Two proposals for National Budget

As a middle income country Sri Lanka is now faced with the shortage of labour at all levels of the economy. Both skilled and unskilled labour still tend to look for overseas opportunities hence creating a vacuum in the labour market to service the domestic manufacturing and service industry.

A macroeconomic policy has to be put in place to address this issue which could otherwise harm the domestic industrialisation process and the vision to be a regional hub. If not the country will continue to allow unskilled low wage rural labour exports to thrive which will have negative implications to the society at large. The following could be considered in addressing this problem:

1. Changing the composition of EPZs

The current Export Processing Zones (EPZs) under the Board of Investment (BOI) are somewhat crowded by labour intensive industries and in some cases not fully utilised. The factories which are running operations with high input cost of labour such as garments are dependent on rural migrant workers as the zones where the majority of BOI operations are heavily concentrated do not provide the required labour locally.

The Government should now concentrate to promote industrialists who are concentrated in these zones specifically in the Western Province to relocate labour intensive manufacturing companies to move towards setting up operations in rural Sri Lanka as it was done in 1992. This could help the north and the east development as well.

It would give an opportunity to women who are migrating for low skilled jobs such as housemaids and domestics to remain in the country and to earn a better wage than what is paid in the cheap labour sector of the Middle East.

At the same time, labour intensive industries could increase productivity to remain competitive. Such industrialisation would also help social problems the country is facing today due to the export of unskilled rural cheap labour.

To make this relocation practically happen, the Government must re-think the current compensation formula which is a hindrance at the moment for employers to relocate. This could be changed by introducing a provincial-based compensation formula that reflects the regional GDP and opportunities for jobs, so that labour intensive industries are encouraged to move to rural Sri Lanka.

The rationality behind this would be that even if a factory would want to relocate from the Western Province and the existing labour force did not want to do so, they would have enough alternative opportunity to move to another industry in the Western Province as the demand is high for local labour, i.e. from apparel to tourism, therefore the compensation scheme should be more practical and affordable to the employer to make business exit and relocate in a poorer province, creating new employment opportunities and social stability.

On the other hand, the 12 or more EPZs operating under the BOI should be converted into next generation production centres and re-engineer the processes to attract FDIs into fields such as IT, motor vehicles, machinery and other upper end technology parks for manufacturing consumer and industrial output. This would also help to retain the skilled employees who are now leaving the country for better prospects.

At the same time such industries will bring new technology transfer and help the country’s aspirations of becoming a more industrialised nation and increase the diversification of the export sector whilst supporting the university system to focus to develop academic degrees the support such industries.

The policy of Budget 2012 should be focusing on giving a competitive business environment to investors to set up technology driven industries in the EPZ and help the local labour intensive industries such as apparel to move to the rural Sri Lanka and further help alleviate poverty.

2. Hub and free port concepts for better business solutions and logistics

As envisaged by the ‘Mahinda Chinthana – Idiri Dekma’ policy document, the Government is focused on making Sri Lanka a regional hub and has embarked on mega infrastructure projects in many sectors.

For the manufacturing, export and the trading sector, the logistics operations should be streamlined just like the tax system done during the 2011 Budget and a national integrated logistics plan should be visible to all local and global investors to see how they could participate through PPP or direct investments and not on ad-hoc basis.

This will build confidence and show the seriousness and the commitment of the Government.

The business community would be the key to success of making Sri Lanka a preferred destination to service the emerging Asia and to become a regional centre for business excellence to attract FDI.

With the development of the port and airport sector infrastructure, it is crucial that tools such as ‘free port’ concepts have to be established into the national law to attract regional/domestic value addition, re-exports, multi-country consolidation and sector-based FDI to be promoted.

This will also increase the shipping/aviation traffic via increased transhipment cargo movement through Sri Lanka for both bulk and containerised cargo.

Such special processing zones could help the question of the heavily debated topic of Sri Lankan tea industry, which is having a constant argument on whether we should import tea to mix with Ceylon tea and increase the volumes or add further value to the limited output of local tea by creating high end branded products with higher price tags.

It is possible to accommodate and solve both problems by adapting a two system export processing environment for the tea industry in Sri Lanka.

A possible solution is to introduce a special free port area for the tea industry to import and re-export with value addition, where a labelling and an administrative process could distinguish the mixed tea vs. the Pure Ceylon Tea that could be identified in the export process.

By this way exporters who would want to import from the region and increase the value and at the same time export greater volume could have a the option of doing so through such export dedicated zones whist the other tea exporters who would want to focus only on the 100% Pure Ceylon brand could work outside the zones with their labels.

Such processes could help both the situation of brand protection and address the limited supply of the domestic market and would help the country to be a tea exporting and trading hub, rather than it being done in the Middle East or UK from our own bulk teas

To achieve the national objective of being a regional/global leader in whatever the fields we chose to do so, in principle we need to understand the hub operation clearly, which is: Increased volume = economies of scale = competitive pricing = economic prosperity.

(The writer is CEO of the Shippers’ Academy, Colombo)