The Top 15 from the market oriented Budget 2016, challenge is execution!

Further to the Economic Policy statement made by the Prime Minister in early November, which was essentially an external market oriented export-led policy statement, in my view the Budget 2016 further gave details to the overall strategy of brand Sri Lanka to the world. But the challenge in Sri Lanka is implementation. Let me capture the top 15 budget proposals that caught my eye and its implications to the changing Sri Lankan landscape.

1) MSMEs Credit Guarantee Scheme in 2016: Rs. 500 million contributed by the Government as initial capital together with the assistance of selected financial institutions, 75 per cent of the principal amount, if in default, of the total facility will be guaranteed and a credit line of USD 100 million from the ADB to support MSME lending at concessional rates.

Implications to Sri Lanka: The issue here is that most SME’s need assistance in the preparation of the proposal, especially in the area of financial forecast which determines the acceptance of the proposal by a financial institution. Many banks have started providing this service to SME’s, but more refinement is needed. The real success of this proposal will be how the financial sector also takes a greater degree of risks and gets deeper in the informal economy of Sri Lanka. The report by an expert panel of the Ministry of Traditional Industry in 2012 gives detailed insights based on the conclusive survey that was implemented.

Sri Lanka needs a mechanism like NCED to track implementation of budget proposals, which was based on the Singapore working model

2) Incubators Assisting MSMEs: Construct mini industrial parks which will be ‘incubators’ in Moneragala, Puttalam, Jaffna/Vanni, and Ampara. The private sector is encouraged to join the initiative in promoting investment and the applicable tax rate to be reduced by 50 per cent for a period of three years from the year in which the profit is generated – an allocation of Rs. 150 million for this purpose.

Implications to Sri Lanka: Whilst the strategy is what Sri Lanka requires, the first task would be re look at the 37 industrial estates that are currently in existence and attend to basic developments required. To be specific, internal roads, sewerage systems, 24 hour security, outer perimeter walls to name a few.  Thereafter, a technology transfer to increase competitiveness must be done as sustainability of the current SMEs in the industrials estates are challenged.

3) SME’s have an issue in marketing their products: Given the lack of funds, SMEs don’t engage in much marketing and advertising activities, hence their products do not get displayed prominently at Supermarkets and shops. Therefore, large supermarkets and retail sellers to lend a hand to SME’s by providing them with some prominent shelf space at a reasonable price.

Implications to Sri Lanka: Whilst this can create access to the local market, regulation must come in for fair competition of own label brands in the distribution chain. Separately, the value chain must be developed to reach the global market place. A best practice globally is the concept of buying houses. This can be tested in Sri Lanka, targeting specific markets based on the product mix. If such options are not pursued this proposal will only be a document on paper.

4) The issue of Regional Plantation Companies (RPC): RPCs that were established in 1992 have now run their course. It is time to rejuvenate the RPCs by restructuring them into small manageable units so that all RPCs could seek listing in the Colombo Stock Exchange (CSE). To strengthen the activities of RPCs, it was proposed to relax restrictions on the usage of RPC land in the cultivation of different crops. However, leases of RPC’s that commit to a long term investment for replanting and modernising will be extended for 50 years, with management fees to be reviewed.

Implications to Sri Lanka: The 10 man committee appointed by the President around four years ago had a detail report on how to increase the competitiveness of RPC’s. One such recommendation was that the lease agreement must cover two life spans of a tea bush, or 66 years. Recommend strongly one visits this in depth report, which included the development of the total value chain given the tea stock currently in the RPC’s are mature to salinity stage of the life cycle. Hence unless replacing can be done structurally we cannot become competitive in the supply chain.

5) Working Committee on Issues relating to Tea: Tea has remained a key export of our country but the value addition is not as significant to the extent expected. The industry is presently facing an issue of a significant dip in prices in the international market. This has had an impact on small and medium scale tea growers. Therefore, to address these issues, it was proposed a Working Committee be established consisting Government and private sector officials.

Implications to Sri Lanka: The working committee must have an evaluation model so that it becomes an agenda in the working model. Recommend strongly a ‘strategic evaluation model’, recommended by the 10 man committee, supported by a software package that could be linked to the RPCs. This will not only help timely decision making but also consistency of policy.

6) Liberalising Tea Imports: The proposal to liberalise tea imports to the country within a regulatory framework with a view to encourage value addition through blending etc. Strict labeling requirements will be made mandatory so that the brand name “Ceylon Tea” remains uncompromised.

Implications to Sri Lanka: Whilst this is about making the industry more marketing-oriented, we need safeguards to avoid imported teas coming into the auction system and destroying the real equity of the brand ‘Ceylon Tea’. In my view, a great deal of work needs to be done prior to implementing this proposal, which is timely.

7) Cinnamon Development Authority: Sri Lanka has the monopoly for the supply of “True Cinnamon” with over 85 per cent supply share in the world market. The value chain of cinnamon is under many different agencies, which stifles the industry’s growth. Therefore, it is proposed to set up a Cinnamon Development Authority with private sector participation to bring all activities in the value chain under one entity, with an allocated Rs. 50 million for the purpose.

Implications to Sri Lanka: Whilst this recommendation is valid from a supply chain side, we must not forget the demand chain development that has happened already. To be specific, ‘Ceylon Cinnamon’ branding work needs completion from a GI perspective. Unless this project is taken for completion we will not be able to get the best from a value addition perspective.

8) The National Payment Platform: Our digital strategy includes the introduction of the National Payment Platform (NPP), enabling the public to transfer funds from any of their bank accounts through the mobile phone for the payment of goods and services using their NDI. The National Payment Platform will bring in savings for the Government by increasing efficiency thereby reducing cash movement and the cash float in the market.

Implications to Sri Lanka: Whilst the direction on digital strategy follows the template of global developments, we must ensure that the software used is as per global standards, even though the Sri Lanka software engineering is an example to the world. The logic being, unless we have at least 5-6 protective layers there can be security issues when it comes to money payments. This recommendation is strictly from a global best practice point, than the credibility of talent.

9) The restructuring of the BOI, Export Development Board and Sri Lanka Tourism Development Authority:  The view is to improve operational efficiency and to facilitate investments. Until the restructuring process is completed, an organisation under the name “Agency for Development” will be established.

Implications to Sri Lanka: Whilst this will surely make Sri Lanka a more competitive nation, the key issue happens to be on the procurement process. The biggest draw back on implementation is the current tender process. One option is to look at the model adopted by France on the tourism front or opt for computerising the system as per the UN system, which is the global best practice.

10) Export Development Council of Ministers: The high level body to take policy decisions and clear bottlenecks will be formed to ensure successful implementation and effective monitoring of the export strategy of the country – the Export Development Council of Ministers (EDCM), chaired by the President, as mandated by Statute and comprising the Prime Minister and other relevant Ministers. This would synergise the strengths of all the stakeholders involved in export promotion, development and facilitation by removing the duplication of work among institutions, ensuring regular monitoring of the progress, taking corrective actions and effectively moving towards the achievement of medium to long term targets on exports.

Implications to Sri Lanka: This recommendation has been in many successive Government policy statements, but to practically implement it will require hard policy decisions. The perennial debate is should Sri Lanka focus on the SME sector for development or should we look at large entities as the incremental impact will be stronger. I guess time will reveal the cutting edge decisions that will be made.

11) International Trade Agency: In order to strengthen the international trade policy framework, the government plans to incorporate an International Trade Agency and also proposes to explore the possibility of entering into Free Trade Agreements (FTA) with countries such as the US, China, South Korea, Singapore, Australia, South Africa and Japan, and also to enhance exports to EU through the GSP+ scheme.

Implications to Sri Lanka: Whilst the FTA approach is the way forward, the issue with Sri Lanka is not on the demand chain in my view. It’s purely on the supply chain consistency. So whilst the market for Sri Lanka products can be expanded with such agreements a simultaneous process must be in play for value chain development and focused brand building.

12) Tourism: Tourism remains a vibrant sector with tourist arrivals topping 1.5 million during the first 10 months of 2015 which is almost an 18 per cent increase over the same period in 2014. However, I regret to note that we have not branded our country adequately to expand the industry.

Implications to Sri Lanka: This is spot on but the issue is that the six month planning (post approvals), as per the Sri Lanka tender process on the creative agency selection, has been put on pause mode. The private sector has recommended that this process be continued and it’s time we heed to this request as the short listed agencies are the top seven global entities. Maybe there can be some merit to listening to the big ideas, and thereafter deciding on the next steps to be chalked up.

13) Sri Lanka Tourism Branding: Sri Lanka has coined many tag lines, yet nothing has stuck. Given the competition in the region, branding Sri Lanka is of extreme importance, if the country is to stand out as the most preferred destination. As such, I propose that a vibrant promotional campaign be undertaken by the Sri Lanka Tourism Promotional Bureau to explore new markets, particularly in the far Eastern countries.

Implications to Sri Lanka: Once again, a factual analysis, but the recommendation must be a combination of digital, trade and profile based promotional spend in my view. This will require strong policy and independent thinking. The best case in point is the campaign ‘Incredible India’ by the Indian Tourism board. Whilst many were not in favor of the creative idea, the team went ahead with it and it became one of the best campaigns globally.

14) Mandatory Hotel Register: 60 per cent of hotels operating in the country are not registered. This has caused many issues in terms of maintaining proper standards in the hospitality industry in the country. As such, a proposal is put forth that all hotels be mandatorily registered under the Tourism Development Authority by 1 June 2016. Strict action should be initiated by the Tourism Development Authority against hotels that are not registered.

Implications to Sri Lanka: Interesting proposal but the reality is that the informal\sector will grow given the new thinking of the shared economy that we live in. Maybe we will have to see developments in markets where Airbnb operate and couch stay equivalents which are now big markets globally.

15) Set up National Innovation Centre in the Ministry of Science, Technology and Research: This will manage the Innovation Accelerator Fund set up as a revolving fund. It is proposed to allocate Rs. 100 million as seed capital to this Centre while another Rs. 3,000 million will also be provided within a period of three years.

Implications to Sri Lanka: Whilst this will drive new product development, we must also look at providing seed capital for commercialiSing such innovations, which is costly. Another option is to look into innovations, but this will not benefit the country as a whole.

About the author:

Dr Rohantha Athukorala was the Executive Director of the National Council for Economic Development (NCED) in the Ministry of Finance the key policy making entity in Sri Lanka and he subsequently served the United Nations during a five-year tenure. He can be contacted in [email protected]