charindra chandrasena  00:00
Hi Dana.

Dhananath Fernando  00:06
Hi Jari. Hi

charindra chandrasena  00:07
Diat. Hi

Speaker 1  00:08
Jari.

charindra chandrasena  00:09
How was the weekend? How has the week been so far?

Speaker 1  00:12
Not good. Not good for Riyadh. Not good for nothing special for me. Yeah, yeah. Just beat off flu, don't you know? Yeah,

charindra chandrasena  00:19
I've also been sick, and and and and a lot of people I meet are also

Speaker 1  00:23
yeah yeah yeah flu.

charindra chandrasena  00:25
Something going around.

Speaker 1  00:26
Something going around. Have to be careful. Have to take the meds early.

charindra chandrasena  00:28
That's the thing. That's the thing. Yeah. So did you see this? IFC has provided provided support of 166 million US dollars to support Sri Lanka's SME sector. So, you know, I thought we'll start the conversation and actually even dedicate this entire conversation to that, to not just specifically that support we are getting from the IFC, but overall about SMEs in Sri Lanka, right? Now the SME sector is considered the backbone of any economy around the world, whether you are a developed economy or a or a developing economy, as they used to say, third world economy, right? In Sri. Lanka. So I'll just read out a few facts in terms of the numbers. As of 2024, SMEs in Sri Lanka represent over 75% of all businesses.

Speaker 1  01:39
Okay,

charindra chandrasena  01:40
and it could be well above 75 even, right? They account for 45% of employment. So nearly half of the workforce in Sri Lanka is employed by the SME sector, and they contribute just over half of the national. I mean, half of GDP. Yeah, 52% So we. with those facts in mind, let me start off with a very, very basic question. Looking at those stats, do you think the 52% contribution to the national economy is adequate, or should it be more? What is your view, Dana?

Dhananath Fernando  02:27
Yeah, so all my views are going to be. I'm going to be a little unpopular by saying all these things, but no, definitely. I mean, not in the sensory. In what context are we talking about? I mean, because it's a small and medium enterprise, where there are two. I mean, glass is either you can comment as it's more than

charindra chandrasena  02:46
half, and therefore the glass is half full.

Dhananath Fernando  02:48
Absolutely. So if you look look at 50% they are contributing, which is good in that sense because they are you know shouldering 50% of the economy. But that's one side. But given the number of establishments, whether 50% is adequate is again a question mark. I think my thought process comes mainly from how to strategize this. Like, how are we going to really align this? Is where I would like to come in. But I mean, they are doing an excellent service in terms of employment and all that, and we are only talking about SMEs. There's another M sometimes come before that. Micro and small medium. So if you add micro and small medium, the stat that I recall is if you add micro, it's about 99% of the establishments are micro small and medium. Like large corporations are about only 1% and even employment it's about 75% when you get micro into the equation, and most of them are probably informal, not definitely getting to the VAT threshold, not registered with the tax authority. There's a lot going on. So in a way, yes, because probably in a island economy, small country, they are the basically the hustling people who really earn a living. But at the same time, whether it is enough to really to be where we really want to be, I would say no.

Speaker 1  04:13
Okay, I'll give Riyadh's view also, and yeah. So my views are actually quite similar to Dana because the reason is just want to touch a little bit upon the what you call the micros. The micros are mostly the business. I mean, more than then they are not actually run as a business. It's done on a personal level. It's like mostly like almost like hand hand to mouth, right? And the other one is the micro sector is actually financed by what we call from the good old days of Kopikade Poli Mudalali, Right, so that's how the financing takes place. So that's why some of the the whole microfinancing kind of took off. I mean, even in Sri Lanka, it's getting formalised now. In Bangladesh, it was a big success with with Muhammad Yunus, who is currently the president of. President, sorry, Prime Minister of Bangladesh. Now, after the crisis they had, where he took over as a as an interim PM, so so that was one of the success stories. So that is something where I think the government also previous governments also had really tried to bring it into the formal sector, where they gave concessional financing from places like IEFC and maybe World Bank. I'm not exactly sure on that, but they did get concessional financing, and then there were companies which specialise in micro financing, and then some of the big banks also got involved in the game. I think HNB kind of brings to my mind Gramin, Gramin, yeah. So that's another like what Dana said. It's it's it's the backbone, and like what you said, it's a backbone of the economy, and that is one segment you have to really formalise because those SMEs, the micros become the SMEs, the SMEs become the large enterprises. Exactly. Yeah, and the large enterprises become larger than life.

charindra chandrasena  05:53
Yeah. So I'll pick up from one point you mentioned about this assistance from banks. Yeah. The support from the banking sector. Now, the government has started a loan scheme after the cyclone to help the businesses affected. The SMEs affected by

Speaker 1  06:16
it.

charindra chandrasena  06:17
They are providing loan at the three plus 3% interest, with a six month grace period to start paying back, and for that they are also providing there's this national institute, which they call it the Sura Kum Ayat, which I'm guessing it's a security arrangement, maybe a collateral substitute for collateral for companies that or businesses that cannot prove sufficient cash flow to get the loan. Building on that, can we focus on this point of governmental and banking sector support is it sufficient, or is it sufficient and not being utilised properly by the SMEs? Because that factor also we have to look at: Are the SMEs taking some concessional loans and not actually putting it to its best use.

Dhananath Fernando  07:24
Yeah, so my views are, Shari, I'm sure bankers will be in here on the commentary probably because in terms, if you look at the credit growth or like the credit weightage, the risk factors are high for SMEs. So that's why generally they have a average higher lending rate for SMEs. So as a result, and at the same time, vulnerabilities are also high. Unlike a large corporation, the ability to absorb a shock is high. So any like any natural disaster, something higher chance for default under the SMEs. But when you say SMEs, I think you should also understand the definition of SMEs. Like these are not like you know, these are not like small vade ad or something as per the definition. These are the companies who are not exceeding 750 million turnover per annum. That's a large amount. And also in terms of employment, maximum number is 300. So anything below 300, so it can be also falling into, I mean, you know, 100 to 200. Also, yeah. So these are fairly well. I

charindra chandrasena  08:33
mean, if a company has 295 employees, that is still going to be classified as an SME. But that's a that's a big company. Big operation, right?

Dhananath Fernando  08:40
Managing 295 people is no joke. Paying EPF, EDF, gratitude, all that is no joke. So, so the challenge is yes. So there is a risk factor, and some banks are actually they are. If you look at their loan book, which is more skewed towards SMEs because their strategy is to drive on SMEs. But where I have a slight, I'm not sure whether it's a disagreement or I have a different view. Now our task has, I what we try to do is make these SMEs large companies. I would say there is a chance, there are cases, but how this happens is in this modern day, not in that sequence, right? It you cannot wait for two three generations for a small company SME to become a large company. How these games work is with let's say IFC support or whoever, where they get an investor. Whether you do a you know rights issue and then you basically jump. If you have a right product, basically you move you become a large company. I mean, at a shorter period of time. For that to happen, the strategy of the government of making them small guys to medium to medium guys to large, I don't think it will take for for a long time. So, Dana, that

charindra chandrasena  09:55
that in Sri Lanka right now doesn't that happen far less frequently than the. Older system of going from micro to small to medium to then large. Are we? We are. We are still very much in that old model.

Dhananath Fernando  10:10
Absolutely.

charindra chandrasena  10:10
Of going step by step by step.

Dhananath Fernando  10:13
Absolutely.

charindra chandrasena  10:14
Whereas you see only you know there's rare kind of companies, especially these modern companies, which which get that capital infusion and then suddenly you know have that exponential growth.

Dhananath Fernando  10:25
Absolutely, yeah.

Dhananath Fernando  10:26
Because when a small company to come to medium large, probably it will take one generation. It will be difficult unless you like really do well. You can do it. The challenge is when you move from one generation to the second generation, second generation to the third generation. There are disputes coming in. Let's we I mean agree because when you have children and then businesses get succession planning, succession planning spouses get involved and then basically it remains as a probably a micro small medium enterprise. So my view is probably we should go for big fish. We set up like we that's where the foreign direct investment comes in, which we can also talk, like where we bring the FDI's and basically SMEs become a feeding system for these big companies, right? They do parts and components of these big companies rather than trying to make like a parts and component companies like a large company. For an example, if we if Sri Lanka does tires or something like let's say an SME I'm not saying tires are being done on SME scale. Let's say we'll do some dry jackfruit some export as SME rather than trying to make it like a large SME like a large company who exports jackfruit, which is because we don't really have the supply you know supply chain to make it like a large company, but instead you become like let's say you bring like a massive fruit exporting company agribusiness, and you become a supply chain to that agribusiness where jackfruit becomes like a one probably like a production line where you do value addition and then you export to a massive global market is what I think a feasible strategy for Sri Lanka, because if we do it, there's nothing wrong what we're doing, but I think it will take a lot of time, and we will not be. I mean, it will take so long for us to really hit the. I mean, you know, our standard of living to go up. But again, having said that, it doesn't mean SMEs are doing a bad job. But I mean, the strategy-wise, when you attract the big fish, there'll be more and more SMEs. But not trying SMEs, the government to support like okay, we are going to have a higher export share from SMEs. I am not buying that argument. I would say you support, you develop SMEs, but you you get the chunk of exports mainly through right. So, so

charindra chandrasena  12:41
to break it down, what you mean? Am I

Dhananath Fernando  12:45
making sense? Am I explaining? No, no. I think

charindra chandrasena  12:46
I think you are. But let me try to break it down even further. I think what you mean is that these SMEs need to be part of a value chain where the ultimate, the final finished product Is a big corporations absolutely, and that big corporation is the one that exports

Dhananath Fernando  13:08
it.

charindra chandrasena  13:09
But the internal ecosystem in the internal ecosystem, these SMEs play a big role because the components for that finished product come from these SMEs.

Speaker 1  13:20
Yeah. So so the

charindra chandrasena  13:21
big company relies on the SME because they have to source it from the SME. So this is a local version of the global value chains that you know have have become very popular over the last 20 years or so. That a lot of countries are jacking into. Your your thoughts on that? Yeah,

Speaker 1  13:40
something similar. So the thing is now, for example, give an example. That's the easiest way to kind of break it down. Now, if you take, let's say, a huge export company like, let's say, activated carbon, there are few big companies that actually export. Sometimes the activated carbon, the components like collecting the coconut shells and all, it might be done by a small company, a guy in that collecting the collecting the let's say the the shells and all. So it might be done by a small company, where they will go in the region. For example, it's in the coconut belt. So in that, there will be small company that might actually collect and give it to to the what you call the large company, which actually does eventually does the activation and actually exports. So that might be one part. Now, for example, if it's a rubber component, sometimes the guys who collect the rubber and all that give them the sheets might be a small company, where it goes into when the value addition takes place. Because normally the high-end value addition is not done at a small and medium level; it's done at the large scale, right? And that you need that level of large-scale value addition, value addition to basically to export, because exports you can't do small level value addition because then you're competing with the world, so it just go in phases. So one thing that impairs SMEs is actually financing. Financing is one huge problem because in Sri Lanka the financing system, the traditional financing system is collateral based, which these. Don't have and sometimes they don't have what you call the cash flow system also. So if the and the problem what the banks face is

Dhananath Fernando  15:10
the risk

Speaker 1  15:11
because there's an amount of risk the banks can take into their balance sheets. So you know it's you know end of the day finance is about risk return. That's one of the reasons why the the the interest rates on SMEs are high because the banks are taking a large proportion of the risk. So I think what's going to happen is with this IEFC loan, I think it's equals to about 50 billion Sri Lankan rupees. I think what happens is that the IEFC loan or the institute that comes under, right? Something like I don't know. I don't know. I don't know if you can compare with this, but something like Freddie Mae or Fannie Mac in the U.S. where the housing loans are set, where they give kind of a guarantee that they give a guarantee for the loan. So IFC is providing the funds. The transactional value is done by the by the banks. And one reason you're going with commercial banks, it makes sense because they know how to evaluate people. They are in the business of banks. Main business is lending and borrowing.

Dhananath Fernando  16:05
Yeah. Right. So the risk

charindra chandrasena  16:06
management framework. Exactly. So

Speaker 1  16:10
it's a tried and tested system. So they generally know. And if those people are, they need to, for example, learn how to do accounts and all. So sometimes they might even direct. At least, if they can't teach them, at least direct them to the right, you know, direction to tell them, okay, you need to do stuff like this in the future for your businesses. Where how to keep accounts? A lot of the micros they don't keep accounts. You know, accounts are basically you know probably sometimes scribbled in a little piece of paper and all that, and and and and it's a day-to-day transaction. So one good thing is SMEs financing is high and then you get the informal financing of micro which we spoke about earlier because as far as you know sometimes there it goes on the interest goes on a daily basis it can be a weekly basis or a monthly basis so for example I know for a fact that some interest some guys this as we say the whole copycat story the polymudala. Sometimes you get these informal borrowers who charge like 2% 2% a week, or can be can be as much as 10% a week.

charindra chandrasena  17:12
Loan sharks, loan sharks, basically

Speaker 1  17:14
loan sharks, right? So if you can put them in the right direction and get their cost of finance down, that means because already if they can pay some of these guys are they are paying that interest on a monthly basis like whatever the monthly 10% or some sometimes 5% a month they pay that on time because these guys they really come after you the loan sharks so if they can 5% means 60% I mean basic math 60% a year 60% a year so but if they can give that at 3% a year, right? So that means I mean they are saving straight away off the bat 57% which means that's a huge relief for them, right? Which will make their businesses more efficient, and then they can concentrate more on you know developing the business. But of these guys, what happens is because they are under so much of pressure of paying the loan sharks, they are just looking to make that day's ends meet. That's why these businesses never progress beyond from hand to mouth, because the reason is their primary concern is to pay the loan off for that day. Yeah, but that's my

charindra chandrasena  18:12
that's my point though. Shouldn't there be more guidance from the government? But how practical is that? Is also a question because I don't think who can

Speaker 1  18:22
give guy guys. No, but

charindra chandrasena  18:24
here's my problem, Leah. Then I think we've spoken about this in the show earlier. I don't think Sri Lanka is a naturally entrepreneurial country. We don't have an entrepreneurial culture really, right? I don't. I don't. I don't think we have an entrepreneurial culture. We are not we are we are not naturally wired that way. There there are countries where now America is a good example where there is independence and individuality from a very young age. You know, just simple things like moving out of your house at 18, right? That teaches you to manage your own sort of world, and and also manage your finances, right? But over here, because you can live with your parents till you're 30 or whatever, I I think it's a bit of a longer, you know, learning curve for them in terms of managing life and then managing finances is also one part of them, and also risk taking.

Speaker 1  19:28
Yeah,

charindra chandrasena  19:28
I don't think Sri Lanka is particularly a risk taking country when it comes to finance and sorry business.

Speaker 1  19:36
Yeah,

charindra chandrasena  19:36
right. We spend more than what we have as disposable income as individuals, but but not necessarily as investments to something.

Speaker 1  19:45
No, can I? Shall I? Yeah, very

Dhananath Fernando  19:48
quick point on Varshari said. I think it's an interesting point that you brought, Shari. Like we are whether we are an entrepreneurial nation. I think yes, absolutely, because the ingredients to become an entrepreneurial nation. Is not there because entrepreneurship takes place when you work with different cultures. Like that's your innovation factor multiplies. For an example, within within this podcast, if there's someone who seated, I mean, who had worked in Japan and come and having this chat, they will bring a different point of view, which will trigger a lot of thought process in our head to start new things. So that's why the Silicon Valley and all that. It's mostly the immigrants who are basically running the show because there's nothing unique about them. I mean, unique in the sense they are coming from different cultures. So the ability to you know multiply. It's like when you have like one letter, the number of words is very limited, but when you have two letters, the combinations are higher. When you have two letters and a number, the number of combinations exponentially grows. So likewise, the product that's number one. Number two is it also comes with absolutely quite of you know thinking completely out of the box, like you know, entrepreneurs are completely who goes beyond the tradition. If something was taught in school, those the guys who are going to break it are the ones who are going to become entrepreneurs. So I I agree with you. But in terms of the the Sri Lankan context, I think the government's guidance probably I would say I would first go. Don't provide guidance. You first keep the environment stable for anyone to predict. If you want to provide guidance, you first keep the environment which is a level playing field. That's the first thing.

charindra chandrasena  21:33
Okay. If

Dhananath Fernando  21:33
you really want to provide guidance, you provide the guidance with easy regulation. Like you know, rather than trying to let's say give a cash out, you basically have a mechanism where, for an example, your research can be done at a lower cost, where you can you know you you incentivize the innovative thing taking place rather than trying to obviously so

charindra chandrasena  21:58
so you you provide assistance conditional upon it being used for R&D,

Dhananath Fernando  22:06
correct,

Speaker 2  22:06
right, something

Dhananath Fernando  22:07
in that sort. Okay, rather than trying to subsidise, because what the easy approach is, you try to subsidise the SME and thinking that they will be able to compete and catch up. But the flip side of it is, Chari, the human nature is when you when you are used for a subsidiary, subsidiary, then you tend to depend on that. Yeah,

charindra chandrasena  22:27
it's a handout and dependency mentality. Exactly, and

Dhananath Fernando  22:30
then the other side grows to defend that subsidiary for a long period of time. So that's where you have to be cautious. Yeah, and that

charindra chandrasena  22:38
also comes down to culture, right? Because we we we have this dependency mentality, whether it's our parents or our teachers, and and then the government. So when something is given, if you don't have, like you said, if it doesn't have to be used for R and D, we can use it for whatever we want, and and that can create issues. Ria, you wanted to say something about yeah. So

Speaker 1  23:01
the way I see it, I'm looking at another another angle of this whole story. Sri Lanka is an economy that actually lacks proper competition. That's a huge issue. Now, for example, for entrepreneurs or anyone to come up, you need competition. So and you need to give a level playing field. In Sri Lanka, the level playing field is not there. Now, for example, if you look at most of the businesses and all that are running, even some of the big ones. I mean, I mean, people can use their wild imagination on this. They generally have some political patronage there. One thing is taxes. Now, for example, that's something that Advocata we speak. I mean, you have seen that. So, so

charindra chandrasena  23:36
you are talking about SME graduate into large companies. Yeah. So the thing

Speaker 1  23:41
is, like, for it to grow now, for example, there has to be a natural process, and that you don't find now. For example, if you look at the let's say tile industry, right? Those ceramics industry. I mean, if some medium level guy comes, he can't go because the reason is because the local manufacturing. That's an

charindra chandrasena  23:56
algebra. Yeah. So that's the thing. I mean,

Speaker 1  23:58
here it's it's an import. It's an import substitution. I mean, import taxes are there, but what happens is it kind of deters. Like it deters the small and medium guy from going forward also, because everyone gets zoned into this comfort zone. Then the then the economy doesn't go beyond that. You need to go at each other. I'll tell you a good example now. If you if you look at the what you call the big apparel firms, right? If you take the 1990s, none of these, the big main three at the moment, or the main four or five, whatever you call, none of them were none of them were not there. There was one particular guy who was leading it, but then again, he was getting special benefits from from a particular minister, right, or from a ministry where this quota system was running, so when the quota ran out, he basically burnt out, right? And where the other guys who are actually competing with the market, competing with the world, they actually survived and they really prospered. Right. So the problem is, you know, you need to get this competition thing going on, right? Where it has to be a level playing field. Where. The government doesn't mess with taxes and all that, which helps certain people, which put certain people in disadvantage. So,

charindra chandrasena  25:05
if I understood you correctly, what you are saying is that the competition has to be at the high level,

Speaker 1  25:11
yeah,

charindra chandrasena  25:12
so that nobody can create a monopoly or even a duopoly,

Speaker 1  25:16
yeah,

charindra chandrasena  25:17
or even an oligopoly. Really, I mean, right? Pretty much that because there is global and local competition,

Dhananath Fernando  25:25
yes, the

charindra chandrasena  25:25
spoils would be you know shared, and therefore for a company say if there are if there are eight big players in a in an industry now that's a good industry for me

Speaker 1  25:38
yeah

charindra chandrasena  25:38
right so then the and maybe there's a big gap between the eighth and the ninth position, but that's okay because whoever is in the ninth position and it may be a lot of companies here, they can actually overtake that, surpass the eighth position,

Speaker 1  25:53
yeah,

charindra chandrasena  25:54
and slowly climb like that. Whereas what we have now, the there's an ocean of difference between no the top three and yeah so that's why the tax

Speaker 1  26:03
policy has to be very consistent also so when we have lot of variation what happens is only the big guys can survive because normally sometimes what happens is they put a particular tax it just comes out of nothing what we used to properly call as the midnight gazets generally that it it basically skewed towards one particular guy or few people in the market I mean and we have seen some of them how some midnight cassettes have been directly linked with scams, right? I mean, there's lot to talk about. You know, there's oil, sugar, things to talk about. So that kind of things shouldn't happen because when that happens, one thing is when you're a person who is trying to go up the hard way, right? One big hit will wipe you out, right? We are a big, large company, a very large company which deals in billions. Even if a hit comes, they can take it. So that because of that, lot of these guys, SME and all, they don't grow beyond that. They think you know what we call in single level. We say, "Thin is what they get. We might lose what we have. So there is that scenario, right? And the other one is there is a problem that I see also in in the education system, where, for example, to have a good business, you need to have good financial discipline among yourself. Yeah, that is something that has needs to be taught.

charindra chandrasena  27:16
That's that's the that's the point I was making earlier. Yeah, that we don't have a really we don't have a saving culture, to be honest. We don't, because you you see, and that's a good quality also. I think from a human point of view, person would share or donate, and you see this, you know, even during national disasters, they don't have much, but they'll give far more than they can actually afford to give. So, from that point of view, it's good. But I mean, from an economic and personal financial development point of view, I don't know whether it is. No, no.

Speaker 1  27:49
So financial means if you are running a business, what they say is the the whole system is basically you should leverage yourself.

charindra chandrasena  27:54
Yeah.

Speaker 1  27:54
Right. So if you are, I mean, if you are a business, you leverage say person, you leverage yourself, you get into debt. Then it becomes a very lucky story very fast. This

charindra chandrasena  28:01
is not even leverages. Sometimes it's it's over leveraged. Yeah. So

Speaker 1  28:04
yeah. So the thing is, what is the normal system of sometimes in businesses? What happens is when they get to a particular point, they would get something flashy. Normally, it's a vehicle or something, or they need to get some asset where they don't keep reinvesting. Where you take the really good old good old the good old system of let's say Warren Buffett, where basically he still lives in that same house what he bought 50 years ago. He still drives a very old car, and lives a very modest lifestyle. So that is also part of your personal discipline, where you where you because when you talk about America, everyone talks about the tech billionaires. The tech millionaires, you know, they just popped up for nowhere because they got into a whole new cycle which nobody experienced, and they were the first people to get into that first move of this thing. But if you look at the traditional, like investors like let's say Warren Guffin, Charlie Munger, and all that, they built it the old system, old system, and that's how most of the businesses. If you look at 95% of the business become successful when you go on the old system.

charindra chandrasena  28:59
Yeah, yeah, true.

Dhananath Fernando  29:00
And sorry, now the government's assistance. I'll give you a classic example why to justify my story. Let's say that we sign a free trade agreement. Now, for a SME company to adhere to a free trade agreement, it would be actually a cost. Cost in the sense they can have some leverage, but it doesn't make sense because adhering to FTA, you can't just do that. There will be lot of compliance, like you know, rules of origin. So many things needs to be done, which actually they cannot absorb that. You know, they really cannot absorb that expertise. So basically, just signing FTS really won't help. I mean, I'm not saying not to sign it for the SMEs, right? Because they, it's blocked. So, but if a large company really can fathom that, you know, human rights guidelines because it's changing all over green energy components and all. So that's where we have to chip in. That's number one. Number two, I'll give you another classic example. Why I say government? How the government can actually? Actually, the Sri Lankan government did it very recently. They had a now for SME guys when they go to take credit, they are using their current assets.

charindra chandrasena  30:07
Okay.

Dhananath Fernando  30:08
Right. So the government actually did a registry, but they cannot really figure out like whether these assets are like whether it's it it has been banked with one bank or multiple banks.

charindra chandrasena  30:19
Right.

Dhananath Fernando  30:20
So they basically created a registry like the crib registry of all current assets all these institutions have taken. It's I think it's an ongoing process. So then the bank's cost or the risk factor is limited when they extend credit, because now they can see actually okay whether this guy I mean whether this particular semi is is good for money, and whether they are assets, what they claim is actually there, and whether it has been banked by multiple banks, right? So then, actually, a cost of credit, cost of capital comes down because information is available. That's something the government can do rather than offering a let's say 5% interest rate loan, because I'm not saying not to I mean offer it, but the approach is because then you are keeping a level playing field to everybody. So then everyone start adhering. It's better for the tax revenue. It better for businesses. It better for growth, and also by having large companies doesn't mean actually have SME. I mean proportion will go down. Actually, in my view, it will expand further because if the large company starts exporting more and more, that means you are SMEs. You are creating a value base that they export more and more because they are they are not directly exporting, but they are exporting through a large corporation,

charindra chandrasena  31:42
and and the economy expands also.

Dhananath Fernando  31:44
Absolutely, right.

charindra chandrasena  31:44
So if if it's 100 billion economy and it's 52% of GDP, then if it's 150 economy, then yeah, you know it has to be you can accommodate that. But but on one point, I want to pick you up on Dana. currently about the exports factor. Currently, about 5% of Sri Lanka's exports is through SMEs. That is them directly exporting. Okay, not going through that large corporation. The government last year has said that it wants to expand this more than double it, so to bring it to 12 to 15% Now that flies in the face of everything you've been saying, right? So you said something good about the government. Now, maybe you can say the other side also. Yeah, you want. Yeah. So

Speaker 1  32:40
just pick on this. So the scenario is if you know the problem is why the number is so low on exports is because I remember I told you about the value addition. So basic value addition you can't export. You need to export it at the next level. So and I think a lot of the SMEs that do export are mostly in for example I think in in consumables and for example in in the food industry, like for example, fish, right? Fish exports. Those are mostly SME companies, and plus you get vegetable exports. So those the value addition, you straight away take it, you pack it in nice, and you send it. So the value addition is pretty low, right? So one area where the government can look at bringing more value addition is these examples that I use widely? Of course, with the single audience, I got hammered alls on this. But the scenario is, you can actually you don't have to export the finished product. That's another mentality we have. We every time we think is no, we need to send the finished product. No, you can send a component. No, for example, in the rubber industry, Sri Lankans to To a certain extent, have mastered the rubber industry because we make aircraft tires, we make rubber components. All the these are high value addition items. Right? I mean, aircraft tires basically your people's lives depend on that, right? So they have mastered that. So the thing is, when a large scale company has mastered it, the know how little by little, you know, the guy who works there, like what we say, you know, in a garage a mechanic works there. After 10 years, when he learns the trick, he goes and starts his own one. So like that, let's say a large rubber company, he works there, he figures it out. You get these smart cookies, no, one or two. They figure it out. Then they take the risk. No, I can do this. So what I'm saying is, don't think about the finished product. Think about small things. Like for example, let's say the Indian auto industry, it's massive. Chinese auto industry, massive. What have you got? We have we have good rubber here, right? And what you can do is you can actually make particular rubber components for them. So that is where the Sri Lankan government can, I mean, the state or the Ministry of Industries, where they can make the connection, saying, right, listen, we have guys who can make this particular compound for you. Why don't you guys have to direct this thing and see how how we can solve this out? So things like you know rubber rubber boots, bushings, you know those things. You know they are not you know you need machining because the thing is Sri Lanka rubber is very good, right? And our guys know how to treat rubber and all that. You know it's a volcanic process. You know our guys know. How to do it? So if they get that opportunity, that is one area where you don't go for the finished product. You go for components, and you tell these guys, "Listen, you are putting all your time and all that. Another reason I'm coming to that is I'll tell you a good example. John Keys, which is one of the I think the biggest company in the country, at least on the stock exchange, they actually long years back, I think about 25 years ago, they actually closed one of their profitable companies. It is which is a huge mystery for me, right? So the late Chairman mr. Ken Balendran, someone I know who knows him because I think we were at a match or something, and he describes really really in the story. What he said was that the reason why mr. Valentin took a decision to close that company down. I think it was a printing company.

Speaker 1  35:44
The reason was the management time that goes into managing that company and managing John Gill's holdings the same time, right? So for him, he's saying you know this company is making peanuts compared to John Giels Holdings, right? So I can't be doing this. Might as well let's just kick it off because so that's what you have to figure out. For some businesses, it has to be large enough and profitable enough for the large guy to get into.

Dhananath Fernando  36:08
Yeah,

Speaker 1  36:08
right. The SME guy will just go and grab it.

Speaker 1  36:11
Right. So that is that sweets what you look at. That is something that you know a lot of the entrepreneurs also don't look at because just because you know some companies into some business, that doesn't mean they want to go beyond because there's something factor called time because the management time is the same. So right, so if the return is not going to come from their business, they'll sell it off. They're saying, listen, management time is management time. We can't be, you know, you know, we can't be, you know, soft pedalling with this. So that is one area. So that's what I'm saying. Always for the SMEs, there is one segment which the large companies won't look at, right? So, for example, the rubber components might be one. I'm not saying I'm just speculating. So, there are opportunities like that. So, one thing is the entrepreneur has to figure out the opportunity because that's where the entrepreneurship comes. Second is the support has to be there for the government to make the connection. That's the government's job. Yeah, every embassy has a commercial officer, right? So, there's a big question for me. Are the commercial officers at the Sri Lankan embassies or the High Commissioners OCS doing their job? Because yeah, I think

charindra chandrasena  37:08
I think the economic diplomacy is Sri Lanka's economic diplomacy needs to lot of improvement, and and I think we should actually talk about it properly, like in detail. Yeah, but but I just want to add

Speaker 1  37:18
this because a lot of the embassy staff. I mean, we have seen enough the political harangue that has been going. That has been filled with politicians or connected then connected their loved ones who are there. So, are those are we sending the right people to do that particular job? Yeah. I mean, you do a political appointment, he is not going to do anything. Yeah.

charindra chandrasena  37:34
To to pick up on what you said, yeah, about this, and what I asked also about the government strategy and the government support. So I was actually while you were talking, I was looking at this national policy framework for SME development from the Ministry of Industry and Commerce. Now, for me, I I just feel like the whole policy is based on what we spoke about earlier, where this micro you bring them to small, small you bring them to medium, medium you take it out and build a large corporation, and then become larger and larger and larger. Now Dana's point was that takes a long, long time, and and in the modern world we don't have that kind of time. We don't have the kind of, but but in Sri Lanka, we seem to almost admire and and you know speak very highly of those kind of companies, and they are great companies. You you take the Sidalep brand, how how mr. Heti Good,

Dhananath Fernando  38:39
yeah,

charindra chandrasena  38:40
yeah

Dhananath Fernando  38:40
Heti Good,

charindra chandrasena  38:40
yeah, how he built that from the streets, basically, right? That's a genuinely inspirational, like research story. But that's a different era.

Speaker 1  38:51
Yeah.

charindra chandrasena  38:51
Do we have that kind of time in this fast-paced world? So, what you're suggesting, and I think both of you agree on that, that the SM. should be feeding into large corporations that can then take out the product. I'm asking: Does it need to be a whole realignment and part of a broader strategy, or can it be done independently? Because I feel like this needs to be an entirely like we need to go back to the drawing board and come up with an entirely new national policy for SMEs. Because this, the other thing is when I told you that we plan to get to 12% exports from SMEs. That is the 2027 plan, right? Which means, and and by the way, that is this government last year. So we are unlikely to see anything new if the goal has been set already for 2027. So do we not need a new strategy altogether?

Dhananath Fernando  39:57
My view is it's an entirely new strategy. That's that's why I mean that's why I said I'll become unpopular by saying this because everyone wants to see the SMEs prosper. For me, the same. Yeah, you you are saying the same thing. My point is, if you when you take this strategy, it will grow SMEs, but not the way that we speak about from making micro one a small, smaller medium and large.

charindra chandrasena  40:21
The one question I would ask, Tana, is we we talk about sometimes aspirational value, you know.

Dhananath Fernando  40:28
Yeah.

charindra chandrasena  40:28
So, are you not then putting a ceiling on the SME, saying, okay, you can develop, but this is the level you can develop. After that, you have it on your field. Even

Dhananath Fernando  40:40
let's say your Siddhaip example, I think anyway, even if you do that, it won't stop a one SME guys to become a complete outlier and actually building a global company. That will anyway happen. What I'm saying is, as a country strategy, you cannot. I mean, how many Siddha leaps we have? Like very few. I mean, very few companies. So that's

charindra chandrasena  41:00
an exception.

Dhananath Fernando  41:01
That's an exception. There will always be exceptions. And we

charindra chandrasena  41:04
don't hear about the failures.

Dhananath Fernando  41:05
Absolutely. We

charindra chandrasena  41:05
hear only about success story. Exactly.

Dhananath Fernando  41:07
There will be always a Malibu Mudalara, Navaloka Mudalali. There will be always people like that. No two words about it. And there will be always courageous people who will really compete with even the large guys and make the SMEs large companies. But as a country strategy, we can't do it. Is my point. But having said that, this is not an easy task because I once I we were asked to come and speak to the local apparel manufacturers like these are the Kelly Felders, good brands. They said we wanted to expand into India. I mean, they said I am trying to. I mean, I cannot even provide supplies to my three four outlets. When you try to expand to India, they are asking whether I can supply for 100 outlets and whether I can reopen for 100 outlets. You

charindra chandrasena  41:50
mean Kelly Felder was asked to export by the authorities?

Dhananath Fernando  41:55
Not the authorities. I think they were considering to expand like to India to increase the market share.

charindra chandrasena  42:00
Right. Okay.

Dhananath Fernando  42:01
I wasn't really remember about the exact context, but what they said was when we said, look, you cannot have like lot of protection and grow because your population is ageing. So for a local apparel brand, when the population is ageing, you really don't have the growth. So your only option is to grow outside Sri Lanka, they said true. You you you have a point, but the problem is when I consider growing outside Sri Lanka, they are asking can we open like 100 200 outlets in India, right? I don't have the capital, I don't have the resources, even I don't have the you know capacity to do it. So that's where it's challenging. So then that means you have to get like a partner. You have to join, go for a joint venture. This is a massive risk, and sometimes you are a family company. You are happy with what you earn, and you have enough means to keep it as it is. But that won't serve the country's purpose. So there has always been a you know dilemma when you are moving to to that. But as a country, that's what I am saying. This strategy won't. It will take a lot of time. It is good for a small and medium, like a ministry or something. That's good because your survival is also depending on how a small company becomes medium, medium, a large. But when you really want to take like massive jumps, you have to have the biggest again. I have no inclination, no any interest on big companies or big corporations or multinationals, I am not saying that. And even you look at how things have changed. Actually, the big companies align with the small companies. Like for an example, if you look at, I will take a one quick example: apparel sector. There are a lot of supply chains no connected to the apparel sector. If you look at their vehicle suppliers, they have to have some level of guideline because it has to be aligned with their Nike guideline, right? Yeah,

Dhananath Fernando  43:45
and their uniforms and everything. So then there are a lot of like even their canteen or the food suppliers. It has to have some level of alignments with the global set. So everybody aligns with that, and you are basically becoming globally competitive in a way, even your tail end. So, so that's where we have to look at because, especially, given this strategy may not work if you are India. We are talking about a small island economy. This strategy may not work in India or in US or in Malaysia. I am saying 20 million population. You cannot. You have limited number of things that you can sell. So, being an SME, whether are you going to sell it for 20 million or whether you really want to expand? And if you are expanding, it's not easy. As I said, they want 100 outlets or 200 outlets. For that, you have to really have that capacity, and that's why I am for imports at the same time because our SMEs to grow to improve efficiency. They will also have to source because when you are like if the Kelly filter says like I cannot supply for like 10 outlets how can I do for 100 outlasts for supply for that 100 outlets you have to have labour material everything for 100 outlasts that means you have to import more and get it done so it is not an easy thing but if you are serious about Sri Lanka road getting to.

Speaker 1  49:53
And we need to expand. You go to the next product like that, like that. You expand the business, and then finally you become a large business. So that narrative system should be there. When I mean, and that is partly nothing to do with the government, right? When we are talking about government, that is partly do with the with entrepreneur or the people who bought the vision to do that business, right? I mean, a good example is like if you take the garment guys, the garment factories thing. Now they are running particular softwares and all that. You know, software companies are there which does particular things which they specialise in. So that's the expansion and the product extension and all that. So that part is part of the entrepreneurship. But what the government can needs to do is at the initial stage from small to medium, and from there to you need to give the because when you become large, you don't need the government, or your your what you need the support for the government becomes very less.

charindra chandrasena  50:49
Yeah, I mean Nvidia Nvidia over the past few years has become one of the most powerful companies in the world. Absolutely,

charindra chandrasena  50:57
just because they were ready when the AI boom happened. Yeah, and now all those all these AI large language models need

Dhananath Fernando  51:08
the NVIDIA chips

charindra chandrasena  51:09
to run. So NVIDIA chips is a is technically a small component. I mean they they they are not computers, right? They're not even mobiles. No, I'll

Speaker 1  51:18
tell you a good example. Now everyone we say Philips, but Philips is with people with beards, right? Like shaving equipment, 10 televisions, everybody call it televisions and all that. But the other big business, making the making the machine that actually burns the chip.

charindra chandrasena  51:33
Right, right, right.

Speaker 1  51:36
So Philips, you know, so everyone will say Philips, you know, but you check like Philips have made this is that now, right? It's not making you know what you call kettles and what do you call irons and you know what do you call trimming machines and things like that. It's not a different game, you know.

charindra chandrasena  51:54
Size doesn't matter, value doesn't matter, right? Really, I mean, if you value doesn't matter if you have the volume.

Speaker 1  52:00
Absolutely.

charindra chandrasena  52:00
So, good, very interesting point to to start ending on. But before we go, we obviously have Dana's message.

Dhananath Fernando  52:10
Absolutely. So you can become an Advocata insider again. Our pitch is that we, in our view, we provide a conversation and a narrative Which is independent, and as it was famously said in a war, that when you are in the centre, you get shot by both sides, and we want you to stand on our side because to provide that independent analysis without affiliating to any political parties or any other interest groups. So, what in in our in our game, it's the consumer is in the centre. That's why we speak for competition. And by becoming an Advocata insider, you basically support economic literacy in Sri Lanka. At the same time, on many difficult conversations on the economic front, that we are bringing it for you on your behalf. At the same time, you also get very quite I mean, unique and exclusive benefits. You get an analysis on exchange rate on the vehicle market, so as weekly update on the economy and how it helps your business. And all the services are available in Singhala. We are looking forward to expand to Tamil and English, but it will take some time with new platform development and all that. It will take couple of months. So subscribe. It's just 12,000 rupees a year, 1000 rupees a month. It's we think it's very reasonable, and you are supporting a greater cause to improve economic literacy in Sri Lanka.

Speaker 1  53:32
Yeah, and Charlie, there's a small listing disclaimer I want to say is that from last week, actually I made a mistake with that visa. There is apparently that retirement visa kind of thing. It's there, but now the thing is the most alarming part of that is actually I made yeah I made error, but the most my my dream home

charindra chandrasena  53:48
you're talking about yeah that's right

Speaker 1  53:49
but the problem is you know and it's already there there's absolutely no promotion right

Dhananath Fernando  53:53
okay right

Speaker 1  53:54
so I mean the thing is already there

Dhananath Fernando  53:57
not not having not having it not having

Speaker 1  53:59
it so that's the thing. So I spoke to some people in the immigration department. Someone I know, then because I got injured, I made a mistake. So you start digging on it. So he's saying it's not only the ministry. There are a lot of issues with the banking sector also because there are certain documentation you need to do to bring a lump sum into the country because you need to keep a deposit. The problem is when you're bringing a lump sum from a foreign bank to here, you need to have a domestic bank account, he said. "There are problems where you really need to push these guys. He said it's a simple process where you need to get a letter from the immigration department saying that this guy is going to be a resident, so he needs to open account to bring the money down here as a deposit, right? As an investment deposit or whatever you call it. But the problem, he said, "there is a bit of a lot of lot of what you call I would say bureaucracy, bureaucracy and lot of many shades of grain. That's where it keeps going up and down. So he said that part, if they can do a system where they can digitise it or something like that, that will be easier. Then he said things will be much more much more easy. But then again, there is. Absolutely no, or very little communication that is going out. That this is already available here.

charindra chandrasena  55:05
Exactly, good, good. I'm glad you you clarified that for our viewers.

Speaker 1  55:10
Yeah.

charindra chandrasena  55:11
Dana, thank you.

Dhananath Fernando  55:14
Next week we are planning to discuss about ombudsman. Sorry, no, the public prosecutor's office.

charindra chandrasena  55:19
Yes.

Speaker 1  55:20
Yeah.

charindra chandrasena  55:20
Right. So, and and and we'll have a we'll have an interesting conversation. We are hoping it'll be enlightening for for you. So, for today, we'll sign off. And thank you, Riyad. Thank you, Dana. See you next week. All right. Cheers to you. Cheers.

Dhananath Fernando  55:37
Cheers.


Transcribed by https://otter.ai