Land Expropriation Policy Brief

Land expropriation in Sri Lanka, governed by the Land Acquisition Act, plays a key role in public welfare and infrastructure development. However, three critical challenges persist: vague criteria for urgent acquisitions, a subjective definition of "public purpose," and delays or inadequacies in compensation for affected landowners. These issues raise concerns about fairness, transparency, and the potential misuse of power. To address these, our policy briefs provide in-depth insights and actionable recommendations for reform.

To access the Land Expropriation Policy Briefs, click below

Advocata Institute congratulates President Anura Kumara Dissanayake

Originally appeared in the Daily FT

The Advocata Institute has extended its heartfelt congratulations to President Anura Kumara Dissanayake on his election as the ninth Executive President of the Democratic Socialist Republic of Sri Lanka.

In a message addressed to the President, Advocata Institute Chairman Murtaza Jafferjee and CEO Dhananath Fernando acknowledged the trust and confidence placed in President Dissanayake by the people of Sri Lanka.

They expressed optimism that his leadership will guide the country towards a more prosperous and equitable future.

“As an independent policy think tank committed to advancing economic freedoms and improving the well-being of Sri Lankans through economic prosperity, we believe your tenure offers a unique opportunity to pursue meaningful reforms that will continue economic stability, promote sustainable growth, enhance governance, and uplift the living standards of all citizens,” Jafferjee said.

The Advocata Institute also emphasised its readiness to support the new administration with its expertise in economic research and public policy, highlighting the power of evidence-based policymaking in driving positive change.

“We look forward to collaborating with your Government on initiatives that foster an open and thriving economy,” said Fernando, expressing the organisation’s commitment to the principles of economic freedom and innovation as drivers of national prosperity.

WPAN Policy Brief : Informal Employment With a Focus on Domestic Workers in Sri Lanka

Domestic workers in Sri Lanka have been a significant part of the paid care eco-system, and have long suffered from poor working conditions caused by many economic and social barriers. Prior to the establishment of specialized child care, and elderly care agencies which are still limited to urban Sri Lanka, domestic workers made up almost all of the paid care sector in the country.

Here is the link to the WPAN Policy Brief on Informal Employment With a Focus on Domestic Workers in Sri Lanka

WPAN Policy Brief : Closing The Divide through Women's Access to Finance

Financial inclusion is the access individuals and businesses have to useful and affordable financial products and services that meet their needs, such as for transactions, payments, savings, credit and insurance. They also must be delivered in a responsible and sustainable way promoting engagement in the formal financial sector.  Access to affordable finance aims to enhance living standards, increase income, stimulate business investment, reduce unemployment, and foster economic growth by expanding financial networks and reducing barriers to entry. 

Here is the link to the WPAN Policy Brief on Closing the Divide through Women’s Access to Finance

Advocata Policy Brief : Tax Free Periods: Call for the Removal of Taxes on Menstrual Products

The affordability of sanitary napkins and its significant impact on the welfare of girls and women in Sri Lanka has become more pronounced in recent years. This is particularly evident due to the decline in purchasing power stemming from the COVID-19 pandemic and the economic crisis. Approximately 4 million Sri Lankans have descended into poverty since 2019, making the total number of Sri Lankans living in poverty approximately 7 million. Therefore, it is necessary to examine the ramifications of the lack of affordability of sanitary napkins which is worsened by the imposition of high taxes on sanitary napkins.

Here is the link to Advocata’s Policy Brief on Tax Free Periods: Call for the Removal of Taxes on Menstrual Products

Advocata Policy Brief : Minimum Room Rates

The proposed minimum room rates seek to place a rate of USD 100 on 5 star hotels, USD 75 for 4 star hotels, USD 50 for 3 star hotels, USD 35 for 2 star hotels, and USD 20 for 1 star hotels within the city of Colombo, effective from October 1, 2023. This will, in effect, act as a price control, ensuring that hotels within these star classifications located within the city of Colombo cannot price their rooms at rates lower than those prescribed by the government. The below policy brief will explore the dynamics of the hotel industry and provide a critical analysis of the potential consequences and challenges of implementing this scheme. By critically evaluating these effects, we aim to provide policymakers and stakeholders with a holistic perspective to inform their decisions.

Here is a link to Advocata’s Policy Brief on Sri Lanka’s Minimum Room Rates

PUCSL Electricity Tariff Revision is Discriminatory

Originally appeared in the Daily FT

Electricity tariff design must meet two main objectives: firstly, raising the money needed to pay for the costs of provision, and secondly, sending the right economic signals to each customer to favour the optimal socio-economic use of electricity. 

To achieve the above objectives the principles that must be followed when designing tariffs are; 

1. Economic sustainability or revenue sufficiency, 

2. Equity or non-discrimination among users, 

3. Economic efficiency in resource allocation, and

4. Transparency, simplicity, and stability of the methodology.

A well-defined and appropriate tariff structure must balance the financial sustainability of the sector on the one hand and the well-being of various segments of society on the other. The CEB’s tariff revisions seem to be mainly focused on the aspect of revenue sufficiency, ignoring the other aspects.  As electricity is a commodity, there should be no difference in the prices charged to different users, except when reflecting any differences in the cost of providing services to different classes of users.

A differential tariff implies that some categories are subsidised leading to the question of who pays these subsidies. The current structure is such that households consuming an excess of 60 Kwh, and general purpose bulk supply users subsidise the industrial, hotel and charitable sectors.

Households that consume over 90 Kwh and general purpose bulk customers are charged a tariff that is double that of industries and hotels. With regards to hotels, in effect, domestic consumers subsidise foreign tourists. However, the differential tariff between general bulk supply and industrial/hotel users is meaningless. For example, a hall that hosts weddings and celebrations would be treated as a general bulk customer and be charged double the tariff that a hotel would be charged, even though both host similar events. A restaurant in a shopping mall would be charged as a general customer, but the same restaurant located within a hotel would enjoy a tariff half of that which a hotel incurs. While this differential existed under the previous tariff, it is made worse under the new structure; hotels faced a 10% increase in tariff while general users faced a 20% increase.

If the idea behind a lower tariff for hotels is to make the sector more competitive, then the solution is to address the causes of uncompetitiveness directly. One area is construction costs which raises the level of investment and the cost of maintenance.  Protectionism for the domestic construction materials industry raises the costs of steel bars and rods, sanitary ware, aluminium extrusions, granite, electrical fittings, and carpets resulting in high overall construction cost. The effective protection granted on these items can exceed 200%; the savings in finance cost from a lower capital outlay would probably exceed the savings from a lower electricity tariff.

Economic value creation can take place in many different ways in an economy and the service sector is no less important than other sectors. The cross subsidisation between customers violates the equity or non-discrimination principle of a good tariff and discourages use by the overcharged and promotes overconsumption by the subsidised. 

For example, the higher domestic tariff may serve as a disincentive for remote work. Remote or flexible work arrangements can reduce transport costs, congestion, energy use and for some, enable a better work/life balance. The government should be facilitating flexible work but the higher rates applicable to some domestic consumers may be a disincentive.

Economic activity is increasingly complex and a value chain can involve many different sectors. For example, the tea industry involves agriculture, processing in factories, transport, warehousing, blending, financing, marketing and exports. Moreover, products are now more knowledge intensive, so a greater part of the value addition arises in non-production-oriented components of the value chain. With differential tariffs, parts of the same value chain may pay different prices for use of the same commodity.

Further, a lower tariff to “industry” penalises new economy enterprises while promoting highly energy intensive users. This distorts resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries where the country may not have a clear comparative advantage. A subsidised tariff also blunts the incentive to economise.

The cost of supplying electricity fluctuates throughout the day, depending on the power generation mix, cost of fuels used, transmission costs and energy losses but as electricity storage is not economically viable, it has to be consumed whenever it is produced. Households with rooftop solar thus enjoy a subsidy. Domestic solar generation takes place in day time where the cost of generation is low but the import of electricity to the house takes place at night when the cost of generation is high. Offsetting units generated against units imported results in a subsidy because of the difference in costs between the two. Time of use metres should be mandated for all domestic users on net metering with the import/export being accounted for on the respective time of use tariff. Indeed all users who consume above 60 Kwh should move to the time of use tariff. 

Should the government decide to subsidise the capital or operating costs to serve certain customer classes, it should do so directly from the budget and while a lifeline tariff for the poor is justified the high domestic users pay a tariff 7.4x that of the lowest. Not all households are the same size and an extended family living in a single house may face a much higher tariff although their income level may not differ greatly from the average.

The PUCSL should review tariffs to prevent the distortions highlighted above. Instead of cross-subsidies, the regulator should be working to reduce overall cost of the provision of electricity through better procurement and greater efficiency. 

Treating all costs as a pass-through in computing the tariff is a mistake. The PUCSL needs to set efficiency targets in order to set fair and reasonable tariffs. The CEB should be incentivised to control its costs by specifying and enforcing performance requirements. Benchmarking CEB performance against regional and international peers to assess relative efficiency is necessary, as is consulting stakeholders on achievable efficiency targets.

IMF & The Urgency of State-Owned Enterprise Reforms

In the wake of Sri Lanka's economic challenges, it is undeniable that State Owned Enterprises (SOEs) have had a substantial impact on the country's fiscal health. They squander resources, land, labour, and add to the debt burden. They monopolize markets limiting competitiveness and contribute to the inefficiency in the economy. At this economic juncture, the necessity for SOE reforms is not just a matter of economic prudence; it is a matter of national importance. Without swift and comprehensive SOE reforms, we risk prolonging our current economic downturn.

The Advocata Institute hosted a press briefing on IMF & The Urgency of State-Owned Enterprises Reforms, to create further awareness and public debate on the urgency of implementing reforms to State Owned Enterprises (SOE’s). This Press Brief was held at BMICH, Tulip Hall on October 10.

The Event commenced with a 15 minute presentation by Rehana Thowfeek, Research Associate at the Advocata Institute analysing the issues surrounding SOE’s and their link to broader macroeconomic issues. Following this, there will be introductory remarks by the main speakers for the evening:

• Professor Rohan Samarajiva - Advisor, Advocata Institute.

• Mr. Dhananath Fernando - Chief Executive Officer, Advocata Institute.

• Mr. Ravi Rathnasabapathy - Independent Consultant

The Presentation by Rehana Thowfeek can be found here

The Full video of the briefing can be found here

Sri Lanka Slips in Economic Freedom

Originally appeared in the The Island, Daily Mirror, Economy Next, Lanka Business online, NewsWire

Sri Lanka ranks 116 out of 165 jurisdictions included in the Economic Freedom of the World: 2023 Annual Report, released by Advocata Institute in conjunction with Canada’s Fraser Institute. The current ranking represents a decline in the economic freedom of the country which ranked 104th during 2020.

The report measures the economic freedom of individuals—their ability to make their own economic decisions—by analyzing the policies and institutions of 165 jurisdictions. The policies examined include regulation, freedom to trade internationally, size of government, legal system and property rights, and sound monetary policy. The 2023 report is based on data from 2021, the last year with available comparable statistics across jurisdictions.

Sri Lanka’s decline in score was driven by 4 out of the 5 sub indicators of economic freedom registering declines in their respective individual scores. These indicators are the size of government, access to sound money, freedom to trade internationally, and the regulation of credit, labour, and business. The only indicators that registered an improvement in its score is the indicator of legal system and property rights.

“The report captured a stark warning: Sri Lanka's economic freedom declined prior to the economic crisis of 2022, a testament to the vulnerability of nations with limited economic freedom in the face of economic turmoil. If the country is to recover, Sri Lanka must prioritize economic growth within the framework of maximising economic freedom for its citizens to trade, work, and transact freely in a stable monetary and fiscal environment” said Dhananath Fernando, Chief Executive Officer at the Advocata Institute.

The number one spot is now occupied by Singapore, followed by Hong Kong, Switzerland, New Zealand, the United States, Ireland, Denmark, Australia, the United Kingdom, and Canada. Other notable countries include Japan (20th), Germany (23th), France (47th) and Russia (104th).

Venezuela once again ranks last. Some countries such as North Korea and Cuba can’t be ranked due to lack of data.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories. It’s the world’s premier measure of economic freedom.

The report was prepared by Professor James Gwartney of Florida State University and Professors Robert A. Lawson and Ryan Murphy of Southern Methodist University.

According to research in top peer-reviewed academic journals, people living in countries with high levels of economic freedom enjoy greater prosperity, more political and civil liberties, and longer lives.

For example, countries in the top quartile of economic freedom had an average per-capita GDP of US$48,569, compared to US$6,324 for bottom quartile countries. Poverty rates are lower. In the top quartile, less than one per cent of the population experienced extreme poverty (US$1.90 a day) compared to 32 per cent in the lowest quartile. Finally, life expectancy is 81.1 years in the top quartile of countries compared to 65 years in the bottom quartile.

“Where people are free to pursue their own opportunities and make their own choices, they lead more prosperous, happier and healthier lives,” Fred McMahon, Dr. Michael A. Walker Research Chair in Economic Freedom with the Fraser Institute said.

See the full report at www.fraserinstitute.org/economic-freedom.

About the Economic Freedom Index

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories.

Economic Freedom of the World measures how policies and institutions of countries support economic freedom. This year’s publication ranks 165 countries and territories. The report also updates data in earlier reports where data has been revised.

For more information on the Economic Freedom Network, datasets, and previous Economic Freedom of the World reports, go to www.fraserinstitute.org/economic-freedom.

The Government Should Rethink the Minimum Room Rates Policy

Originally appeared in the Daily FT, Daily Mirror, Daily News, Lanka News Web

The Advocata Institute expresses concern over the recent proposal by the Sri Lankan Authorities to impose minimum room rates on hotels in the city of Colombo.  

This proposal, set to take effect from October 1st 2023, stipulates rates of USD 130 for 5-star hotels, USD 100 for 4-star hotels, and USD 80 for 3-star hotels. While the authorities argue that this measure aims to counter underpricing by higher-tier hotels, this policy threatens to undermine the growth and vitality of the tourism sector. It places an unnecessary burden on hoteliers already grappling with the challenges posed by the global pandemic and subsequent economic crisis. Further, it undermines the country’s competitiveness in the regional tourism market.  

Pricing acts as a reflection of the quality of services offered by hotels and serves as a differentiating factor. If prices fail to accurately represent the services provided, customer dissatisfaction can ensue, especially when compared to more competitively priced options in neighboring countries such as Thailand and Vietnam. This is supported by a comment made by the Sri Lanka Association of Inbound Tour Operators (SLAITO) which states that “before implementing such prescribed rates, it is crucial to generate demand and interest in Sri Lanka...Adopting these rates will render Sri Lanka uncompetitive and result in a loss of clients, even when compared to hotels in New Delhi, with which they are currently competitive”.

Sri Lanka has previously attempted to implement price controls between 2009 and 2019, following lobbying by a segment of  hoteliers aiming to compete more effectively against 5-star rated hotels. However, this policy failed due to numerous violations resulting from inadequate monitoring and enforcement by the authorities. Many hotels, including those that initially advocated for the government's proposed room rates, have not complied with the established rates, as alleged by the former Minister of Tourism, John Amaratunga. 

The imposition of minimum room rates restricts hotel owners' flexibility in setting prices in accordance with market demand and effectively stifles healthy competition among various establishments. The tourism industry experiences fluctuations in demand that correspond to seasonal and weekly trends. Such demand patterns necessitate the ability for hotels to tailor their pricing strategies to capitalize on peaks and optimize profitability.

Every hotel has its unique room pricing considerations depending on factors such as location, size of the hotel, market demographics, level of competition, and type of service offered to name a few. The uniform imposition of minimum rates disregards the diverse range of hotels and accommodations available in Sri Lanka, catering to various budgets and preferences. This one-size-fits-all approach disregards the crucial factor of consumer choice. Imposing minimum room rates on a certain type of accommodation whilst disregarding alternate forms of accommodation available within the city of Colombo such as guest houses and Airbnbs, undermines the effectiveness of this policy.  

Furthermore, hotels do not solely rely on revenue from room occupancy; rather, the occupancy of rooms paves the way for alternative sources of income such as from food and beverages, along with the provision of other hotel-related services. For example, a leading hotel in Colombo earned 77% of their revenue from food and beverages in contrast to the 19% earned from accommodation services in 2022. Therefore, when the government intervenes in one component of a hotel’s business model, it disrupts the interconnected methods of revenue generation.  

Further, the foundation for these minimum rates—star classifications—is itself flawed. This system primarily relies on quantitative factors, often overlooking qualitative aspects such as service quality and ambiance. The inability to quantify these vital attributes compromises the accuracy of the classification.

The tourism industry in Sri Lanka has historically played a crucial role in the country's economic development, providing employment opportunities, promoting cultural exchange, and contributing significantly to foreign exchange earnings. However, the recent decision to enforce minimum room rates could deter these potential visitors who are seeking affordable accommodation options, particularly given the publicity international vloggers have given Sri Lanka as a tourist destination. Further, this approach stifles innovation within the hospitality sector, and ultimately leads to reduced tourist arrivals and negatively impacts the entire value chain that relies on a thriving hospitality sector.

This policy undermines competition and oversteps in a serious way the role of government in a competitive market economy, the stated policy framework of the government. 

The Advocata Institute strongly urges Sri Lankan Authorities to reconsider this ill-advised proposal. 

By fostering an environment that embraces market competition, Sri Lanka can position itself as an attractive destination for travelers while allowing its hotels to thrive and cater to diverse consumer demands.

Economic crisis to reverse SL’s gains in economic freedom

Originally appeared in the Daily Mirror, Daily News, The Morning

Sri Lanka ranks 89 among 165 jurisdictions on the Economic Freedom of the World index. 

Colombo, Sri Lanka— Sri Lanka ranks 89  out of 165 countries and territories included in the Economic Freedom of the World: 2022 Annual Report, released by the Fraser Institute in association with the Advocata Institute in Sri Lanka.

Hong Kong and Singapore top the index, continuing their streak as 1st and 2nd respectively. New Zealand, Switzerland, Denmark, Australia, the United States, Estonia, Mauritius, and Ireland round up the top 10.  

Research shows that people living in countries with high levels of economic freedom enjoy greater prosperity, more political and civil liberties, and longer lives. For example, nations in the top quartile of the economic freedom index had an average per-capita GDP of $48,251 in 2020, compared to $6,542 for nations in the bottom quartile (PPP constant 2017, international US $).

In the top quartile, the average income of the poorest 10% was $14,204, compared to $1,736 in the bottom quartile (PPP constant 2017, international US $). The average income of the poorest 10% in the most economically free nations is more than twice the average per-capita income in the least free nations. 

Sri Lanka’s ranking for Economic Freedom

The report, which is based on data until 2020 shows that Sri Lanka gained 11 places to be ranked 89th compared to the previous year where the country was ranked 100. However, Sri Lanka’s overall score has remained the same (6.72), which suggests that the improvement in ranking is due to a decrease in economic freedom in other countries.

 Sri Lanka’s score in key components of economic freedom (from 1 to 10 where a higher value indicates a higher level of economic freedom)

“Improvement of Sri Lanka’s ranking on the Economic Freedom index is welcome, but we have to note the data is based on upto the year 2020 and the ground reality today is the economy has deteriorated further as Sri Lanka defaulted on its sovereign debt for the first time in history," Said Dhananath Fernando, CEO of Advocata Institute.

"Hence, it is quite evident that due to the ongoing economic crisis in Sri Lanka several of these indicators, if measured now, are going to paint a different picture, especially in the areas of access to carryout international transactions unhindered and the freedom to trade.”

Based on Advocata’s own calculations with 2021 data, the access to sound money has fallen.

"In the process for Economic Recovery, Economic Freedom is the best framework to structure our reforms, especially on reforms that target Economic Freedom will not only provide stability but also ensures economic growth and higher quality of life for our citizens,“ Fernando further stated

About the Economic Freedom Index

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories. It’s the world’s premier measurement of economic freedom, measuring and ranking countries in five areas—size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally and regulation of credit, labour and business.

This year’s publication ranks 165 countries and territories. The report also updates data in earlier reports where data has been revised.

For more information on the Economic Freedom Network, datasets and previous Economic Freedom of the World reports, visit www.fraserinstitute.org. And you can “Like” the Economic Freedom Network on Facebook at www.facebook.com/EconomicFreedomNetwork. See the full report at www.fraserinstitute.org/economic-freedom.

Dhananath Fernando appointed CEO of Advocata Institute

Originally appeared in the Daily FT

Advocata Institute, a public policy think tank based in Colombo has appointed Dhananath Fernando, as its Chief Executive Officer. Dhananath, who is a founding member of the Institute has worked as Advocata’s Chief Operating Officer since its inception. 

Advocata Institute was started in 2016 by a group of professionals aiming to provide market-oriented policy alternatives to existing public discourse in Sri Lanka. The founding group was advised by leading academics and business leaders. 

“Dhananath has been instrumental to the growth of Advocata as a significant voice in the policy debate in Sri Lanka,” said Advocata Institute Board of Directors Chairman Murtaza Jafferjee. “The Board has no doubt that he will lead Advocata into even greater heights”. As the COO of Advocata, Dhananath has managed to play a pivotal role in the organisation with key responsibilities in fundraising and communication. He is a frequent writer and commentator on economic policy in national media. 

Prior to joining Advocata, Dhananath worked in market research and administration. He is a graduate from the University of Colombo and studied at St. Sebastian’s College in his hometown of Moratuwa. Dhananath volunteers his time for CandleAid, a charity based in Sri Lanka, and a number of other initiatives including the AK Lit Fest, a trilingual literary festival and Lakmahal, a community library. 

In 2022, Dhananath was chosen from Sri Lanka for the prestigious Eisenhower fellowship. He is also recognised as a “Asia 21 Young Leader” for 2022 by the Asia Society for his impact with the Advocata Institute.   

“I thank the Advocata board of directors for trusting me and supporting me,” said Dhananath Fernando. “I feel we have all contributed to a greater cause bigger than ourselves to make Sri Lanka prosperous and competitive where hard work and free exchange is valued. A big thank you to our founding members and our Board of Advisors and our team for their continued dedication and support. It’s always a team effort.”

For more on Advocata’s scholars, members and associates see www.advocata.org/about