesto making is political not scientific or systematic. 

Those who have been involved in manifesto making will testify to the opacity of the process, wherein what is accepted one day can disappear the next and new clauses and conditions can mysteriously appear even after “finalisation”.

Contributions can be sought, and consultations conducted, but in the end, decisions are made by a few in proverbial “smoke-filled rooms.” A manifesto is, at most, broadly indicative of orientation and priority-setting. Given the partisan and opaque procedure used to develop a manifesto, errors and impossible promises are unavoidable.

But because the Cabinet Paper lacks any other justification, one must look. Rather than rely solely on the quoted excerpts, I went to the source. The proposed actions are inconsistent with the language of the manifesto.

In order to guarantee the people’s right to such safe food, the entire Sri Lankan agriculture will be promoted to use organic fertilisers during the next 10 years. For this, production of organic fertiliser will be accelerated.

• To resuscitate the farming community, we need to replace the existing fertiliser subsidy scheme with an alternative system. In the new system, the inorganic and organic fertiliser both will be provided free of charge to farmers. They will be promoted to shift gradually into a complete system using entirely carbonic fertiliser.

• A system of assistance will be introduced to convert traditional farming villages into users of only organic fertiliser.

The language is anchored on food safety. But the ban affects fertilisers and chemicals used for all crops, not just what is consumed by citizens. There is a commitment to provide inorganic fertiliser free. The transition is to take place over a decade. These actions are to be taken in the context of “a new national agricultural policy would be introduced after an in-depth review of the present policies.” This promise is prefaced by a condemnation of “policy that changes from one season to another”.

No national policy based on review of existing policies and experience; no assessment of the experience of other countries; a policy that changes things in one week not a season. And most importantly, the telescoping of a 10-year process into a few months. Sudden, not gradual. Instead of free inorganic fertiliser, a ban. Not limited to traditional villages but across the board. The proposed bans lack a mandate.

Procedurally flawed

A change in a policy with broad impact requires care and caution. 

The change may do much good, as the Cabinet Paper claims. Because of the repeated claims that our food is contaminated with “vasa visa,” most consumers would support a change away from chemical fertiliser and pesticides. But they are unlikely to accept higher prices and unavailability. Hotels are unlikely to accept “ugly fruit”. Growers are unlikely to accept drastically reduced yields and/or inability to market their produce at prices that are above costs of production. The net benefit must be demonstrated, not simply asserted.

Growers large and small will be unhappy about being unable to recover the investments they have made in preparations for growing or in crops in the ground by this sudden reversal in policy. This response will also be shared by other participants in the sector who had entered perfectly legal contracts but are now unable to clear their shipments from the port. It is common sense for the government to give adequate notice of a change in policy or the law so that affected parties can make the necessary adjustments to their business practices minimising losses.

Policy changes that can do good, can also do harm. It is customary in policy formulation and implementation to look at relevant cases in other countries or in this country. Risk assessment, identification of collateral effects, and careful structuring of rules to avoid negative outcomes can be done by government officials or by external consultants with the required expertise. When the government liberalised the market for international telephony in 2003, we studied prior experiences in countries including Hong Kong (the most liberalised market in Asia) and India (to learn what missteps to avoid). 

The President claims that Sri Lanka will be the first to go all-organic. A cursory internet search will show that a fellow SAARC country, Bhutan, announced the intention to go all-organic in 2008; and that its experience has been assessed by independent scholars and published in the peer-reviewed and open scientific publication PLOS ONE in 2018 (DOI =10.1371/journal.pone.0199025). The abstract states: 

Organic agriculture (OA) is considered a strategy to make agriculture more sustainable. Bhutan has embraced the ambitious goal of becoming the world’s first 100% organic nation. By analysing recent on-farm data in Bhutan, we found organic crop yields on average to be 24% lower than conventional yields. Based on these yield gaps, we assess the effects of the 100% organic conversion policy by employing an economy-wide computable general equilibrium (CGE) model with detailed representation of Bhutan’s agricultural sector incorporating agroecological zones, crop nutrients, and field operations. Despite a low dependency on agrochemicals from the onset of this initiative, we find a considerable reduction in Bhutan’s GDP, substantial welfare losses, particularly for non-agricultural households, and adverse impacts on food security.

Does this mean that no other country should go all-organic? No. Is this the only study? No. The purpose of looking at the experience of others is to learn from them. It is irresponsible not make the effort to mitigate the negative impacts will fall upon consumers, growers and others in the sector and to design the policy most suited for local conditions.

Even within the country, prior knowledge existed because the fiasco of the previous Government’s effort to promote organic farming at the behest of Ven. Athuraliye Rathana, MP. That ended with much waste of public funds and the shutting down of the implementing agency, SEMA. It would not have been all wasted if the present Government made the effort to learn from it. 

The Government appears to have learned little from the palm oil ban that had to be walked back and modified. It is normal procedure to circulate a Cabinet Paper to all relevant Ministries for their input to and to win concurrence. Walking back and modifying is what happens when this procedure is not followed.

This blanket ban does not affect only food items consumed within Sri Lanka. It affects subjects under multiple Ministries. It can devastate non-food segments such as foliage exports. It is likely to strangle the fast-growing fruit and vegetable export industry which was subject to rigorous enforcement of standards such as Euro GAP that my organisation worked on with the Department of Agriculture and the exporters association. The Legislature can choose to take actions that result in such collateral effects. But it should at least have considered them. This Cabinet Paper does not.

What should be done

The Government should suspend the implementation of the Cabinet Paper and appoint an inter-Ministry committee of experts with the power to co-opt external experts to report back on a practical method of achieving the objectives of ensuring food safety and environmental conservation. Given the complexity of the changes and the collateral effects, it is best that a pilot be conducted. The larger program design should be based on those learnings. 

If the Government does not act responsibly, the Opposition should demand a select committee, or at least a debate in Parliament. Stakeholders should move the courts. Our food and our livelihoods are too important to be cavalierly toyed with by those learning on the job.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

The way forward for the Proposed Colombo Port City Economic Commission Bill

The Advocata Institute carried out an independent analysis on the proposed Colombo Port City Economic Commission Bill.

Following observations and analysis were formulated using insight from key public policy experts and scholars. We have written to all members of Parliament, highlighting these observations and made recommendations to maximise the economic outcome of the Colombo Port City Project.

To read our analysis and the elaborated outtake of the issue.

To read the letter in Sinhala

To watch the video on PORT CITYය චීන කොලනියක්ද?

---

03 May 2021

Honoured,

Member of Parliament / Minister

The way forward for the Proposed Colombo Port City Economic Commission Bill

The Advocata Institute wishes to make the following observations on the proposed Port City Economic Commission Bill (the "Bill"). The Bill in its present state has weaknesses that should be addressed in order to maximise economic opportunities and outcomes. We would like to emphasize that the Port City could form an important step forward for the country but to be successful it must address the shortcomings highlighted below.  We call upon all parliamentarians from all parties  to work together to address these issues.

1. A Case for Special Economic Zones in Sri Lanka 

1.1 Special Economic Zones (SEZs) are a tried and tested means of bringing in positive value addition to an economy. They also have the potential to accelerate economic growth. This is best reflected in how SEZs such as Shenzhen in China, the Dubai International Financial Centre and Luban IBFC in Malaysia have grown into booming global financial, manufacturing and technological hubs. If implemented with the right policies and a globally accepted regulatory framework, the Colombo Port City is capable of achieving such outcomes.    

1. 2 According to our analysis SEZs benefit an economy by acting as:  

1. A magnet to attract Foreign Direct Investment.

2. A laboratory of experimentation to achieve a particular objective and then scale it up. 

3. A catalyst for structural transformations and ultimately diversify the local economy.

4. A regional pressure valve to increase employment in disadvantaged areas. 

1.3 However, the success of an SEZ can only be determined by evaluating the linkages generated within the local economy.  In other words, they can only be considered a successful policy tool if they encourage technology spillovers or knowledge diffusion that enable the local economy to acquire new productive capabilities. Following this rationale the Colombo Port City must be developed as a stepping stone to enhancing productivity, upgrading industrialization, and achieving export diversification. 

1.4 The productive capabilities of SEZs lie in how they allow governments to provide all the conditions necessary to attract investment within a limited budget. In their ideal form, SEZs are places that have all the facilities that firms need to thrive. Since each industry needs many complementary (public) assets to succeed, SEZs can play an important role in creating the right conditions for industrial success. This might include suitable land plots, hard infrastructure, and site-specific policies or clearances. Moreover, firms in SEZs can benefit from each other’s proximity – they can be each other’s suppliers and customers – thereby making a strong case for Sri Lanka to utilise SEZs to achieve economic growth.   

1.5 Given the thicket of red tape in Sri Lanka, in order to become truly effective SEZs require a degree of plenipotentiary powers. Following the literal rule of interpretation, plenipotentiary powers can be defined as “someone who is fully authorized to represent a government as a prerogative or having full powers”. The provision of such powers allows SEZs to operate independently and achieve productive targets without having to deal with tedious and time-consuming  processes that hobble businesses in the  rest of the country. This is why SEZs can effectively accelerate economic growth, while also being an incentive for Foreign Direct Investments.  

1.6 Sri Lanka has resorted to the use of plenipotentiary powers as a policy tool in 3 previous legislations. These are the Gal Oya Development Board Act No 51 of 1948, River Valley Development Board No 4 of 1975 and Greater Colombo Economic Commission Act No 4 of 1978. To understand what these plenipotentiary powers are, see Annexure 1. Hence, the use of plenipotentiary powers as seen in the Bill is not new to Sri Lanka. The Greater Colombo Economic Commission Act, which forms the precursor to the current BOI Act, provides the legal framework for these economic zones to act independently and prerogatively to achieve economic outcomes. According to a study by Boyenge (2007), in 1980 the zones accounted for only 8.8 per cent of total industrial exporters, however, by 1991 their share had risen to 44 per cent. By 2007, Export Processing Zones (EPZs) were contributing 38 per cent of the country’s total 9 exports in terms of value. A more recent overview of EPZs in Sri Lanka (Japan Development Institute, 2011) showed that 1,726 projects were in operation in the 12 zones, generating 346,516 employment opportunities. Therefore in our view the Colombo Port City Economic Commission having plenipotentiary powers streamlined towards the achievement of economic goals, satisfies a timely requirement.

2. Tax concessions

2.1 Taxes are the most important source of revenue for the government to fund essential public goods and services. However, in 2020, tax revenue fell to 8.1% of GDP exacerbating Sri Lanka’s already precarious fiscal situation. With a history of fiscal deficits, the compounding effects of debt financing has snowballed into serious concerns regarding debt sustainability. In 2020, central government debt is estimated at 101% of GDP and is expected to worsen in the coming years. 

2.2 The tax concessions as provided for in the Bill can create distortions within the economy while seriously impairing fiscal sustainability. For instance, in the labour market, it could lead to higher attrition rates in enterprises located outside the Port City due to tax concessions to local employees not being offered outside the SEZ. Businesses located within the Port City will also benefit from agglomeration effects of being in the Port City and having access to world class transport systems, utility services, preferential access to the highway and maintenance services. Therefore an investment in the Port City  should yield a much higher return, thus not requiring further fiscal incentives. There is of course a need for the zone to be competitive vis-a-vis other zones but the generous tax incentives being offered over and above the tax concessions already provided for under the Inland Revenue Act No.24 of 2017 will further compromise the progressivity of the tax system and affect competitive neutrality. 

2.3 There are however, instances when fiscal incentives (tax credits, grants etc) may be warranted, for example where private returns are below the cost of capital but social returns (positive externalities) can be generated. However, the existing Inland Revenue Act provides for such incentives- we recommend that the power to grant fiscal incentives be retained within the Ministry of Finance. Hence, we call upon the government to make the necessary amendments to the Bill to establish fiscal accountability under the Ministry of Finance. 

2.4 Research also suggests that the effectiveness of tax incentives in attracting FDI is low. The list of priority factors for investors is highlighted in Annexure 2. Tax incentives are marginally effective in terms of attracting FDI in comparison to other factors.

3. Financial Regulations

3.1 Developing a fully fledged OFC (Offshore Financial Centre) requires the relaxation of  capital controls to permit free movement of capital improving the ability to compete globally. However, given Sri Lanka's current status of debt sustainability, sovereign rating downgrade, and foreign exchange crisis, it may not be the most appropriate time to set up an OFC. Stringent foreign exchange controls in place as of now may not allow the relaxation of capital controls. Hence, it is prudent to delay the setting up of an OFC within the Port City, or risk the entire project failing.

3.2 The success of a financial center depends on the confidence and trust that it evokes in investors and customers. The key to building this trust and confidence is dependent on two factors. First, the governance structure in place, i.e., the laws, rules and regulations governing financial products and services. Second, the way in which the regulatory authority/ies apply and enforce the regulations. Further, these regulations must conform to international best practices set out by institutions such as the Basel Committee on Banking Supervision (BCBS) and Financial Action Taskforce (FATF) recommendations on anti-money laundering and combatting the financing of terrorism and proliferation (AML/CFT), to ensure global acceptance.  Any attempts to circumvent these standards could have adverse impacts on financial institutions operating in the rest of the country as well. There is, however, a case for moving from a rules based financial regulation, as is currently in place, to a more principle based financial regulation. Such a move encourages financial innovation and facilitates the expansion of  financial services in a dynamic global environment. There is also a case for unified regulation of financial services (a single omnibus legislation which has been adopted by other financial centres). The Bill only refers to regulation of banks and capital market institutions. It is silent on whether insurance companies would be allowed to operate within this jurisdiction and who would regulate that sector. It is of vital importance that this issue be addressed if the Port City is to be operated as an OFC.

3.3 According to the draft Bill, licensing (Section 42(4)) and regulating (Section 45) for offshore banking businesses is done by the Commission with the concurrence of the Monetary Board under the Banking Act No.30 of 1988. However, as per the bill the examination of such entities would be undertaken by a “competent authority” appointed by the Port City Commission (Section 49) and the Monetary Board may only call for information and reports from these entities through the Commission (Section 51).  But the Bill is silent on the expertise and experience of those who would be appointed by the Commission to undertake examination of these entities. Our recommendation is that until a separate financial regulatory framework for the OFC is set up in the Port City, and until persons with the necessary capabilities are recruited, the existing regulators must undertake both the regulation and supervision of financial institutions set up within the Port City.  

3.4 We also call upon members of Parliament to make an addition to clause 5, as subsection (k) reading “Uphold laws and regulations on anti-money laundering and terrorism financing” in light of the above mentioned AML/CFT issues.

4. Labour Regulations

4.1 The Colombo Port City expects to operate as a service-oriented SEZ that propels Sri Lanka to be a major trading and services hub within the Indian Ocean. It hopes to attract top-notch IT, financial service firms and types of businesses and economic activity that will be highly innovative. In order for such firms to thrive and grow, a labour environment that accommodates failure, mistakes and high rates of experimentation is crucial. 

4.2 This requires a flexible labour market with low redundancy and restructuring costs that promotes swift adaptability to market changes. Prioritizing labour solutions over capital will result in job creation that will ultimately benefit the country. However, the labour regulations in operation in Sri Lanka does not facilitate the same.

4.3 For instance, the Termination of Employment of Workmen Act (TEWA) was enacted in the early 1970s when the government in power at that time promoted inward-looking economic policies. It regulates the termination of workmen by employers with 15 or more workers employed and applies to only around 15% of the labour force in Sri Lanka. TEWA has been identified to pose two main issues: making dismissal of employees too difficult and expensive. The high severance costs TEWA imposes along with EPF payments for the formal sector are prohibitively expensive for employers. Hence, TEWA is challenged as an impediment to healthy development of the labour market, preventing the private sector from adjusting to the globalized economy. The rigid conditions imposed by TEWA has acted as a catalyst for the creation of a large informal sector that amounts to almost 70% out of total jobs in Sri Lanka. 

4.4 The formal sector offers many benefits, in comparison to the informal sector, that outweigh its costs. They are higher productivity, lower capital costs, increased access to finance, social insurance benefits like health insurance, pensions and most importantly higher pay. Hence, formal jobs need to be encouraged within the Port City by making its compliance standards more flexible. Unemployment is a social problem and its burden and economic costs must be borne by the society in totality instead of the retrenching firms alone. Such costs weaken them and leave less room for them to restructure and expand their firms. Therefore, the option of an Unemployment Insurance Scheme is a better mechanism to provide unemployment benefits funded through monthly contributions similar to the EPF and ETF.

5. Recommendations on Parliamentary oversight and Accountability

5.1 At present, the Bill states that the Commission should submit to the President or Minister in Charge, an annual report setting out the status of operations, income and expenditure of the Commission. Alongside this, it also provides for the audit of accounts of the Commission.

However, as the main parliamentary oversight mechanisms in place to examine the activities of the government bodies responsible for public accounts and public enterprises are the COPA and the COPE, we recommend that the Port City Commission be made accountable to these committees. 

5.2 In relation to the composition of the Commission, it is our recommendation that the Secretary to the Treasury be appointed as an ex-officio to the Commission since this would allow for fiscal accountability.

5.3 We believe that the nationality of the Commissioners should not be prescribed to avoid the exclusion of global talent. However, at the maximum, to only have it restricted to the appointment of a majority of Sri Lankan nationals. We also believe that the Director General of the Commission should be the best executive talent and therefore, should not be restricted to being a Sri Lankan national. 

5.4 We also believe that staggered appointments to the committee would ensure institutional stability, preserve institutional memory and political representation. This process entails the availability of a vacancy every year, allowing the government in power to make an appointment subject to procedures whilst ensuring that there is continuity as well as working across party lines. 

5.5 To be in line with the international governance standards, Advocata also recommends affirmative action to ensure that the Commission mandates a minimum of 1, preferably 2, qualified women to be appointed to the Commission. 

By approaching the Colombo Port City Economic Commission Bill from such an analytical perspective, and with the specific conditions of Sri Lanka in mind, at the minimum, the Advocata Institute recommends the consideration of the reforms outlined above to achieve maximum economic outcomes.

Yours Sincerely,

Signed by,

Murtaza Jafferjee  (Chairman, Advocata Institute)
Dhananath Fernando (Chief Operating officer, Advocata Institute)

---

Annexure

Annexure 1 

1. Gal Oya Development Board  Act No 51  of 1948

By way of Plenipotentiary powers the Gal Oya Development Board could: 

Article (5) -  The Board being given  absolute power to appoint officers and servants. 

Article ( 9) - Authority over roads and irrigation 

Article ( 10) - Determine fees and levies over the supply of water. 

Article ( 14) - Establish own departments 

Article (15) - Power over crown land 

Article ( 16) - Power over the acquisition of land. 

Article (21) and Article (22) Power to make laws and bylaws. 

1. River Valley Development Board Act No 4 of 1975 

By way of Plenipotentiary powers the River Valley Development Board could 

• Article (4) - Power over the appointment of  officers and servants

• Article ( 20) - Special powers over the administration of underdeveloped areas. 

• Article (21) - Power to make rules 

• Article ( 22) - Power to make laws 

1. Greater Colombo Economic Commission Act No 4 of 1978 

By way of Plenipotentiary powers the Greater Colombo Economic Commission could 

Article  16 

•  Implement the objectives of the commission

• Acquire, lease or sell land 

• Lay out industrial estates for sale or lease

• To enter into agreements with enterprises 

• Exercise, discharge powers and duties. 

• Carry out general duties 

Article  17 

• (1) Power to enter into agreements with any enterprise in and outside the authority and to grant exemptions from any law referred to in schedule B. 

Article 25 

• (1) Power to authorize any enterprise carrying on the business of banking. 

• (2) Authorize the operation of the banking business. 

Annexure 2

List of factors that are  more important than tax incentives for investors -  study done by the United Nations Industrial Development Organisation (UNIDO) in 2010:

1. Economic stability

2. Political stability

3. Costs of raw materials

4. Local markets

5. Transparency of legal framework

6. Availability of skilled labour

7. Labour costs

8. Quality of life for expatriate staff

9. Availability of local suppliers

10.  Bilateral agreements and treaties. 

Understanding economics, understanding life

Originally appeared on The Morning

By Dhananath Fernando

Why Sri Lanka needs to comprehend economics to tackle its other problems

It is said that when John Lennon (the singer/songwriter) was five years old, his mother used to say that happiness was the key to life. When he went to school, the teacher asked him:  “What do you want to be when you grow up?” John replied: “To be happy.” The teacher told him: “You didn’t understand the question,” to which John responded: “You haven’t understood life.” 

John Lennon’s thinking is valid in economics as well. When we fail to understand economics, most of the time we just don’t understand life. 

It is a more serious problem for the common man’s life when our policymakers don’t understand economics. Asking the common man to pay for someone else’s decisions and choices is not the right way to think about economics. 

Sri Lanka’s continuous battle with Covid-19 is a good case study, not only in economics, but also in understanding what is happening to our quality of life. Especially with the risk of a Covid-19 third wave at hand. 

Public Health Inspectors (PHIs) have recommended another lockdown. A record number of patients have been reported per day, far exceeding our testing capacity. Newspapers have reported about a UK variant and asked the public to keep a two-metre physical distance, instead of one metre, to combat the new variant. 

As the nation went through a second lockdown, this column highlighted why Sri Lanka cannot afford another lockdown. 

Simply put, our government revenue is declining, our foreign currency debt repayments are mounting, our channels of foreign currency earnings have been interrupted negatively, and most of our economic challenges have reached a boiling point. 

None of these problems have quick fixes. The only quick fix we can apply is to buy more time. All the above are symptoms of wrong economic thinking rather than problems that cannot be solved. The right economic thinking is more important than ever before, as we slowly drift towards the brink of a third Covid-19 wave.

Economics is the study of maximum utilisation of scarce resources that have alternative uses. On the health care front, our hospital beds, PCR testing capacity, ventilators, vaccines, and oxygen supplies have now become crucial, scarce resources. 

If we fail to utilise these scarce resources to their  maximum, as a country we will face a health care crisis. This is taking place in the backdrop of a grave economic crisis that has been multiplying over the years. Globally, vaccination is in high demand, and even the slightest delay to place an order could cost human lives. To get vaccines faster, we need foreign currency and a good working relationship with other countries to get the vaccines down. Unfortunately, things are a bit difficult at the moment.

When resources are scarce, the only way to maximise that resource is to prioritise them – this means removing barriers for more players to enter the market and allow market forces to work, thereby allowing new channels of supply to be established. 

On the demand side, we have to constantly build public awareness on action on better sanitisation and minimise the spread of the virus.

During the first lockdown, this column recommended a strategy of testing based on symptomatic cases and asymptomatic cases, with the ability to do contact tracing and random testing. Basically, to highly prioritise the symptomatic contact traces, and assign low priority to the asymptomatic cases that are difficult to contact trace. 

The column also recommended conducting regular testing for frequent commuters and touch points such as taxi drivers, bus conductors, and others who interact with many people. During the initial wave, the testing was only allowed to be conducted through government hospitals, while the private sector was not allowed to conduct PCR testing. That decision was later relaxed.

Similar restrictions and guidelines were available for health care and treatment by private hospitals. What economics teaches us is that when resources are scarce, the actual cost of utilising that particular resource is the cost that we have to forego for the usage of the same resource. 

When it comes to PCR testing, when everyone is attempting to get the test from the government system, we have to forego the opportunity cost of someone with the disease getting tested, and someone who could afford to get the test done with a payment. 

The more we overstretch the government system, it is the more affluent and politically connected who get the opportunity of obstructing the poor man’s opportunity. 

Now the context has changed. Our existing problems remain as they are, a similar situation has occurred on our hospital beds, oxygen, and vaccines. The solutions to these problems have to be evaluated in multiple facets, as there are many dimensions. What often takes place in Sri Lanka is considering all aspects except economics. 

Given the scarcity of hospital beds, we now have to consider all methods of increasing the number of beds, PCR testing, and getting vaccines on the supply side.

At the same time, we must restrict the spread by continuous public education to manage the demand side. After seeing news stories from India, we may have to look at opening our health system for more private sector involvement. This can be through requesting hotels and unoccupied tourism properties to convert to hospital wards based on their consent as a backup plan, and allowing regulatory relaxation to bring down life saving medication. 

That is just healthcare economics. Vaccines and all medical equipment require money to purchase and upscale. We need both local currency and foreign currency. We have to think about financial resources on the other hand. To save foreign currency, policymakers are running a marathon of banning some import product categories every week, without understanding the overall impact the public has to face. 

Last week, it was fertiliser, and the week before it was palm oil. There have been many on the list. All these controls have a ripple effect, and impact the economy and public life. 

The ban on tyre imports has created a new market for secondhand tyres, which is a serious road safety concern. The ban on palm oil adds additional risk of multiple usage of coconut oil, which also adds to health risks and increasing the smuggling of coconut oil. As a result, the little quality of life we have is diminishing everyday. 

According to John Lenon’s understanding of life, we should not misperceive economics only in monetary terms. Economics is the science of maximising scarce resources with alternative usage. It is everywhere in life. 

We see the importance in healthcare economics better now than ever before due to the pandemic. The objective of economics is to take more people out of poverty by utilising our resources. Controlling imports or defending our current account is not a form of economic governance. It is important to understand the problems and the symptoms of the problem. But we need to comprehend economics to understand the problems first. 

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.

Missing the boat again

Originally appeared on The Morning

By Dhananath Fernando

The many wasted opportunities to capitalise on Port City

This is just a funny story I have heard before; not a true one. Once upon a time, a man was caught amidst a flood, and his life was in danger. This man was extremely religious and believed that his God would rescue him from any threat to his life. A boat came to rescue the man, but he refused, saying that his God was going to help him. Then an emergency rescue team arrived, and he rejected them as well, saying: “I don’t need you. My God is coming to rescue me soon.” Flood became very serious and a helicopter arrived, but the man said he didn’t want anyone’s assistance and the same answer was provided.

Unfortunately, the man died in the flood and he met his god after death. At the very first meeting with his God, the man said: “I am very disappointed with you my God. You didn’t rescue me from floods”. God said: “I first sent a boat to rescue you, and then another emergency rescue team, and finally I sent a helicopter as the floods became severe, but you didn’t consider any of my attempts!”

When it comes to our economy, isn’t that the same case for Sri Lankans? Sri Lankans leave the country, claiming we do not have economic opportunities. Some Sri Lankans even risk their lives by attempting to go to Australia and Italy by boat. When Sri Lanka attempts to implement policies where we could navigate towards the same development as some of the countries they aspire to run away to illegally, the same Sri Lankans oppose and protest.

Think about the recent discussions on the Singapore Free Trade Agreement (FTA), the Millenium Challenge Compact (MCC) agreement, East Container Terminal discussion, and now, the Port City public debate.

Instead, many believe working with a foreign nation is a part of a whole conspiracy. We are overwhelmed with the belief that we can become self-sufficient in everything under the sun. We have forgotten that the global context has changed. Global supply chains have changed over the last few decades. We as Sri Lankans have forgotten the power of mankind when we share ideas with each other. Connecting with each other and sharing ideas is sharing and creating wealth.

It is true that working with other countries is not a one-way street; it has to have mutual benefits. The way forward is not to isolate ourselves and attempt to do things on our own, but to connect with the world. That is how small countries like Sri Lanka can succeed.

As of now, Sri Lanka is at the critical juncture of getting the fundamentals right with the Port City Bill, which is now being challenged at the Supreme Court. Of course, constitutionality and the legal aspects have to be considered and cleared before we move forward. What is missing in the discussion is the concept of the “Special Economic Zones (SEZs), and the ability to understand that Port City has to be a special economic zone instead of a real estate project, where we just sell land to investors without creating a business- and market-friendly environment.

“Special Economic Zones” are a concept where a separate and an easy regulatory mechanism is set up in a region to create a business-conducive environment. Businesses can be done easily and people can live conveniently only when markets operate right. We have to establish special economic zones because the rules and regulations in the mainland or other parts are so laid back that doing business or convenient living is difficult.

Take current Sri Lankan regulation as an example: 80% of our land is owned by the Government, where the citizens haven’t been provided property rights. Which investor would invest in a business when the ownership of the property is not secured? According to Minister of Justice Ali Sabry, contract enforcement takes 1,318 days on average, where it is just 164 days in Singapore. The average time to resolve a criminal case is about 10 years, while our business registration takes months. Small and Micro enterprises have tiers of regulatory barriers. Granting a permit for construction takes more than three months or so for accessing electricity. Those are the fundamental reasons why people leave Sri Lanka – because the rules we have set for ourselves are not supporting our aspirations.

What we need to do ideally is to make the rules of the entire country easy for business, and for people to live. Since we haven’t had the political will nor the knowledge to do it, we have to go with second-best solutions. One of the second-best solutions is “Special Economic Zones” such as Port City.

What ultimately decides whether a country and its people are going to prosper or not are the rules that it sets, because our opportunities for investments, doing business, employment, real wages, and quality of life will depend on what we set as rules to govern ourselves. Those rules cannot be excessive, but have to support markets.

While the concept of a “Special Economic Zone” is in the right direction, we should not think that Port City is going to solve all our problems. We can attract investments only if we set an example by allowing market forces to operate. Our immediate term debt repayment challenges, and our regulatory barriers in the mainland, remain as they are, and we have to take a holistic approach on serious economic reforms connecting with the world.

The tax concessions suggested have to be reconsidered, as these would not only further distort our markets by giving just a few politically connected businesses tax benefits, but also a serious burden on our balance sheet when the Government expects to develop infrastructure near Port City, such as the connecting roads to the airport highway and the tunnel connecting Port City and Marine Drive.

We have to be sensitive about the geopolitics coming into play with Port City, and we should not lose our friends internationally. It’s a long-term project, and things change very fast in this era of time.

Like the man who said no to his god’s rescue attempts, we too have missed so many opportunities that could have complemented the Port City project further. If we had implemented the projects with the MCC (after clearing all constitutional matters), it could have been a better attraction to investors. On the MCC project that was developed by local experts, the project on facilitating the proving of land rights could have attracted more investors to Sri Lanka to set up manufacturing plants, and the Port City could have served as the financial service center.

The traffic plan and the infrastructure projects could have added significant value to the entire project. At the same time we could have managed our geopolitics better.

The same goes for the Singapore FTA. We could have provided a strong signal that we are a nation open for business by creating rules that support industry and strengthening trade relations with countries like Singapore. Investors expected to come to the Port City could have tapped into global talent, taking Sri Lanka one step closer towards becoming a global hub for business.

Again with the East Container Terminal, where more Indian investors could have attracted and created a Port City, a truly multicultural, multinational special economic zone. What history teaches us is that we have been provided with so many opportunities, like the man who was provided the chance to save his life from the flood. How we managed and what we did with it is something we have to rethink.

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 Port City We Need

Covered in the Daily Mirror, Daily FT, Daily News, The Morning, Lanka Business Online,

By Resident Fellows of the Advocata Institute

Better economic rules, not giveaways should be the focus of the new governance zone

Deng Xiaoping China’s great reform leader, faced a serious problem in the 1970s. Thousands of young Chinese were crossing to Hong Kong risking their lives. Rather than cracking down on the migrants, Deng sought to understand why they were migrating. Clearly the economic opportunities in Hong Kong were greater than in mainland China. Deng was also impressed by the rapid rise of the some asian economies, in particular the modernisation of Singapore.  Singaporeans, like the residents of Hongkong, were majority Chinese by descent and had even less natural resources. How did they achieve something that China couldn't?  

The answer was that these countries had better rules, better incentives, and a better economic governance system. Deng knew he needed to ‘reboot’ China with reforms that allowed markets to coordinate economic activity,  protect private property, and allow for Foreign Direct Investment: radical reforms in communist China at the time. He also knew that implementing these reforms in the entirety of the country would be a nonstarter. Entrenched interests who benefit from the status quo would fight to keep the existing order. To solve this, China demarcated the Shenzhen area as a special governance zone and implemented a new - more open - economic system. This was the start of the Special Economic Zones (SEZs) in China. It was promoted as a laboratory to experiment with market principles to serve “socialism”.  

The results are astounding. In the past forty years Shenzhen has been transformed from a fishing town of less than 30,000 to the third largest city in China with a population of more than 12 million. By 2018, the economy of Shenzhen was $366 billion, four times that of Sri Lanka. 

In some ways, Deng’s problem is now Sri Lanka’s problem. To be sure, emigration out of Sri Lanka is not as severe as it was in 1970s China. Sri Lanka’s business environment is also not as bad as the Chinese system at that time. Yet market based reforms started in 1977 have all but stalled.  

Like China, in “mainland Sri Lanka” too an entrenched elite who benefit from the existing rules lobby to maintain the status quo. The result is that very little progress has been made over the last 15 years on reforms necessary to boost economic growth. After a brief post-war spurt between 2010-2012, economic growth slumped and has remained stagnant.

This is visible in Sri Lanka’s low scores on various rankings that measure the efficiency of the business environment. In the World Bank’s influential Ease of Doing Business report, Sri Lanka is ranked 99 out of 190 jurisdictions. The country has fallen behind regional peers like India, Bhutan and Nepal, having once been an early economic reformer in the region.  

Take the legal system, where Sri Lanka is one of the worst performers in the world. In contract enforcement, the World Bank ranks Sri Lanka 164 out of 190, taking on average nearly four years to enforce a contract. In Singapore, it takes just over five months. It's no wonder that foreign investors prefer easier destinations to deploy their capital. 

This is the logic for the Colombo Port City. Poor governance is a barrier to growth in many developing countries but implementing broad reform for better governance is extremely difficult. The idea is that by building special governance zones, governments could adopt completely new systems that overcome the problems that exist in the rest of the country. These zones would operate like “one stop shops” with pre-approvals and fast-tracked court systems, making doing business easier and hopefully attract foreign investment.  

Special zones are not new in Sri Lanka. Much of Sri Lanka’s export industry resides in the country’s dozen or so Free Trade Zones. Colombo Port City is different by virtue of being the first special zone developed by an international operator.  Unlike the FTZs, the focus is on white collar jobs and financial services instead of manufacturing exports. It also has a broader remit: the proposed legal structure lists seven laws that don't apply to Port City, and a further 14 that could be exempted in the area by the proposed oversight body. The Port City masterplan promises world class living facilities, entertainment, financial services, and business.

Yet Port City’s success, and indeed its importance to the country at large, will only depend on its ability to provide a superior economic governance system. To be a success Port City will need to guarantee greater economic freedoms to its investors, have an efficient legal system with clear and predictable laws. It needs to minimise discretion of the commissioners and have a fair and transparent regulatory structure. These are the critical features that have made several small cities like Hong Kong and Singapore prosper. 

This is the Port City we need. A better governance zone that can attract FDI, skilled people, spread knowhow, and serve as a lab for policy experiments. Get this right, and Port City could create positive spillover effects and expand economic opportunities for Sri Lankans. By learning from it’s successes, we can hope to scale some of the policies in the enclave to the rest of the country.

What of the Port City we will get? In the coming weeks, the country will debate whether the specific provisions in the Port City bill are prudent.  The supreme court is already hearing 19 petitions that challenge its constitutionality.  Like any project of this nature, there are also political and economic risks that need to be considered.  

Managing the geopolitical risk is going to be an enduring challenge in Sri Lanka. Here there are no easy answers, except professional management of our foreign affairs and dealings. Big picture thinking is needed instead of the current win/lose mindset and transactional diplomacy.

Another risk is in the domain of economic distortions. Unlike in Shenzhen which was conveniently located far from the commercial centres at the time, Port City is on the doorstep of Sri Lanka’s capital. After the operation of the Port City, life as a businessperson could be very different depending on which side of the Chaithya Road your business is situated. You may be competing for the same resources but face very different rules and taxes. The latter is a deeper malaise.

Already stretched for revenue to cover even its debt obligations, the Port City may prove to be a leakage point of taxes for the State. Finally,  given its proximity to Colombo, there is a risk of capture of the regulatory framework of the same elite who have secured rents for themselves in the existing system. It’s no accident that successful SEZs tend to be away from the established power centres, such as Shenzhen was to Beijing. 

Only good rules, predictable policies, and oversight can overcome these challenges. A focus on better governance rather than tax breaks and giveaways would help keep the house in order.  

It would be better for the entire country to be governed by better rules and efficient systems that enhance ease of doing business. Given its size and scope, the Port City cannot perform miracles, but we can hope that Port City would be a catalyst in bringing about some of these changes to the country proper.

The project itself is an admission of failure in governance. Even when Sri Lankan leaders know what to do, a combination of backward ideology, political opportunism, vested interests, and lack of state capacity seem to hold back the vital growth oriented reforms. It is these reforms that are needed to expand economic opportunities for all Sri Lankans.  

The Port City can give the country a shortcut to attract foreign investments, provided it focuses on the right thing -- better economic governance.

The authors are resident fellows of the Advocata Institute, a free-market think tank based in Colombo. Learn more about Advocata’s work at www.advocata.org. The authors are grateful to the many useful conversations with the think tank’s advisors whose ideas helped this article.

In the Port City debate, hypocrisy is bipartisan

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

It is hypocritical for a political coalition that demonised the then Government and minorities by vigorously promoting the principle of ‘one country, one law’, to then propose to carve out the Port City development as a geographical area exempt from many of the laws and practices prevalent in the country. Those who sow the wind, reap the whirlwind. Because of this hypocrisy, the Government has great difficulty doing what it knows is the right thing for the country.

It is hypocritical for members of the dominant party in the previous Government (now split) to protest vociferously against the special treatment proposed for investors by the Colombo Port City Economic Commission Bill. They full well know the dysfunctions of the investment environment in Sri Lanka. The then Government was working on a bill on the same lines. There was discussion on placing the financial city within the jurisdiction of the English courts then.

It is not hypocritical for the Bar Association and other interveners to object to the proposal to establish an International Commercial Dispute Resolution Centre and to the associated legal workarounds. But it is wrong and self-serving. Members of the legal profession, more than anyone else, should know how dysfunctional the country’s legal system has become.

At the 47th Annual Convocation of the Bar Association, the Minister of Justice said that the average time to enforce a commercial contract in this country is 1,318 days (3.5 years). It is said to take one year to get a date for an appeal to be fixed for hearing on a criminal matter.

All of us who worked on improving Sri Lanka’s rank in the Ease of Doing Business Indicator know that the legal-system-related factors are a major factor in Sri Lanka being relegated to the back of the class. Poor performance in resolving insolvency and enforcing contracts are major contributors to Sri Lanka being ranked 99th out of 190 countries. On enforcing contracts, we are ranked 164th.

So, the previous Government was right when they considered placing contracts of investors in the Port City under English commercial courts. The experts who crafted the present bill were right in making arbitration by the International Commercial Dispute Resolution Centre mandatory and allowing for a fast-track engagement with the Sri Lankan courts as needed. Commercial arbitration is nothing new in Sri Lanka. To argue that it violates our Constitution is a little farfetched.

But of course, professional associations rarely allow logic and the national interest to come in the way of the financial and related interests of the members. The Sri Lankan legal system is one of the worst in the world, partly because the powerful private interests of the legal professionals are given priority over the interests of litigants and the country. It is not in their interest to admit how broken the system, they profit off, is. The Colombo Port City Economic Commission Bill is an indictment of that system. Lawyers, individually (as a prominent politician/President’s Counsel so vividly demonstrated) and collectively, are likely to oppose it.

The Port City bill is a workaround. It is needed because our systems are broken. President J.R. Jayewardene established the Greater Colombo Economic Commission (predecessor to the Board of Investment) as a workaround solution, by Act No. 4 of 1978 because our systems were a barrier to the attraction of needed foreign investment. We have the Katunayake and Biyagama zones and the various value-added manufacturing industries that are keeping our economy afloat, thanks to that workaround.

The tragedy is that 43 years later we are still doing workarounds. We need these stopgap measures, but we need to give the highest importance to fix all the systems that affect all our citizens, not just the foreign investors. Despite the specific mention of the doing business indicator in the Port City Commission Bill, the indicator is not done for enclaves but for the country as a whole. Improving the key systems across the country is what others are doing. India is now more than 30 places ahead of Sri Lanka, thanks to dedicated task forces. China is ranked 31st, more than 30 positions ahead of India and more than 60 ahead of Sri Lanka. I invite the readers to look at how well our competitor, Viet Nam, is doing.

If we do not improve the ease of doing business for all, we will be overtaken by Pakistan soon. They are taking concerted action to improve performance on the components and are now just nine places behind. Do the work around, but for God’s sake, focus on system improvements throughout. Define threshold levels in the Port City Bill itself when the workarounds can be discontinued, and we can celebrate living in a country where the legal system does not require bypass.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

From the frying pan..

Originally appeared on The Morning

By Dhananath Fernando

The dangerous precedent set by the sudden, outright ban on palm oil

Chief Seattle, a native American tribal chief back, in the 18th Century said: “Man does not weave this web of life. He is merely a strand of it. Whatever he does to the web, he does to himself.” Such wisdom is not only valid to man and the environment – it’s also valid to the concept of a market. 

Any interventions we make to one single market results in damage to the rest of the whole market, and to our own selves, but policymakers still don’t seem to understand this basic fact.  They do things with good intentions, but at an enormous cost to everyone else in the system. In the Sri Lankan context, some of the market interventions are made to gain political advantage, which ultimately ends up diluting political capital and worsening the problem further.  

Sri Lanka has a history of banning goods, and banning palm oil is only the latest example.  

Sometime ago, there was a discussion on banning 20-micron polythene, and then His Excellency  President Sirisena wanted to ban chainsaws and carpentry sheds. Then there were discussions on banning cattle slaughter and sachet packets – and now the spotlight is on banning palm oil.

It was reported that the Government decided to not only ban importation of palm oil, but also the operation of palm oil plantations. The decision further stated that the existing palm oil plantations are required to uproot the palm cultivation with a 10% annual phasing out, while replacing the cultivation with rubber and other products. It was justified on the grounds that the objective of this decision was to protect consumers from carcinogenic compounds in the market. However, on the very next day, it was announced that the Government expects to provide a license for palm oil importation, after listening to the concerns raised by the bakery and confectionary industries, where palm oil is a main ingredient. This creates a serious and valid  question: How can we import palm oil and allow the confectionery and bakery industries to operate, if palm oil has carcinogenic content? The justification does not make logical sense. 

The global palm oil industry 

Let’s first take a look at the numbers to understand the palm oil industry. According to United Nations statistics, palm oil is a $ 60 billion global industry that provides direct employment to 6 million and indirect employment to another 11 million. In 2018, around 21 million metric tonnes (MT) of palm oil was produced. Indonesia and Malaysia are the main palm oil producers in the world, where India, China, and the EU are the main importers. In terms of global vegetable oil production, palm oil has taken the lead over the last decade, compared to other edible oils such as soya, sesame, and sunflower oil. 

Local palm oil industry

If we look at the Sri Lankan palm oil industry, about Rs. 26 billion has been invested, with cultivation on over 11,000 hectares, which is just over 1% of the extent of our entire tea plantations, according to a research report published by Capital Alliance Research Team.

According to the same report, Sri Lanka’s actual coconut oil production is about 27,000 MT, whereas the palm oil annual requirement is about 217,000 MT. Industries such as margarine, soaps, shampoo, ice creams, and biscuits use palm oil as a main ingredient. 

Some of the organisations dependent on palm oil are multinationals and large locally-owned corporations. At micro level, small businesses such as restaurants and small-scale confectionery businesses and bakery industries, who are the main users of palm oil, will feel a significant impact from the decision. Additionally, five publicly listed companies (Watawala Plantation PLC – annual revenue of Rs. 2,675 million; Namunukula Plantations PLC – annual revenue of Rs. 1,049 million; Elpitiya Plantations PLC – annual revenue of Rs. 780 million; Agalawatte Plantations PLC – annual revenue of Rs. 456 million; and Kotagala Plantations PLC – annual revenue of Rs. 109 million) will be  directly affected.  

 Economic impact 

Like Chief Seattle said, humans and the environment are strands of the same web. Similarly, the palm oil industry is connected with so many other industries. This affects our overall economy, as all markets are interconnected. So the sudden decision will have an impact on the economy,  starting from the small “wade” shop down the road that uses palm oil as the main frying source, which is available for a reasonable price to large scale companies who are in plantation, confectionery industries along with listed companies.  

Most likely, the unavailability of palm oil will affect the higher demand for coconut oil, which will increase the demand for coconuts. Higher demand with stagnant supply will lead to increase in the domestic prices of coconuts and coconut oil. Higher coconut prices would negatively affect coconut exports, sales, and exporter margins. 

Since shifting to coconut oil is expensive for  small-scale businesses, usage of the same coconut oil multiple times for frying purposes will be incentivised. Black markets will be created for palm oil, or market manipulation will take place with further carcinogenic substances, which will be even more difficult to track. In some instances, prices of food may further increase, and some shops may have to close down permanently. 

 Negative signals to other markets undermines property rights 

Banning palm oil plantations overnight without any consultation, and requesting to uproot the existing plantations, will be considered by investors as undermining of private property. Uprooting incurs extra costs in addition to the losses that will be faced by plantations. Even if they shift to other cutivations such as rubber, the challenges imposed to these businesses would affect the ease of doing business and investor confidence, at an hour where we need their support the most. 

 Setting up a licence regime

The last few decisions made by the economic policymakers on banning certain products and services have seen Sri Lanka drifting towards a complete licensing regime, in which only the politically connected and privileged would be benefitted. Such culture would set up a bad example for all other markets and businesses, and it opens room for more corruption. Starting from banning tyres, bathware, and many other imports, the sequence of actions has been: Ban first; face resistance from the industry; and provide special licenses for importation to a handful of suppliers. 

This sequence of events is the setting up of a license regime. Such regimes are harmful to consumers and distribute profits to palm oil substitutes, which may not produce enough to make up for the reduction in imports. Consequently, such action would raise the price of coconut oil, which is used widely in Sri Lanka. In terms of economics, banning products creates the ideal situation for “rent seeking”, where an intervention distorts incentives. And, resources used to gain access to these profits creates deadweight losses (meaning both the consumer and the producer lose out).

Concerns of health and water usage of palm and palm oil 

Health concerns have been highlighted by scientists all over the world on edible oils, which are mainly not limited to palm oil. According to European Food Safety Authority (EFSA), the risks of cancer are mainly due to glycidyl fatty acid esters (GE), 3-monochloropropanediol (3-MCPD), and 2-monochloropropanediol (2-MCPD), and their fatty acid esters, which form when processing vegetable oil at high temperatures, which could be carcinogenic. 

Like consuming substandard sugar and salt, the edible oils could bring health concerns. This has been highlighted in many parts of the world. On the other hand, the usage of soil water has been a main concern for the resistance for palm cultivation. Palm cultivation is way more productive than coconut and other edible oil products, because it consumes more water than any of these. In other words, by utilising way less land, we can match the same oil requirement by palm, so at an overall level, it consumes less water and provides for more productivity. 

The way forward and solutions

As a way forward, there are multiple fronts the Government needs to address: First, to make sure not to make uninformed decisions – without industry consultation – which have a direct impact on their political capital and the wider business confidence. Secondly, banning is not a solution to the problem, but only worsens the problem further! 

Even if palm oil is proven to be carcinogenic and damaging to the water bed, then incentive structures have to be used to discourage its usage. Just because we are all aware that cigarettes, alcohol, and white sugar are cancer-causing, we don’t ban these products, as it would create further distortions. 

Thirdly, property rights have to be respected to attract investment; and fourthly, creating a licensing regime will further make the process unproductive, while further creating public health calamities that will end up in tarnishing the Government’s reputation and pushing public health towards further risk. Like Chief Seattle said, we all are a part of the same system. Banning is the same as distancing ourselves from the strands of a complicated web. It further weakens the web instead of straightening it out. 

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 state minister is right on alcohol

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

State Minister of Coconut, Kithul, Palmyrah and Rubber Cultivation Promotion and Related Industrial Product Manufacturing and Export Diversification Arundika Fernando was wrong in asking ASP Eric Perera to go easy on small-scale producers of illegal liquor. 

As ASP Perera correctly explained, police officers cannot make arbitrary distinctions between law breakers who are small scale and who are not. This country is plagued by abuse of prosecutorial discretion. It is wrong to demand that investigatory discretion be further abused too.

But the State Minister has a point. We should not be misdirecting scarce police resources on prosecuting producers of alcoholic beverages. We should change the law to reduce the financial incentives of operating illegal stills. 

The Minister of Public Security was wrong to transfer a law-abiding and apparently efficient senior police officer. Instead of engaging in such actions harmful to the efficient functioning of government (another consequence of the 20th Amendment), he should have focused his attention on the parlous state of law and order in this country. 

More than half of the police force of over 88,000 is still deployed on VIP security almost 12 years after the decapitation of the LTTE; and 30 years after the decapitation of the DJV, the military arm of the then JVP. Laws are not enforced without fear or favour. Most people are told to catch the law breakers and bring them to the police station. Sometimes the police are a greater threat to citizens than criminals. 

The story of Scotch 

Most decision-makers in this country have a liking for Scotch whiskey. Therefore, the story of Scotch may be more persuasive than the stories of arrack and baijiu (which will also be told).

As the distilling of whiskey became more popular in Scotland, legislators sought a piece of the action. The first taxes on Scotch were introduced in 1644 which led to an increase in illicit whisky distilling across Scotland. By the 1820s, as many as 14,000 illicit stills were being confiscated every year. More than half the whisky consumed in Scotland was illegal. It was even said that King George IV drank nothing but illegal Glenlivet.

In 1823 the Excise Act was passed, which permitted the distilling of whisky on payment of a license fee of GBP 10, and a set payment per gallon of proof spirit. Next time you partake, examine the label. It is likely that the bottler of your favourite beverage traces its origins to around 1823.

Even after COVID-19 and a punitive tariff imposed by the United States, earnings from the export of Scotch whiskey amounted to GBP 3.8 billion in 2020. The year before, it was GBP 4.9 billion. This does not include earnings from related activities such as whiskey tourism. Over two million visits to Scotch distilleries per year were reported before the pandemic hit. 

The story of arrack

Arrack manufacturing was developed during Dutch rule of the coastal areas. Exports grew rapidly under early British rule. Unlike its Scottish counterpart, the Excise Ordinance of 1834 consolidated legal production in a few large companies and made the pot still distillers illegal. Exports ceased.

It is possible that concerns over quality of the product, including periodic methanol poisoning, led to restrictive licensing. The manufacturing and consumption of hali arakku (arrack from pot stills), derogatively described as kasippu, was a major element of life in the coastal belt. The battle between the police and illicit distillers was never ending. When the men got incarcerated, women ran the business. 

It is this ancient tension that Arundika Fernando gives voice to. People believe the Government-sanctioned liquor is too expensive or that its quality has been compromised because of the incentives set in place by the excise taxes. Or they simply prefer the taste of the local product. The gap between what the Government-sanctioned liquor is sold for and the cost of producing hali arakku is large, permitting significant expenditure on bribes.

The State Minister should not be asking for selective enforcement of the law and ‘rehabilitation’ of small producers. There is no way a practice that has survived for a century or more can be eliminated by any form of ‘rehabilitation’. What he should be advocating is the reform of a law that criminalises industrious people and is an engine of black money that then poisons the rest of society. 

Reform the law

There are reasons to worry about excessive consumption of intoxicants. People can get sick and, in a publicly funded healthcare system like ours, the costs of treatment will be borne by all. People have been using intoxicants of various forms throughout history, suggesting that stamping out the practice is unrealistic. Yet it is wise to do things like control advertising of alcohol, which Sri Lanka has been doing since the 1990s, and to promote moderation. 

It is unlikely that the Sri Lankan excise and police authorities will ever be able to fully stamp out pot still production. The resources needed for stronger enforcement would cause further harm to the weakened law enforcement that exists today. 

Government should look at a comprehensive solution that includes rationalisation of excise taxes, whereby what now goes under the table to politicians and police personnel comes to the State. Encouragement should be given to the development of premium brands associated with colourful narratives that can do well in export markets and even in the wealthier market segments within the country.  Arrack-centric tourism should be promoted. Reduction of excise taxes combined with a reallocation of enforcement resources will create the right conditions for the needed focus on ensuring the quality of the manufactured output, putting a stop to what many believe to be rampant tampering. The world’s most consumed alcoholic beverage is not whiskey. It is Baijiu, the most famous brand being Moutai. What used to be quick way of getting drunk has been undergoing an extraordinary transformation in recent times, with all sorts of premium products and brands being developed and marketed outside China. Some bottles are priced in the thousands of dollars. 

Sri Lanka’s arrack has greater potential than the Chinese firewater. But the potential cannot be realised only by the old established big companies. Legalising small producers and unleashing their innovative energy is the essential precondition for Sri Lanka regaining its position as an exporter of premium alcohol products from coconut, kithul, and palmyrah.  The State Minister should proceed with confidence. If the President is against this kind of initiative, he would not have created a separate Ministry for Coconut, Kithul, Palmyrah and Rubber Cultivation Promotion and Related Industrial Product Manufacturing and Export Diversification. There is only so much you can do with coconut ekels.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Confused by the coconut oil conundrum?

Originally appeared on The Morning

By Dhananath Fernando

As usual, Sri Lanka is cruising through another eventful week; this time with discussions on the topic of imported coconut oil that is said to contain carcinogenic compounds called aflatoxins. On social media, I saw people sharing posts saying that, to date, they were under the impression that the coconut oil they have been consuming was produced in Sri Lanka.

The government authorities, public health officers, Sri Lanka Customs, Sri Lanka Standards Institute (SLSI), and many other government agencies are running around scrambling to check whether the carcinogenic coconut consignments have been released to the market. As we get closer to the Sinhala New Year, it is the norm that the prices of coconuts increase, and also that coconut oil consumption increases. So, people were already confused as to whether to buy coconut oil or not and as to what substitutes are available.

This is yet again another example of closing the stable door after the horse has bolted. It’s quite unfortunate that no one thinks about the economics behind the coconut oil issue. Instead of trying to take political advantage of the situation, we need to explore the root cause of the issue.  

Let’s understand the numbers first. According to Coconut Development Authority (CDA) Director General Dasitha Niroshana, Sri Lanka’s total demand for coconut oil is about 180,000 MT (metric tonnes) per year. Out of that, about 90,000 MT are for domestic usage and the balance is for industrial usage. Over the last few years, our local coconut oil production was about 40,000 MT. Due to climate challenges, higher prices, and thin margins, coconut oil production has been negatively affected. For the last few years, local coconut oil production has come down to about 25,000 MT. According to these statistics, about 140,000-155,000 MT of coconut oil are being imported for industrial and domestic use. Refined as well as non-refined coconut oil is imported. Given the nature of the product, microbial activity can take place when it’s stored for a long period of time and also based on the handling process.

It takes about eight coconuts to produce 1 kg of coconut oil. For the domestic usage of coconut oil, estimating that the production levels are at 25,000 MT, about 200 million nuts will be required for domestic consumption alone. The total nuts we can produce per annum is about 2,600-3,000 million by utilising 20.6% of our arable land. As Sri Lankans consume quite a lot of coconut for personal use and for their cuisine, we are still short of about 600 million nuts per annum to meet the total national demand for coconuts.

As the coconut yield is somewhat sensitive to water levels, changes in weather affect the harvest and supply. Additionally, the coconut trees in Sri Lanka are very old, and only about 62 nuts can be produced per tree. Meanwhile, the best Sri Lankan yield amounts to about 6,000 nuts per hectare. If we look at competitive markets like Kerala, Malaysia, and the Philippines, it’s as high as 11,000-14,000 coconuts per hectare, while Indonesia has the highest productivity with 15,000 coconuts per hectare. However, the Sri Lankan coconut is specifically preferred for some industrial uses, as the aroma and taste of the Sri Lankan coconut is quite unique. However, we can’t match the demand. 

On the other hand, the edible oil market is changing drastically. With consumption patterns of customers who want a healthy heart and less cholesterol content, markets in Europe and America shifted to edible plant fats of soybeans, corn, peanut, sunflower oil, and other oil sources. 

The price of coconut is one key determinant for the import of coconut oil. Given that the margins are thin in the coconut oil industry, when the coconut prices go up, there is more incentive to import coconut oil instead of manufacture it locally at a higher cost.

Most of the coconut-based export businesses are also affected when coconut prices go up, as they have signed agreements with their buyers overseas. 

On the demand side, locally, the demand is increasing with the increase in population and usage in Sri Lanka. On the supply side, it’s stagnant or decreasing due to extremely low productivity. As a result, coconut prices go up, which affects the entire value chain of the business cycle. 

So the big question is, what have we done to increase productivity and take a count on the policy prescription we have been following?

When the coconut prices went up during the tenure of the last Government, they imposed a price control. Following in the same footsteps, the current Government too imposed a price control last November. Needless to say, none of the price controls really worked. Instead, it further distorted the market. When you have price controls, inferior-quality products are entering the market or the available products are disappearing and black markets are created. In the case of coconut oil, the market distortion by price controls on coconut has incentivised people to bring low-quality products and manipulate the market.

Additionally, one substitute product, which is palm oil, has been discontinued, due to environmental reasons. Palm oil is a substitute for coconut oil and produces a higher yield than coconuts. Rather than finding a solution for proper water management, complete interference in the market has now distorted the entire market with the introduction of products that allegedly contain carcinogens to the market. As a remedial action, the CDA has issued a five-star label to seven selected coconut suppliers where the production method is evaluated from end to end and monitored by government authorities so that consumers can be assured that the coconut oil is pure and good to use. Yet again, however, the prices are about Rs. 100-200 higher, according to the CDA Director General. Obviously when you only allow only seven players to supply authorised coconut oil, the suppliers are going to increase the prices, as they lobby to keep higher profit margins. In economic terms, we can call this a “rent” , due to the advantage of the restriction of access by new players.

In summary, we have distorted the concept of markets by introducing price controls and providing licences. As a result, our productivity is very low in the coconut sector and our solution for all problems has been market intervention again and again by consecutive governments. At the same time, as a result of focusing on unnecessary state-owned enterprises, the State has forgotten the role of necessary market regulations to ensure consumer protection. As a result, from time to time, we hear news stories of the importation of rotten tin fish and carcinogenic coconut oil, and we kill time till another similar story explodes. The problems remain the same or become worse; our attention diverts; life goes on… 

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.

Port City more crucial by the day so don’t delay

Originally appeared on The Morning

By Dhananath Fernando

Debt repayments, human rights issues, credit rating downgrades and pandemic make Port City our big hope.

The company Google maintains the idea of “10X thinking”. What 10X thinking means is that if one is serious about innovation, one would ideally improve things by 10 times, rather than by 10%. While Google believes we have to move at 10 times the speed for real transformation, the Japanese believe in a business philosophy that goes by the name “Kaizen”. The Kaizen theory emphasises that small-scale productivity improvements, if done consistently, with the engagement of employees, will lead to effective transformational change over time.

In hindsight, looking at Sri Lanka’s development pipeline, our own 10X ideas or Kaizens are not something we can be too proud of. We’ve hardly had any 10X ideas, and have had little consistency in our policy. In fact, one could say that the only consistent aspect of our policy is that it is inconsistent.

One of the main 10X ideas for Sri Lanka that this column has extensively discussed is land reform, chiefly through building a digital land registry that could infuse capital into the economy and improve agricultural productivity. The other 10X idea we have on our table is the Colombo Port City, a project by China Harbour Company. 

The reclamation of 269 hectares of land was completed in January 2019. The construction of the water breaker was completed in June the same year. In this backdrop, it has been reported in the media that last week the Cabinet approved the Colombo Port City Economic Bill, which allows the establishment of a special economic zone within Port City.

What is so special about Port City? I am sure most Sri Lankans would say they know nothing much, other than the fact that it is a Chinese investment, and an ambitious project to build a city on the sea. Many view it as an infrastructure project to build a financial city with tall buildings, including hospitals, residential areas, hotels and schools, and many other ancillary services, to make Sri Lanka a financial hub. 

Then the main question we have to ask ourselves is: Why would investors want to come to Port City? The simple reason is that the Port City would act like a special economic zone with special laws and regulations. Therefore, it would be a more convenient place to operate. Secondly, reduced regulations would make it easy to connect with other centres, creating a conducive environment to make profits.

However, people are largely unaware that the new law in force in the Port City actually makes it a project with 10X additions, and gives it an opportunity to become a financial hub in the region. The significance is not in the skyscrapers or other physical infrastructure, but instead lies in its potential to create an easier operating environment with lower regulations.

The next question you may ask is: Why do we need a new law for the Port City? Why can’t it fall under existing Sri Lankan business law? The answer to that is simple: If businesses in Port City come under Sri Lankan law, and under the current jurisdiction and regulatory framework – starting from business registration to resolving a business conflict, or any transaction for that matter – then these businesses would experience the same inconvenient and cumbersome process of doing business that all investors in Sri Lanka presently have to endure.

To attract an investor to Port City, the laws and regulations it comes under should facilitate the creation of speedy business services, and have significant synergies in productivity, thereby significantly lowering business transaction costs. In addition, the laws incorporated will have to be competitive and on par with other competing financial hubs, such as Singapore.

The draft law will be a critical factor that determines the future of this multi-billion dollar project. It has to be competitive with other financial centres in the region if it is to succeed. If it fails to meet these standards, investors have no reason to bring their money, or to move their financial institutes and headquarters to Sri Lanka.

We cannot comment on this law until it is placed before Parliament, but we know for sure that this should have happened far earlier. The Port City project was launched in September 2014, but even after seven years, investors are yet to see this law. This is essential to their investment decisions.

Under the previous Government, it was reported that some attempts were made in drafting the law, but it was not presented to Parliament, and the project was on hold for renegotiation. While the Cabinet clearance of the Colombo Port City Economic Bill could renew hope for the project, we should not delay the process further. At the same time, we have to be absolutely confident that the law has been drafted with the right specifications to meet investor expectations. Because of the current delay in producing the legal draft to Parliament and getting it approved, a quick sale on land in Port City has been affected. Just by the sale of land, or 99-year lease agreements, the Government expects a minimum of $ 1.8 billion in revenue, and $ 3.4 billion for the China Harbour Company. However, in making an investment calculation, we look at not only the amount of money we invest, but also the time spent.

According to State Minister of Money, Capital Markets and State Enterprise Reforms Ajith Nivaard Cabraal, out of $ 32 billion expected in foriegn currency inflows to the country, $ 15 billion in exports and about $ 7-8 billion in remittances has been forecasted. More than $ 3 billion is expected in total only for this year in the form of Foreign Direct Investment, and the main investments are expected through the Port City project. Therefore, the development of the Port City is a significant source of income for the country.

With mounting debt repayments for the next three to four years, and now with the UN Human Rights Council’s human rights-related issues, we should understand the importance of the collective effort of maintaining Sri Lanka’s image as a credible global partner. In this backdrop, placing all our investment expectations into the sole basket of the Port City is going to prove risky.

Let’s think through this in the shoes of an investor. Imagine you have about $ 1 billion and you’re considering investing in the Port City project. But to date, you do not know the law that will be enforced, while concerns have been raised by the UNHRC. In addition, the country’s credit rating has been downgraded by rating agencies, particularly in the face of the pandemic. Would you, as an investor, confidently bring your $ 1 billion to Sri Lanka – or would you delay the investment and consider markets such as Singapore, Malaysia, and Vietnam?

On the other hand, the Government has to be very careful of the potential opposition from anti-competition lobby groups who will be affected by the Port City. A successful Port City project means the presence of international law firms, IT professionals, health care workers, and education experts; opening up competition with the best of talent and skill at the global level. Sri Lanka’s experience in the recent past has not been very positive when it comes to opening up to competition. Our strategy has always been to look inwards, rather than outwards.

Therefore, the Government has the twin challenge of first getting the legal draft right and getting it out fast; and providing investors with confidence and addressing investor expectations with a collective effort of easing businesses in Sri Lanka. Secondly, the Government will have to manage the resistance that is likely to pop up from lobby groups for changes in the legal draft, blocking international competition in certain sectors. 

If we are serious about a transformed Sri Lanka, we need a combination of Kaizens and 10X ideas; meaning we have to consistently implement 10X ideas for a significant period of time. But only time will tell what we will do.

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.

Enough rent seeking, bring on competition

Originally appeared on The Morning

By Dhananath Fernando

I studied at a semi-government school. Students studying in these schools pay a school fee every month. Due to financial constraints, some students found it rather difficult to pay this fee. As a solution, we decided to organise a food fair to raise funds as opposed to collecting money, which we thought would be a direct burden on most parents. The fair required students to bring food that was tradable. I remember referring to this as a “salpila” in Sinhala. Most parents contributed by sending in homemade food items such as hot dogs, sherbet, short eats, faluda, and sweetmeats.

However, the food fair faced a significant challenge. We were only permitted to have the fair within the 20-minute lunch break and were strictly advised not to disturb the academic timetable for the day. I was not too pleased with this and proudly suggested a “brilliant” idea to increase the demand and sales of our little “salpila”. My “brilliant” idea was to close down the school canteen during the lunch break on that particular day, so students will be left with no choice but to purchase from the “salpila”. However, to my dismay, the then principal explicitly turned down my request. He then explained to me how short-sighted my proposal was.

It was then that I was introduced to the concept of “rent-seeking. Rent-seeking is the manipulation or alteration of the market for financial gains. This exactly was what we had proposed. The principal went on to question us on how we could match the demand of 3,000 students and the plight of the canteen owner who was on a rent agreement with the school.

I argued back, questioning “what is the big loss the canteen owner is going to make just for closing down the canteen for 20 minutes” and “why can’t the principal support us in such a noble effort of assisting our classmates to continue their education”. Our principal explained to us that bending the rules to make profit is not the way to do business or to help our classmates. However, he said that we can compete with the canteen focusing on goods that are not available there.

Now, as an adult, every time I see an overnight gazette notification or stories of import taxes on sugar, CESS on tiles, import duties on menstrual hygiene products, I revisit my school days and my short-sighted thought process which I believed to be “brilliant” at the time. The most recent story on the matter is the sugar importation conundrum which took the limelight with the COPA report. There is one school of thought that it is just a revenue loss for the government and there is another school of thought that this is a fraud. However, it is clear that the consumer has become the net loser. It is unfortunate that the discussion is not on the economics of it but rather pointing fingers at each other and comparing which losses are greater: Bond fiasco or sugar tax reduction.

Overnight gazettes: Open window for fraud and corruption

Having low duties on imports is always better for imported commodities as ultimately the tax has to be paid by the consumer. While the taxes have to be low, it is equally important for the taxes to be consistent and predictable so the room for market manipulation is limited. On the other hand, using quantitative restrictions to limit imports would encourage rent-seeking, a concept proposed by Prof. Anne Krueger.

It has become the habit of all consecutive governments to impose various import duties and taxes on various import items which affect the prices drastically. When the taxes are changed overnight in significant amounts inconsistently across and selected commodities, it will act as a barrier for small players to enter into business as they do not have the capacity to absorb tax losses or match massive quantities as it is difficult to decide on prices.

As a result, the importation of commodities such as sugar only has a handful of importers who act as an oligopoly and can manipulate market prices. Especially when taxes are brought down from large amounts such as from Rs. 50 to 25 cents, there is a higher chance of getting insider information and manipulating the market. As a result, few traders have the opportunity to get to know information early and bring in stocks early and store in bonded warehouses where only the taxes are applicable on rates where the consignment is released. This allows them to take the tax advantage by keeping prices unchanged. Or in worst cases, taxes can be brought down overnight and it can be increased again overnight, favouring a few individuals just after the goods are cleared at the port, and this is how the overnight gazette notification opens the window for rent-seeking. This can be seen every time when a budget is presented and many speculations float around on the vehicle market and many other commodity markets.

Consecutive governments are of the belief that overnight gazette notifications have become a tool to raise revenue for the government as well as to regulate markets, and this sugar tax has proved that it is not only a completely ineffective tool, but also a window for corruption.

Government’s policy inconsistency with tax policy

One of the main reasons provided by the Government to keep the corporate tax and income tax unchanged is to provide policy consistency so the business can predict future trends and support growth. The same thinking process needs to be applicable for indirect taxes as well. Both direct taxes as well as indirect taxes have similar consequences when it comes to inconsistency. Finance Ministry officials have agreed that high tariffs on sugar add a burden on the cost of living and that is one reason to bring down taxes, which is the right way to think about it.

At the same time, we should not forget the tariff on other commodities such as tiles, bathware, menstrual hygiene products, construction steel, other food items, cement; all product categories and commodities too add to the cost of living of people. When we have double and multiple standards on tariffs, that too distort markets and open opportunities for rent-seeking.

The policy of self-sufficiency has been challenged

On the other front, with the reduction of sugar tariffs, acknowledging that the tariffs have caused to increase the prices and shrink the supply has proved that self-sufficiency in sugar is an impractical concept to achieve. In a recent interview, Trade Minister Bandula Gunawardana has mentioned that import controls caused small-scale exporters who export coconut-related products and food items to be badly affected. The same argument has been highlighted by this column since the day the self-sufficiency policy was pronounced, highlighting the consequences on both losing our export markets, volumes, as well as our export competitiveness. 

Imports restrictions by themselves cannot cause pressure on the LKR, as it does not reduce the demand for sugar. What can cause pressure on the rupee is the ill-managed Monetary Policy that causes the pressure on the LKR and the balance of payment crisis. After serious import controls and trade restrictions, that is one reason why the rupee has achieved a historic low last week.

Though how good may be our intention, not knowing the right concepts not only distorts markets, but also brings united consequences for people and their quality of life. Like my principal advised me many years ago, the way to combat issues is not by rent-seeking but by competition.

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.

Poverty reduction needs to be prioritised with cohesive export-led growth policy framework

Originally appeared on The Daily FT

By Prof. Sirimevan Colombage

In Sri Lanka, around 40% of the population lives below the poverty line, according to expert opinion based on the survey data for 2016, in contrast to the official poverty ratio of only 4%. In the backdrop of the COVID-19 pandemic, the poverty ratio is likely to have reached nearly 50% of the population by now.

Adequate attention has not been given to poverty reduction in policy formulation agendas in recent times. 

An outward-looking trade policy aiming at export-led economic growth is imperative for poverty reduction, as evident from the fast-grown East Asian countries and emerging Asian economies such as Vietnam and Bangladesh. 

SL’s actual poverty 10 times bigger than official estimate

According to the Department of Census and Statistics (DCS), Sri Lanka’s headcount poverty index dramatically declined from 22.7% in 2002 to 4.1% in 2016, as per consumption approach. In computing this poverty index, DCS has used the National Poverty Line (NPL). 

The limitations of using the NPL for poverty estimation have been articulated in his incisive article by Wimal Nanayakkara, Senior Visiting Fellow at the Institute of Policy Studies (IPS) and former Director General of the Department of Census and Statistics. 

He suggests that the World Bank’s Global Poverty Line (GPL) is more appropriate for estimating the headcount index in keeping with international standards. The current NPL is based on the market values of an outdated basket of goods and services drawn from the Household Income and Expenditure Survey conducted by DCS way back in 2002. 

The World Bank’s poverty thresholds vary with the member country’s per capita Gross National Income (GNI). With her per capita GNI of $ 4,060, Sri Lanka reached the Upper-Middle Income Country (UMIC) status ($ 3,996 – $ 12,375) in July 2019, and hence, people who live below $ 5.5 daily income per person are poor based on GPL relevant to UMIC, according to Nanayakkara. 

Sri Lanka’s per capita GNI declined to $ 4,010 in 2019. As it was lower than the revised July 2020 UMIC classification ($ 4,046 - $ 12,535), Sri Lanka quickly slipped back to the Lower Middle-Income Country (LMIC) status ($ 1,036 - $ 4,045) along with Algeria and Sudan, as rightly predicted by Nanayakkara.  The applicable GPL for LMIC is $ 3.20. 

In terms of the GPL of $ 5.5, which is applicable for UMIC, Sri Lanka’s headcount poverty index for 2019 is as much as 40.4%, according to Nanayakkara. This can still be considered as the current poverty position of Sri Lanka, as her per capita GNI is still very close to the lower end of per capita GNI of UMIC, though she is now in LMIC category. 

Thus, the actual number of people living below the poverty line in Sri Lanka is about 10 times bigger than the mere 4.1% of population, as reflected in official statistics. 

Export-led growth for poverty reduction

It is essential to accelerate the rate of growth of Gross Domestic Product (GDP) to overcome poverty. The main ingredient for growth acceleration is foreign trade expansion which enables developing countries to gain market access, economies of scale, capital inflows, technology infusion, productivity improvements and efficiency. 

Open trade has been increasingly recognised as the key driver of employment creation and poverty reduction across the world in recent decades. Exports are critically important for economic growth, particularly for developing countries where domestic markets are small. Exports allow domestic producers to access international markets, and thereby to benefit from economies of scale. 

The world-wide evidence proves that those countries that achieved high export growth are the ones that enjoy high GDP growth and extensive poverty reduction. 

Sri Lanka’s backward technology and innovation

The formidable challenge currently faced by Sri Lanka is to raise her export growth at a rapid pace to achieve high GDP growth so as to reduce poverty. 

The country’s export sector, which is limited to a few low-tech products particularly apparels, has failed to graduate to high-tech and high value-added exports such as electronics and bio-technology products, unlike East Asian countries. This was due to the country’s backwardness in technology and innovation. 

In this regard, Foreign Direct Investment (FDI) can play a major role in fostering export growth by way of facilitating foreign capital inflows, technology infusion and foreign market access.

Trade opening and FDI inflows are found to be the major driving force behind the success stories of East Asian economies. More recent examples are India, China, Vietnam and Bangladesh. Outward-oriented economic strategies adopted in these countries, much later than Sri Lanka, led to foster export-led growth enabling millions of people to come out of poverty. 

Bangladesh: from a “basket case” to an economic powerhouse

Bangladesh is a good example to illustrate how prudent economic policies can turn a poor country, which was once branded as a “basket case”, into fastest growing economy in the Asian-Pacific region. It has become the new economic leader in South Asia with annual GDP growth rate over 6% in recent years, which was driven by the three star-performers – agriculture, garment exports and worker remittances. 

The key factor that fosters export-led growth in Bangladesh has been the liberal foreign investment regime by means of legal protection for foreign investment, generous fiscal incentives, concessions on machinery imports, unrestricted exit policy and full repatriation of dividends. 

Prudent fiscal management too was achieved in Bangladesh containing budget deficit to 3.5 - 4.0% of GDP. It helped to lessen inflationary pressures and to maintain exchange rate stability so as to facilitate the export drive. 

Export-led growth has enabled Bangladesh to reduce poverty from 40% of the population to 14%. In parallel, there have been substantial improvements in social indicators – infant mortality, maternal mortality, undernourishment, school education and adult literacy

Phases of foreign trade regimes

Sri Lanka has oscillated between inward-looking and outward-looking trade policies from time to time since Independence, and therefore, failed to sustain steady export-led growth path so as to bring down poverty levels. 

Perhaps, such policy changes can be conceptualised by using the theoretical framework developed by the US National Bureau of Economic Research (NBER) in its series of studies on trade liberalisation under the direction of Anne Krueger and Jagdish Bhagwati in 1978. They divided a country’s liberalisation process into five phases from trade controls to liberalisation, as shown in the Table.

The NBER studies, drawn from the experiences from different trade regimes in a number of countries including India, Ghana, the Philippines, South Korea and Chile provided ample evidence on the benefits of trade liberalisation.

Sri Lanka’s trade liberalisation under stress

In 1977, Sri Lanka moved from Phase II (NBER classification) of stringent trade and exchange control controls to Phase III marking the initial stages of trade and exchange liberalisation. The liberalisation process had been intensified since then.

In 1994, the Sri Lankan Government accepted the obligations under Article VIII of the Articles of Agreement of the International Monetary Fund (IMF). Accordingly, all restrictions on current account transactions of the balance of payments (BOP) were removed and the Sri Lankan Rupee was allowed to be freely convertible for such transactions. This shift to Phase V (NBER classification) was a major step towards trade liberalisation. 

However, the momentum of liberalisation was short-lived as various types of controls had to be imposed frequently due to the ethnic conflict, balance of payments difficulties, macroeconomic instability and external trade shocks. Thus, the country reverts back to Phases I and II from time to time.

Recent import controls

The country’s BOP situation has worsened since last year due to the COVID-19 pandemic which has adversely affected the export and tourism sectors. The external payments problems have been compounded by foreign debt commitments which amount to $ 6 billion this year. The rise in global market prices of crude oil and other commodities has further pressurised the BOP situation. The likely decline in worker remittances will further enhance the BOP deficit. 

In the backdrop of BOP difficulties, the Government has imposed import controls on a number of “non-essential” goods since last year. These include motor vehicles and various other consumer durables.

These import controls have adverse implications for economic activity, GDP growth and poverty reduction. 

Debt sustainability risks ignored through swaps  

The Government was able to secure $ 1.5 billion swap from the People’s Bank of China last week to meet immediate BOP needs. It is reported that the Government is negotiating with India to obtain another $1.1 billion under swap facility, debt freezing arrangement and development aid.

These swap facilities are temporary solutions to overcome BOP difficulties, and hence, deeper policy adjustments are essential to address the disarrays in macroeconomic fundamentals, particularly debt sustainability risks.   

Keeping IMF at distance

Overwhelmed by the Chinese swap, State Minister Ajith Nivard Cabraal claims that the Government can manage without IMF assistance. In fact, the challenge is to resolve the macroeconomic imbalances, rather than stubbornly refusing to go to IMF. 

Malaysia, which had strong macroeconomic fundamentals during the Asian financial crisis, could afford to refuse bailout from IMF. 

Sri Lanka’s case is totally different with her high budget deficit, unsustainable debt commitments, balance of payments difficulties, slow economic growth and more than anything else, acute poverty. 

It is ideal that if these deep-rooted problems can be resolved by ourselves without seeking anybody’s assistance, leaving aside the IMF.

IMF’s conditionality requires correction of macroeconomic fundamentals with stipulated deadlines. We ourselves can make these corrections without obliging to IMF. It is not happening that way, and therefore, swaps which do not impose any corrective measures, are the easy way out for the authorities to evade the much-needed policy reforms. 

So, the macroeconomic disarrays will remain unresolved forever exerting disastrous effects on the country’s economic growth. As a result, the poor who represent about one half of the population will continue to suffer without having basic human needs met. 

Outward-looking strategy imperative for poverty reduction

The current restrictive trade policy measures, which are based on the inward-looking approach, have been imposed to tackle the BOP difficulties. However, they are detrimental to export-led growth and poverty reduction.  

Hence, a cohesive export-led growth policy framework is essential to address the socioeconomic problems faced by nearly 50% of the population living below the poverty line. Poverty reduction, which is almost ignored in the current economic policy formulation, should be an explicit target of any future growth strategy. 

(Prof. Sirimevan Colombage is Emeritus Professor in Economics at the Open University of Sri Lanka and Senior Visiting Fellow of the Advocata Institute. He is a former Director of Statistics of the Central Bank of Sri Lanka, and reachable through sscol@ou.ac.lk)

Falling in love and developing a country

Originally appeared on The Morning

By Dhananath Fernando

Why both are about processes and not single moments

Simon Sinek, a management consultant and the author of the book “Start With Why”, in a video interview provides some interesting thoughts about measuring “how much you love”. He questioned the moderator: “Do you love your wife?” and the moderator answers: “Yes, of course,” and Simon asks back: “Can you prove it? What are the metrics that you use to prove that you love your wife?”

Obviously it’s a difficult question to answer by anybody, because while love is a feeling which we know exists, it is very difficult to prove in which form it exists. Simon then explains how “falling in love” is a process rather than just an event. It is true there is love at first sight but proving how much you love someone and quantifying it is not easy. Simon explains how tiny little acts like greeting, listening, sharing, caring, dating, and understanding convert to love over a period of time, and that it’s really difficult to pinpoint at which point it became love or how much we love someone. You can check it yourself by trying to recall at what point you really fell in love with the ones you love.

I feel that Simon’s thoughts are not just relevant to love but also applicable to the concept of development of a country. Many of us think development is just a one-off event without really understanding it as a process that occurs over time. We always associate the “development of Sri Lanka” to actions and outcomes such as electing appropriate leaders or utilising an existing natural resource. If we look at recent Sri Lankan history, we have always been of the opinion that one single event can transform Sri Lanka into a high-income country. As a country, we were excited when there was news of a gold mine or even a single incident about a herbal syrup developed for Covid, thinking that this could have taken Sri Lanka out of poverty, by exporting the syrup to the entire world. We tend to get excited when we see news stories on exploring our valuable phosphate mines or hear about explorations of crude oil in our marine territory. We repeatedly forget that all these resources have zero value if we do not have the right institutions as a country. Just take Venezuela for example. They were the fifth largest crude oil supplier in the world, but the exploitation of such a valuable resource is not reflected in the ailing economy.

Sri Lanka’s case remains quite similar. We too have an adequate resource base, but the same resources have become a barrier to our development. This is mainly because we have failed to set up the right institutions. As a result, we always tend to celebrate events and just spend the days, rather than thinking about our economic development in the long term. Now the public discussion on economics is on the China swap agreement of $ 1.5 billion and on the investments in the West Container Terminal (WCT). In both cases, we have failed to propose a credible plan for our debt sustainability or to set up an open transparent tender process on selecting investors for the WCT. This has been the same operating procedure across all governments. So, most likely, these two discussions would just become events to celebrate, which will then be forgotten after a few weeks’ time. Then, we will be back at square one after a few months’ time on our development agenda.

Many have misunderstood the role and purpose that institutions play in the road to development, here in Sri Lanka. Sri Lankans generally perceive a building or an agency as an institution. The Supreme Court or Election Commission are also associated as the bedrock institutions of a country. However, in reality, it is what they represent in a democracy that really defines the meaning of an institution. So the meaning of an institution goes beyond physical places.

According to Jim Collins’ book “Good to Great: Why Some Companies Make the Leap…and Others Don’t”, it is not the time tellers but the clock builders that matter. Building an institution is something like building a clock where the concept of time is communicated to anybody at any time without any discrimination. It is a platform where time is shown to all, even without the presence of the actual builder. Just take the election process as an example. The election process is an institution where people have the right to exercise their choice in selecting the person who is suitable to govern. It is not the Election Commissioner or the Election Commissioner’s office that matters. Of course the physical building matters, but it is the concept of election that matters rather than the office.

It is the same when it comes to our economy and facing economic challenges. The recent swap we received would be a great relief for Sri Lanka. Especially at this juncture, as this column highlighted many times, this creates a need to engage with our bilateral partners and international agencies. But instead of just celebrating the swap, we need to direct the institutions to ensure our debt sustainability. We should establish a mechanism for managing our debt, under a single office and a system to avoid borrowing beyond our capacity to repay. Our currency and Central Bank must have the institutional power to roll out the right monetary policy to ensure that our currency is worth holding and people’s hard-earned money is not devalued due to higher inflation.

When it comes to ports and foreign direct investments (FDIs), our need is not to speak to investors and select them single-handedly and offer unsolicited projects, but to set up the right institutional framework, so that any investor will have the ability to invest and to make the process simpler, easier, competitive, and transparent. That is a “clock” that we have to build instead of celebrating the short-lived “time telling” moment. We have to face the moment of truth at one point and our moment of truth for the last few decades is that we have failed to reach $ 4,000-plus per capita income except for a short period before Covid. Our basic needs such as housing, transportation, education, and healthcare have been the same as the last few decades and the improvements are not taking place. As a result, Sri Lanka has become what it is today.

The fundamentals behind sustainable development involve setting up the institutions. When institutions are built and strengthened, the physical infrastructure falls in place, human values such as genuine, integrity, and hard work get recognised. 

The path to development is like falling in love, as per Simon Sinek’s example. It’s a result of so many tiny little actions. Same as “love”, the importance of institutions cannot be seen sometimes or even cannot be measured. But it’s there and it’s the foundation of the development of a country if we are serious about making Sri Lanka a free and a prosperous nation.

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.

A sportsman’s advice for the ports game

Originally appeared on The Morning

By Dhananath Fernando

The problem with GoSL’s ‘East to West’ plan

I was of the opinion that rugby was always a big boys’ game, till I met Sudath Sampath, the legendary former Sri Lankan rugby Captain who was fondly known as “Little Serevi” (Waisale Serevi is a Fijian former rugby union football player and coach, and is a member of the World Rugby Hall of Fame). 

I met him at the University of Colombo when he was the head coach. I was surprised how he became one of the best rugby players Sri Lanka has ever produced, given his physical stature. He did not fit into the typical rugby player profile of six feet tall and about 90kg in weight; but he was agile, fast, and very sharp at assessing the game.

He is also a master of the rules of the game. Rugby is a complicated game with many rules. There is one set of rules for the scrum, another set of rules for a ruck, and separate set of rules for a lineout, in addition to the general rules, such as not dropping or passing the ball forward. 

One main advice by Mr. Sampath to be successful in the game is to “know the rules of the game and know it really well”. He wanted players to watch the same game many times on how the “All Blacks” understand the game and its techniques.

His second advice was that “it is better to be agile and be a team player than being stiff and play an individual game”. I not only often recall Mr. Sampath’s advice in personal life, but also in Economics, especially when it comes to the Colombo Port and its container terminals.

“As a country, do we know the rules of the game in ports and do we have an efficient and flexible turnaround system?” is the question we have to ask ourselves everytime we see the debate on Colombo Port. After a massive national debate on East Container Terminal (ECT), the discussion is now moving towards the West Container Terminal (WCT). According to media reports, it will be a 35-year agreement with an 85% share to India’s Adani Group of Companies to operate it on a Build-Operate-Transfer (BOT) basis, and keep a 15% share for the Sri Lanka Port Authority.

So first let’s try to understand the game behind the port operation’s business model. Then let’s try to debunk the myths. It must be first understood that a port cannot survive just because it has a strategic location. The strategic location is important, but it is no more the single deciding factor for a port to be successful. 

The Port of Djibouti in Africa is strategically located, while it is also a member of the Belt and Road Initiative. However, the port is not considered a successful one. On the other hand, the port of Salalah in Oman and the Port of Tanjung Pelepas in Malaysia are thriving ports in the world, handling significant container volumes, but are not strategically located.

The simple reason behind the latter two ports’ success is that they know the rules of the game, and have a sharp understanding of how the port business works. It is a networking industry, requiring investors and their management practises that can increase the efficiency or number of moves per hour and the turnaround time, thereby making the port operations faster  and helping shipping lines process their containers faster. 

Distance to a port from the main shipping route matters, but efficiency matters too, as they both determine the cost for the shipping line. Therefore, in order to be a global player in the shipping business, Sri Lanka must be connected with the main shipping lines, as well as being efficient and agile in our delivery of our port operations. 

To maintain that connectivity with shipping lines, Sri Lanka should be open to foreign direct investments and create an investment-friendly environment. Improving efficiency must be the bedrock of this business model, along with private domestic investment. This way, any investor who risks his money, time, and resources is psychologically motivated to recover the investment. 

One can understand the importance of this factor by comparing employment numbers and efficiency rates (number of movements per hour) of the SLPA-operated JCT, and private sector-operated joint ventures, SAGT and CICT.

So what would be the consequences of picking WCT before ECT? First, being open for foreign direct investment and attempting to get global partners is a decision in the right direction. Foreign direct investment brings much-needed knowhow, which spills over to other industries and increases productivity. 

However, the ideal procedure should have been an open tender process, so that the best business offer of foreign direct investment could have been evaluated competitively. To avoid the geopolitical tug-of-war between China and India, the tender procedure could have been structured by the respective geopolitical interests. 

If the Government is to be believed, the current procedure has been to request the respective governments to nominate their business partners. However, this prevents the achievement of best possible outcomes for the country as it is brought by a competitive bidding process.

Secondly, is there an incentive in leaving the SLPA to operate the ECT, and opening the WCT to foreign direct investment? Well, this simply doesn’t make much sense, for it will be disadvantageous for the ECT! 

Given the financial situation in Sri Lanka, it is very unlikely that the Sri Lankan Government and the SLPA will have the fiscal space to invest in the  ECT. The gantry cranes and all other machinery for the necessary infrastructure will need to be imported, and the availability of foreign currency for such an investment remains a question mark. 

The ECT is already late by more than two years, and it will take another 18 months from the date of commencement for the infrastructure development to be completed. So in simple terms, chances are limited for the ECT to take off in the next few years.

If the operation of the WCT, which requires more infrastructure development compared to the ECT, does get off the ground soon, the business ecosystems will be focused towards the WCT, as they can be more efficient and have the scale to connect with other global partners. 

That may leave the ECT in its current stage with only hollow ownership for the Government, without generating revenue and profit, or its full capacity being utilised. Ultimately it will affect the entire efficiency of the port. 

The concept of making Colombo Port a maritime hub will be just another daydream. The original design of the entire port is to handle about 30 million TEUs with the development of the port along identified phases. 

This was the identified strategy to become a maritime hub but the delays we incurred from political parties and trade unions is most likely to pull us back and make us more insignificant in the Indian Ocean.

The Galle Port, which is under SLPA, was involved in discussions for years to be developed as a yacht marina. However, the opportunities have now shifted to Oman and Dubai. We haven’t been able to optimise the Trincomalee Port, even more than a decade after the war ended.

All these resources remain under our ownership but remain underutilised or underperforming. Unfortunately, we continue to play the ports  game without knowing the rules, thereby losing lucrative opportunities and playing self-interested petty politics without being a team player, whereas the entire country could have been a beneficiary of the competitive transhipment business. “Little Serevi” Sudath Sampath would not have approved.

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.

Our depressing debt diagnosis

Originally appeared on The Morning

By Dhananath Fernando

Sri Lanka must understand how it got here before getting out of here

Last week, the Central Bank announced all export proceeds should be brought into the country within 180 days of shipment. Additionally, they stated that all exporters should convert 25% of their foreign currency earnings to LKR from the invoice value upon entry into the country. This was brought in just a few weeks after they restricted forward purchasing for importers. With these two moves, Sri Lanka’s debt sustainability has come under the spotlight once again. Recent reports from Standard Chartered Bank and Barclays Bank have also contributed to the discussion.

It is clear that the Government and the Central Bank are looking at the problem differently to how investors, financial markets, and other stakeholders perceive the problem. Indeed both sides share their opinion with good intentions of overcoming the current turbulent time. 

As per recent media reports and a press release by the Central Bank, their objective is to build non-borrowed foreign reserves in order to meet our debt commitments. The Government is looking at the problem as a cash inflow-outflow problem. Accordingly, the Government expects about $ 32-35 billion inflows, about $ 15 billion from exports, about another $ 7 billion from remittances, and about $ 1.5 billion from tourism, with foreign direct investments (FDIs) and other transfers, etc. filling the balance.

On the outflow side, the Government expects about $ 19 billion for imports and sovereign bond payments are about $ 2 billion every year, so the debt can easily be served without any problem according to the reports. It further states that total sovereign bonds are about $ 15 billion which is about 17% of total debt, and none of the other creditors have made any concern over our debt sustainability. Recently, the Governor made remarks that the Central Bank buys about $ 10 million per day to build up reserves so we can cover all debt commitments. According to his view, the outlook on exports, FDIs, tourism, and remittances looks positive with the vaccination drive. 

On the other hand, investors and other agencies are of the view that reprofiling debt with International Monetary Fund (IMF) support is the best solution at hand as our foreign reserves are eroding faster than expected. They see the problem as a solvency problem rather than a cash flow problem; that we need to buy time to bounce back with a lesser impact on the entire economy. It’s not that all reserves are liquid as some reserves are in gold and some IMF commitments and swap commitments are already included in the available reserves of about $ 5 billion. The question from the investors is: “If the cash flow is smooth, why does it continue to erode the reserves which are now at a historic low?” In this context we have to evaluate what we should do and what is possible to do.

Let’s get into the basics. In the debt discussion, we have all been debating on how we can settle the debt and how we can keep our noses above the water. But we should not forget the reasons that brought us to where we are today. We borrowed beyond our capacity at high interest rates and invested in projects which generate returns far less than our payment capacity. In other words, we borrowed at market rate and invested in non-tradable goods which did not generate any tradable return necessary to repay a part of the debt. Since we have failed to avoid the causes of the problem, now we have to pick the best possible escape route from the problem.

Secondly, in my view, we have to estimate the extent to which we can build up reserves by buying USD from the market given the current policy stance. The Government has committed to a policy to keep the interest rates unchanged and keep the exchange rate to USD in the Rs. 185 range. We need to understand that the USD inflow estimate of about $ 15 billion is not owned by the Government but by the exporters, and so are our remittances. The same applies for the imports where importers have to have money from the market to import the basics such as fuel, pharmaceuticals, etc. In this context, to build up the reserves, the Government has to buy USD from the market and that is how the Government can capture the USD available in the market from exporters. To do that, the incentive structures have to be there for exporters to sell more USD rather than save USD. Currently, the interest rates for USD are higher than interest rates for LKR accounts, so expecting a currency depreciation, the market perception is more skewed towards keeping their money in USD form. To overcome that incentive discrepancy, when the Government imposes a regulation to procure the USD earnings by exporters within 180 days and to convert 25% upon shipment, it is likely that the exporters under invoice consider options to park their money in offshore accounts, which will further erode our inflows. 

At the same time the regulation will impact some exporters who run on thin margins who have a portion of imports in their exports. On the other hand, the companies who have USD commitments and agreements with other companies now have to face extra pressure and loss on conversions due to this regulation. 

In my view, the sovereign debt problem has a broader dimension beyond just calculating cash flow. Because the Government owns the debt and because the USD cash flow is owned by private businesses and individuals, the Government requires a mechanism to capture it either by taxation or mopping up the liquidy from the market by tightening the systems by allowing the interest rates to move upwards. That will slow down the economy. The Government’s current strategy of buying their own Treasury bills and bonds, in other words printing money, will add constant and excessive pressure on imports through channels where the imports are open, though we have a import control policy. At the same time, it is highly likely that the excess liquidity will convert to credit with the economic recovery from Covid-19 and add pressure on inflation and cost of living. We have to keep in mind that while we build reserves by buying USD from the market, we might have to sell some of it again to keep the exchange rate stable. Changes in the exchange rate will affect our debt-to-GDP ratio.

It is true the sovereign nations have the legitimate power to print money, but ultimately what consecutive governments consumed by taking debt has to be paid in real terms by earning it real value, and there is no shortcut for it. Very importantly, while the debate is on as to what route we need to take, we should not forget the reason that brought us here.

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.

Why is the President being ‘landed’ with this request?

Originally appeared on The Morning

By Dhananath Fernando

A digital land registry could help our rural masses 

The “Gama Samaga Pilisadarak” is the President’s most recent engagement programme. Positives and negatives of the programme have both been openly discussed on mainstream and social media. As per media reports, the programme is structured in such a way that officials of key ministries, such as Land, Education, and Road Development, visit villages with the President. 

People are then requested to put forward their problems before this entourage of officials. They try to solve the problems at the location itself, directing the state officials to act faster. The President mentioned that following such a course of action has helped build local infrastructure and helps him understand people’s problems better. 

On the contrary, on social media, views have been expressed on forest destruction concerning areas where the President has been visiting, and describing this as an attempt to prioritise development at the expense of our green cover. 

The objective of today’s column is not to provide a commentary on “Gama Samaga Pilisadarak”, but an effort to put things into perspective regarding the most common concerns people have been putting before Sri Lanka’s First Citizen. Secondly, we aim to explore why the very same issues are being repeated in most of the villages. In my understanding, the problems presented to the President are just symptoms of a bigger problem, and it looks like the solutions instantly provided by the officials are just temporary solutions without understanding the problem at its root. 

Most frequent requests made to the President, as have been telecast in the news, are requests for land to conduct agricultural activities. The fundamental question is why solving issues surrounding land has become a common-priority request, as we saw on television, with people screaming and pleading the President to get their land matters solved.

As indicated multiple times in this column, about 80% of Sri Lanka’s land is owned by the Government. Out of that, about 30% is our forest cover. As a tiny island, land is obviously a limited resource in economic terms. Therefore, if we fail to optimise the utilisation of land, all the natural beauty and biodiversity we brag about is most likely to fade away from us. 

Creating land, like what we did with the Port City, is extremely expensive and environmentally costly. The problem lies in the fact that most of the land our farmers cutivate is only under a licence, and they do not have a title. As a result, the farmer has to visit the Divisional Secretariat to obtain a license, renew the license, or even to obtain approval to change the crop they cultivate. 

Smaller and smaller portions

Most of these lands our farmers cultivate are provided under different land and agricultural projects. Over generations when the original land is divided among family members, the land plot becomes smaller and smaller.

For example, look at what happens when the original land of five acres is provided to a farmer, which in turn is divided among his four children. This will get subdivided after the next generation. Now, instead of five acres, only about 25 perches of land will now be available, and this has limited scope for agriculture. As a result of these smaller land plots over generations, industrialisation or commercialisation of cultivating lands is unfeasible.

Employing technology and machinery to increase productivity on a 25-perch land plot is not feasible. As a result, people ask for more lands from the Government, or encroach on forest cover to do their farming.

On the other hand, these lands do not have titles. So farmers are unable to optimise the maximum usage of the land using technology, because they have no source for capital. They don’t have other assets to use as collateral to access finance, nor are the banks willing to provide them loans without any valid collateral.

As a result, the land problem has become a vicious cycle. These circumstances have led to a scenario where a combination of factors continue to make our farmers poorer and our agriculture unproductive, while trapping our farmers in informal loans and creating severe social concerns such as suicide. There is the additional issue of contributing to the loss of our forest cover and destroying our biodiversity. 

If we look at countries that are in deep poverty, one of the common denominators is that the people of those countries do not have their land and property rights. There is no magical formula for an economy to take off without establishing property rights for their citizens. 

The President expressed his displeasure at rumours circulating on social media on the destruction of forest cover, but until we provide a permanent solution to this problem, we will lose out on every front. The President will have to hear the same complaint at every location he visits.

On top of that, the Government has decided to stop all agricultural imports for the next four years, as per reports by The Morning. This will most likely worsen the situation. Food prices will go up, and more farmers will attempt to do agriculture by practicing their unproductive farming methods. 

The rising prices will punish all our poor consumers already suffering from the high cost of living. At the same time, our tourism will suffer, as it needs some imported agricultural products to prepare the cuisine. However, it is understandable that balancing such a dilemma when foreign reserves are depleting is going to be a serious challenge.  

What is the solution?

The President has a greater opportunity to capitalise on this matter economically as well as politically. We have to have a digital system and a digital land registry. As soon as the “digital land registry” is spelled out, many associate it to the three-letter “MCC” agreement. That is now gone, and there is very little value in debating it now. 

But over the next four years, the President can prioritise the digital land registry, which will mark forest cover on the cadastral survey system with GPS coordinates. It will increase Government efficiency drastically, release the dead capital of land among farmers, and investments will start kicking off. Most of the back-end work has been done, and cases for the need for a digital land registry have been developed. 

The question is: how are we going to find money to implement the survey and purchase the technology? We have to seek out multilateral donor agencies, or a potential bilateral loan, to secure the funding, as this will create massive economic potential. Setting up a digital land registry will be significantly impactful, rather than just developing a road or incurring another massive capital expenditure. 

This is an action which will move us upwards in the Ease of Doing Business Index, and build investor confidence. At the same time this will fall perfectly in line with the President’s manifesto of “Vistas of Prosperity and Splendor” under a digitised economy. 

The ripple effect will trickle down to smaller cases at courthouses, as well as to micro and small business enterprises when the project unfolds. 

Since there have already been many land deed programmes such as “Jayabhoomi” and “Swarnabhoomi”, this will not be a simple and easy project. Having the simple digital infrastructure ready is the first step to address these issues, both at present and in the long term. 

The main opposition comes from lawyers, as they are the main beneficiaries of delayed court proceedings. If the President focuses on this single reform, it will not only be the best-ever environmental conservation reform to protect our green cover, but also a historic economic reform to unlock our dead capital, and reactivate capital markets and agriculture. Most importantly, it will be a big relief for our farmers and fellow Sri Lankans.

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.

When floor tiles go sky high

Originally appeared on The Morning

By Dhananath Fernando

Sri Lanka can’t win by obstructing its competitors

I still remember some silly things I did when I was in school. It was an inter-house pre-selection race for 400 metres for the school sports meet. As you all may know, to match the equal distance for each athlete, the most outer track athlete is placed slightly ahead at the start of the race and the most inner track athlete is placed at the very behind at the start. So during this race, I got lane eight, the most outer track. Without realising that the starting point placement was done to provide a level-playing field I thought I have some added advantage to start the race well ahead.

The race started and we were all accelerating to the finish line. After a few metres, from the corner of my eye I saw the athlete next to my lane running faster and he was getting closer to overtake me. So I changed my track to lane seven and obstructed him. Just after a few seconds, I realised that the lane six athlete was about to overtake me. I changed my track to lane six. Then the athlete on lane seven overtook me. Throughout the race I was trying to obstruct the other athletes without running my race in my own track.

I was disqualified from the race. I was not only disqualified from the race because of my silly way of obstructing all athletes, but also because they had to redo the race. I still remember what my house master in charge told me after disqualifying me from the race. “Son, you can’t win a race by obstructing your fellow competitors. You have to work hard and practice to run faster than them. That is the only way you can become competitive and win a race.”

When I saw headline news stories on the Sri Lankan floor tiles, wall tiles, and bathware cess tax revisions and Customs import duties, and collective voices against obstructing imports of these product categories as per the new tax revisions, for a moment I wondered whether we as a country are trying to make the same mistake I did as a schoolboy athlete by trying to win a competition by obstructing our competitors without trying to be competitive by ourselves.

The bathware story took the limelight with a gazette notification allowing the importation of bathware with a 180-day credit period when the forward purchasing of foreign currency was not facilitated by banks. In simple terms, this is a condition where the importer has to negotiate with the supplier to give goods for a credit period of half a year and the importer has to bear the cost of exchange depreciation. So it was not at all very favourable for importers. Even in that context, the Imports and Exports Commissioner General instructed banks not to facilitate any imports of tile and bathware products on the next day itself. 

It was reported after a few days on some news stories (gazette notification is not yet up on the Government website) that the industry associations agreed to increase the Customs import duty to 30% from 15% and increase cess to a flat rate of Rs. 125. Currently for certain sanitary products cess is 0% and some other product categories are charged at 15% or Rs. 40 per kg.  

Essentially, if the media report is true, our Customs duty has increased by twofold and our cess has increased by threefold. According to the same media report, even before 2015, cess was 25% or Rs. 75 per kg. So even after a good seven years, we still want to obstruct our competitors at a higher degree with the higher cess. Let’s try to understand the overall impact 

First, many people do not know how the tax calculation is done. The import tax formula is not as simple as saying that it is the addition of one tax to another tax. There are taxes on taxes (Value-Added Tax [VAT], Port and Airport Development Levy [PAL], etc.). So if the Customs duty doubles from 15% to 30%, the impact on the final tax on the consumer can be larger than just adding 15% to the final tax rate. According to the current calculation revealed by Sri Lanka Customs, the effective rate can go up as high as 89.80% of the actual imported value. 

What does this mean for the local consumer? This means the local consumer has to pay twice the price to buy a bathware set, floor tile, or wall tile. In other words, our fellow Sri Lankans have to pay the cost of two bathrooms to build one bathroom. Needless to highlight, the bathrooms constructed by Sri Lankans are not royal-class gold-plated commodes and silver flushing systems; a basic commode and even a squatting pan have been taxed at a high rate as 52%. This will not only impact the local consumers but also other local micro, small and medium enterprises (MSMEs) as well. 

When most of the MSMEs do their small constructions, they have to spend twice as much for the bathware and tiles, which increases the capital they require to start business. Most of them take loans to start businesses. Ultimately, this high cost of tiles affects their competitiveness in the business as well. Think of a small clothing shop in your town. Most of the time the floor is tiled and the shop requires a bathroom, so can we justify asking that entrepreneur to pay twice as much for some of his construction items which is a main part of the building when he is starting the business?

It does not affect only the small entrepreneurs, but rather creates a ripple effect across the economy. In the tourism industry, construction materials such as wall tiles, floor tiles, and bathware are used for most constructions. So as a result, their capital investment goes up and they have to cover capital through the room rate. As such, in the same room category, Sri Lanka’s hotel room rates are higher than the competing destinations in the region.

It is the same for luxury hotels as well as medium and small leisure sector entrepreneurs. It is not just the leisure sector, but even the Government has a big problem with the cost of construction. If you list down requests from rural students to the President in the programme “Gama Samaga Pilisadarak”, they are all about a building to do their studies, toilet facilities, a laboratory, or a playground. The cost of construction is as high as the sky so even the Government has a problem in allocating money for construction capital expenditure.

Further, think about the young professionals and all Sri Lankans who want to build a basic house but consider it a dream house. They take a bank loan with the greatest difficulty and pay twice the price for wall tiles and floor tiles from the money they borrowed.

Protecting local manufacturers and industries?

The main argument that has been put forward on increasing the tariff on bathware and tiles is that it is a move to protect local manufacturers. As Sri Lankans, we unanimously agree that local industries should be protected, but we have to evaluate how we are going to protect them without punishing our consumers. The only solution to protect them is to become competitive and that is a win-win for local manufacturers as well as the local consumers. 

Many policy-makers and, to an extent, Sri Lankans are of the opinion that when we allow imports, it will affect the local manufacturers’ sales volumes. Some consumers are of the opinion that the higher import duties don’t affect them because only the prices of imported items are increasing and the prices of local manufactured products will remain the same. I too wish that the market acts the way we think. What happens in the market is actually the same thing I tried to do in the 400-metre race.

When we obstruct the competitor’s imported products, we narrow the window of competitiveness in the market and limit the entry of similar products to the market. In other words, we limit the opportunity for the consumer to buy a reasonably priced product from the market by imposing a higher tariff and making them uncompetitive. By doing that, like I obstructed the entire race which created an absolute disaster, all other connected industries will be affected. It will affect the pricing of apartments, roads, government infrastructure, wages, and the aspirations of young professionals. The tariff rates are extraordinarily high, not only with regard to tiles but in terms of most construction items. This obstruction of competition is not a recent phenomenon but it’s been there for decades in the tile and bathware industry. However, even after a near tariff imposition of over 80% on cost in some instances, we have managed to fulfil only about 50%-60% of the local market demand. As a result, Sri Lanka is stagnated in the same place without being competitive in industries, but rather complaining that our export portfolio is not diversified. 

How can we protect the local industries?

Local industries can only be protected by being competitive and the definition of protecting local industries should not be punishing the fellow voiceless Sri Lankans. The only sustainable way of winning a game is hard work and being competitive. Instead of being competitive, if we lose our focus and try to obstruct the competition, we will not be able to achieve anything more than what we have been experiencing so far. This was the same policy we adhered to for decades and we have to question ourselves as to why we haven’t succeeded. We have to remind ourselves what my house master in charge said many years ago and redefine the way we think as Sri Lankans.

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.