Last week I had the privilege of meeting an award winning industrialist who owns a 600 million rupee packaging company. Having worked as an apprentice for a packaging company, I knew the best way to judge the business health in the market was from a company such as this.
The logic being they cater to a wide array of clientele ranging from the FMCG sector to the export industry.The response was very encouraging. She said that demand was booming and the challenge was meeting the requirement in a timely manner. I inquired ‘what’s next’? for which her response was ‘we are expanding and moving to a second plant in Horana.’ I guess this affirmed the statistical number crunching that registered an 8.5% GDP growth in the 2nd quarter.
I had heard of Horana being one of the best places to do business. Going through some past information I found what I was searching for. The Asia Foundation had done a study on the Economic Governance Index (EGI) and Horana had emerged as the place that has the best enabling environment. In simple words ‘the best place to do business.’
Economic Governance Index (EGI) –The best research for Sri Lanka
A typical enabling environment is evaluated in a country on 10 key attributes. They are registration/permits/Licenses, Land Access/property rights, Transparency/participation, Regulation/compliance, costs/Infrastructure/business services, Taxes, Legal Institution/Conflict resolution, Government Attitude towards business, Informal charges-favouritism/discrimination and Crime/Security. The EGI Index is computed for a country on the above attributes.
The EGI was conceptualized and launched in Sri Lanka by the Asia Foundation about three years ago on the success achieved in Indonesia, Philippines, Vietnam and Cambodia. It helps identify government’s influence and constraints to economic growth as well as points to the influence of economic governance on private enterprise.
To my mind it is one of the most important pieces of research done in Sri Lanka. The logic being that whilst large industries are scattered around the Western Province, the backbone of Sri Lanka’s economy are the Small and Medium Scale Enterprises(SME’s) which are rooted around the country.
Market Horana – the best for business
On the overall EGI rating, Horana has emerged as having the best enabling environment for private enterprise scoring 6.65 points on a scale of 9. This means that Horana has the potential to be marketed as the best place for business in Sri Lanka. We already have an Industrial Estate in Horana which is one of the best performing in the country. This can be further extended and upgraded with better facilities to the standards of the Katunayake Investment Zone and thereby turn Horana to be the next investment hub in Sri Lanka. The lowest scoring location being Puttalam with 4.79 points is worrying, given that the Tourism authorities have a robust plan to develop this area to the new emerging post war demand for Sri Lanka as a tourism heaven. If one goes into the details of this study and implement the structural adjustments that are required Puttalam can be developed. This is the advantage that the country has, in having political stability.
Why an Enabling Environment
Let me shed some light on the concept of “an enabling environment.” A typical enabling environment is created by the right working balance between the Central Government, Provincial Council and the local authority (LA’s). Sri Lanka is powered by 9 provinces and 330 local authorities. The Provincial Councils and Local Authorities (LA’s) have to work closely in the planning and implementation of any activity at the grass root level so that an enabling environment can exist for the private sector to drive business. If we take countries such as India their tiered approach of driving policy and creating an enabling environment has been the success to India becoming a power house not only in South Asia but in the world. American President Barack Obama once said that ‘if a company is looking to be a global organization it will not achieve this end, if they are not in India.” This statement best explains why almost all global companies operate in different parts of India due to its efficient enabling environment.
Recently when I met the Secretary to the Ministry of Industry of Tamil Nadu he said that Tamil Nadu must be ranked separately by the Global Economic Forum because 52 of the top global companies have their manufacturing operations in Tamil Nadu due to its enabling environment which to my mind is where a geographical area like Horana can also become if its properly led.
If we dig deeper into the Sri Lanka’s administrative structure, the local government (LA’s) consists of 48 Municipal Councils (MCs), 42 Urban Councils (UCs) and 270 Pradeshiya Sabhas (PS). The effectiveness of implementing policy and creating a partnership between the private sector and the government for economic growth is ultimately on the effectiveness achieved at the MCs, UCs and PS. The challenge therefore is that unless the private sector engages at this level effective business strategy activation will not be possible. This is where Horana comes out strong and it now needs to be developed to be stronger and better.
I like to recall the statement made by the great Bill Gates at the recently concluded World Economic Forum in Davos. He said that “the ultimate reason that business and government must exist is to serve the people.”
This is where the learning’s from the Economic Governance Index better known as the EGI comes to play. Therefore it is one of most important pieces of research that Sri Lanka must draw upon.
The country’s 7-man task force in developing Industrial strategy, in which I am a member, recently identified that 10 industries in Sri Lanka remain the foremost right across Sri Lanka in each province. Even with all the regional resources which are specific to different parts of the country, Sri Lanka has not been able to tilt the business landscape to make an individual identity in each of the geographical areas on this strength. This is where Provincial Councils must play the catalyst role by creating an enabling environment thereby drive the SME sector to harness these business opportunities.
If I draw some other information from the EGI study on the attribute of Registration, Permits and Licenses: A measure that examines the time it takes to register a new firm Kuliyapitiya has been placed 1st. My suggestion is that we can target a particular industry to the geographical area where the setting up time is crucial for business success. On the area of Land Access and Property Rights: A measure of the availability of land and building Chilaw emerges as the best hence maybe we can drive the implementation of the Land Title Act from this geographical area which will provide an impetus to developing business with extra capital. May be this area can be developed for Animal Husbandry where large areas of land are required for setting up of farms.
On the attribute of Transparency and Participation: A measure of accessibility to obtain proper planning and legal documents Matale has been ranked 1st whilst on Regulatory Environment and Infrastructure and Business Services: A measure of the flexibility, ease of working with officials and adequacy of infrastructure Nuwara Eliya is ranked the best. This confirms the strengths of that area which is namely the fertile lands that exists for may be cultivation of fruits and vegetables. Sri Lanka can ideally drive this industry better to capture a larger share of the tourism related markets in the Maldives where many Sri Lankan hotel chains operate. This can be further extended to the development of tropical floriculture business targeting Japan as an export market.
Horana has once again come out strong on Taxes: A measure of the administrative and fiscal burden imposed which means it is ideal for setting up of industry whilst on Legal Institutions and Conflict Resolution: A measure of private sector confidence that legal institutions protect property rights Minuwangoda has emerged the best. On Government Attitudes toward Business: A measure of the support extended by government Haputale emerges the best which once again can be targeted for the development of new business that require a certain elevation for better results. Animal husbandry business could be a better option. Nawalapitiya is been placed 1st for No informal Charges, Favouritism, and Discrimination: A measure of the influence of informal charges. Whilst on No Crime and Security: A measure of the extent of crime and violence against businesses and the safety of personnel and assets Gampola/ Udapalatha comes top.
The Link to poverty – Sri Lanka at 15%
The significance of this study is that even though Sri Lanka’s growth has outperformed other countries in the region with overall poverty dropping to 15% from 26% in the 1990’s gives us an indication of the country’s social development even though it has been battling a thirty year conflict that ultimately catapulted in to fighting one of the most ruthless terrorist organizations in the world. Setting a target for zero poverty by 2020 is a pragmatic vision given the booming tourism industry that is in the high end of human resource requirement. An eminent hotelier said last week that to cater to 2.5 million tourists Sri Lanka will require a minimum 10 million people to be engaged in the tourism sector which I guess spells out the strategy needed in advance to achieve that magical number of zero poverty.
However, a point to note is that the Gini Coefficient of Per Capita Consumption in Sri Lanka has increased at an annual rate of 2%, much higher than for East Asian Comparator countries with the exception of China. This is a worrying indicator hence needs to be addressed. Poverty has also proved to be highly regionalized. Rural poverty has declined by less than 5%, while urban poverty has declined by 50% and that of the estate sector (i.e. plantation crops in the hill country) has increased by 50% for the same period as per the World Bank Report of 2005. Approximately 20% of the population still lives below the official poverty line, which is a measure of the amount of income available to purchase a sufficient amount of food for a daily prescribed caloric intake as per World Bank, 2005 Report. Hence, whist at the surface the data seems very positive the details reveal that there is a burning problem where the rich are getting richer whist the poor are getting poorer which is where industrialization comes into play given that it is a high consumer of man power.
Importance of Economic Reforms
It could be hypothesized that Sri Lanka’s economic performance in the recent past has been mainly due to the economic reforms that were initiated in the 1970s and continued today with varying degrees of success. The skewed growth record and ensuring income inequality can be ascribed to the incompleteness and inconsistency of policy reforms. While trade reforms (reduction of protectionism and general liberalization) have been fairly successful, those were not accompanied by the fundamental market and institutional reforms necessary to sustain a private-sector led growth that include agriculture, manufacturing and services, so that benefits are equally shared among different societal strata. Broad-based infrastructure improvement and fundamental institutional reforms to enhance economic governance are needed to propel economic dynamism outside the Western Province, where a majority of small and medium enterprises (SMEs) are located. The EGI reveals the true picture and can be the best tool to plan the way forward strategy for Sri Lanka.
The Link to Global – Economic Freedom
If we use the above information to achieve a competitive advantage globally the best would be to mirror it against the Heritage Foundation’s Economic Freedom Index. Theory says that there is a clear relationship between Economic Freedom and levels of prosperity in a country.
The global average across all countries is 59.3% whilst the South Asian average is 53.5%. Sri Lanka is at a 54.6% which means that we must understand the macro reasons that need to be corrected at national levels so that at the micro level we can start driving a game plan. I would argue that if the 13th Amendment was implemented 20 years ago with more power to the Provincial Councils, the EGI rating could have been stronger whilst we could have been within the first fifty on this aspect. In effect it means a more enabling environment for private sector enterprise to flourish.
1) Carefully examine the overall Economic Freedom Index and understand where correction is required.
2) Re-visit the study of EGI by the relevant government heads and thereby sketch out the way forward to make one’s electorate stronger as having an enabling environment.
3) Doing a similar study in 2011 to determine the new ranking and where correction is required.
4) Develop a country game plan based on these findings on where industries can be set up so that there is a master plan that all are aware of when planning for Industrial Estates and Industrial Parks.
5) Share this with the private sector chambers and develop a Public Private Partnership strategy in Sri Lanka’s developmental agenda.
6) Share same with developmental partners such as NGO’s and INGO’s so that a detail strategy can be developed on the Millennium Development Goals that has been targeted at the national level.
7) This overall architecture can be evaluated at the quarterly District Developmental Committee meetings that the President/Ministry of Economic Development chairs.
8) This can be driven to a global marketing plan from a specific geographical basis just like what Tamil Nadu is currently doing in India.
In conclusion in my view what’s important is for us to proactively be part of this programme and not wait for policy makers to do the changes.
The author is an award winning marketer cum business personality that has served top global multinationals in the South Asian region and has also served the government of Sri Lanka in key positions in Business and Trade. Currently he serves the International public sector and also serves on many private sector management boards. Rohantha is an honorary board member in key government policy making bodies of the new administrations.