Fast-tracking business growth and development

Friday, 25 July 2014 00:03 -     - {{hitsCtrl.values.hits}}

The three-day conference hosted by the Institute of Certified Management Accountants of Sri Lanka (CMA) held a comprehensive panel discussion on ‘Fast Tracking Business Growth and Development’. Moderated by Daily FT Editor Nisthar Cassim, members of the panel discussion were University of Colombo Professor in Economics Prof. Sirimal Aveyratne, Colombo Stock Exchange Chairman Vajira Kulatilaka, Mobitel Chief Financial Officer Nishantha Weerakoon, MIF Holdings Director Operations Malik Fernando, ICTA Chief Executive Officer Reshan Dewapura and Ceylon Electricty Board General Manager W.J.L.S. Fernando. Following are the excerpts of the discussion: By Shabiya Ali Ahlam Q: How important is brand building in the context of developing exports of Sri Lanka? Fernando: I think it is absolutely critical and we all understand that. But how we do it is a challenge. Sri Lanka is still very much in a training mode. The potential is in tea, but tea is exported in bulk form and there is very less branding there. There is no branding in cinnamon, spices and rubber. Essentially what we should be branding are all the primary agricultural products and adding value here. There are also service brands where on migrant workers we can send them out as nurses and technicians as opposed to housemaids. That is one other element. Focusing on agricultural branding, which is what Dilmah is doing, it is about getting out of the trading mind-set, adding value to the source and developing their own brands. Private labels should be frowned upon except for apparels where the supply and buying power is such. But in any other agriculture product, it is critical that we brand locally but it is a long haul. In the end it pays dividend by consumer and customer loyalty and the premium that can be charged over other origins. Tourism is another service brand where we haven’t had sufficient development. The idea of what Sri Lankan Tourism is, this is not clear. So service brands must also not be neglected. Q: What is Dilmah’s experience? Is it a hard route to become a globally-renowned brand? Fernando: It is a very tough route. My father started it. He was in tea for about 50 years and was a bulk tea exporter and he developed the Dilmah brand for 26 years. Year on year, it becomes harder. What it needs is dogged determination and unwavering focus. You cannot be greedy and expect results immediately. You need to start at some point and several others have done that. The issue is, what is the definition of the brand? 85% of our tea goes to the Middle East so on the purchasing power we are only addressing 6% of the world consumers. Having a brand that sells in three or four countries is not a brand. It has to have global presence and a unique standardised platform. Unless we position as a premium product, branding anything out of Sri Lanka and selling it cheap will not succeed. It has been a challenge. Q: There is a perception that Sri Lanka’s industrial and commercial tariffs are the highest in the region. How are you addressing that and what steps are available to make electricity cheaper? W.J.L.S Fernando: I would like to say we need to have a uniform tariff structure across the board, be it commercial, religious, industrial and others. But as you know we are a country with diverse groups and needs of people and there are certain realities that we have to address, like poverty. Of course when you go to certain countries you will see rational tariff making. That doesn’t mean we don’t do the same, we do. At the same time we have got to make ends meet. When there is a social need thrust upon us to give power at a lower price to certain societies, you will be pleased to note that about 50% of the domestic consumers pay Rs. 6 per unit while industries pay about Rs. 11. There are high end consumers of the domestic segment who also pay Rs. 45 per unit. So there are serious anomalies in the structure as you see that is dished out to the consumer. There is a policy with which we are trying to reform the tariff, unify it and bring down the slabs so it becomes easy and simple to understand and help achieve cost effective tariff. But we have not managed to get this. Why is this so? It is not because of a lack of planning. For as long as I know we have been adopting least cost planning. We have a captive market and being a Government entity it is our duty to plan right so we get the least cost option in place. I must admit that in the last 10-15 years we have not been able to meet this objective. We wanted a coal power plant way back in 1988. It finally happened in 2010. In the absence of a coal power plant, we couldn’t allow people to be without electricity so we resorted to what was not done in any other country of our nature. We import oil, burnt it and generated electricity at tremendous cost. This was the result of our not being able to have the coal power plant on time. In 1999 we had the money allocated with Japanese sources, but we couldn’t do it. We have the objective of having a uniform tariff and bringing down the tariff. The tariffs are coming down thanks to the coal power plants that are in function. There is hope.   Q: Norochcholai has been in the news more than anything else. As a General Manager do you admit there is a real serious problem or is it just that various parties are creating a problem? W.J.L.S Fernando: It has been media hype more than anything else. You will see that any plant doesn’t operate the way it should. In fact we have been having an average running of 72% and this is quite common for a coal power plant for this magnitude. And it is the only coal power plant in the county. There of course was an incident late last year where something that shouldn’t have gone wrong did go wrong. But at the same time we have managed to commercialise the second power plant without a hitch since the commencement along with the remedial measure of the power plant. Since February the plant has been operating without any problems. Q: How can capital markets play a much more dynamic role in the development of the country? Kulatilaka: No country can be developed without the capital market. One of the Mckinsey studies recently pointed out that for a growth rate of 8-9% the country needs about $80 billion capital in debt and equity in the next 10 years. So we have to be ready as a capital market to provide that capital to the industries. That is the part the capital market can play. Most think that capital market is equity, which is shares, but a more important role can be played by debt since equity is the more expensive part and debt is cheap comparatively. The debt market is the bigger one. On the other hand, the capital market can be used for hedging purposes. This is where we don’t have the hedging instrument yet other than the over-the-counter types that are given by banks and financial institution. A more dynamic hedging market also has to develop. These aspects will have to be looked at in the next two years or so. We have to start developing this base to come up with instruments and make the capital market vibrant and provide the capital needs of the country. The country has the potential to address this gap. Q: You are also an investment banker and there is an ongoing debate that interest rates have come down. There is no heavy borrowing from the private sector and the Central Bank has called for a further reduction of rates. What is your reading and how can cost of finance be reduced? Kulatilaka: One of the basic things is that there is a deleveraging happening in the consumer market that is linked to pawning. I never thought that the pawning market was so big and effective and active in the consumer sector. There is about Rs. 145 billion worth of deleverage that has taken place in the pawning sector. It is like what happened in the USA, people are deleveraging. When gold was valued was about $ 1,900 people used to borrow 90%. Now it is at around $ 1,200-1,300 and banks are giving only 60%. The Government has thought of giving guarantees to increase that. There is a huge deleveraging happening, but borrowing in other sectors is picking up. You can’t borrow when the interest rates are coming down other than for consumer segment. Q: What you are saying is that access to finance is very competitive now. Is that your position for SMEs and the private sector? Kulatilaka: It is very competitive, at least in the SME sector. People know how to ask for rates. There was a time when people didn’t know how to ask for rates. Now capital markets have also come in as debentures were given interest free and bigger companies and banks borrowed at a lower rate. And that can be going to the SME sector with competitive rates. Q: How has the telecom industry progressed and contributed to the whole economic revival? Weerakoon: When you look at the mobile industry, there is a strong correlation between economic growth and mobile penetration in the country. There have been many studies and recently I have found that in developed countries, every 10% of mobile penetration has contributed to 0.6% growth in GDP. In the developing countries it has been about 1.2% so similarly in Sri Lanka we can safely say that we have contributed around that. But how did we do it? In 1992 when mobile technology was introduced to Sri Lanka, there were only 2,600 subscribers. And even in late ’90s there were about 400,000 subscribers. By 2000 there were two million subscribers. Now we have 20 million and almost 99% penetration in the country. How did we contribute to this? In the mobile industry we were able to bring down the cost of the ownership. According to studies by Nokia in 2008, Sri Lanka had the lowest ownership since there was much competition. We are able to break the business barrier and facilitate the industry for real growth. Q: But is this model sustainable? We have heard in the news that at least two companies have been talking about selling and buying. There is consolidation talk. Five players are too many in the industry. Is this sustainable in the next five to 10 years? Weerakoon: I think five players are too many for country of 20 million people. According to published data, only Dialog and Mobitel are making money, the other two are losing, so it is not sustainable and even the regulator is promoting consolidation.  Q: How is the whole IT and BPO sector? We have a success story, but how are the two specific sectors that are the future stars of the country? How are they faring so far? Dewapura: The entire IT sector has seen growth and development in the last decade and within that specifically there has been significant growth in the IT/BPO sector. This is the area where we export IT products and services. The best way to illustrate the growth is to give numbers. Back in 2005 in IT/BPO we had a workforce of about 25,000 people and we were earning annual revenue of about less than $ 100 million. According to the figures released by the Central Bank, we are now exporting close to over $ 700 million and have a workforce of about 80,000. This is a huge growth. A number of MNCs are clients of the Sri Lankan IT/BPO industry. It is a success story and there is tremendous growth, but how has this happened? The organic growth of the company has also contributed to this but there has been specific focus both from the industry and the Government. From the industry, they have specifically focused on how you can compete in the global market. We have only 20 million people and we have limited resources, so how can we compete with countries with unlimited resources? We have gone into niche areas where with market segments, verticals and geographies we have been able to excel in these niches and we have gone up the value chain in providing this service. That is the key reason why the industry has been able to grow. Secondly, the Government has intervened and provided assistance and supported in numerous areas. Looking into the future we want to get into the $1 billion export mark by 2016 with a workforce of 100,000. I think we will reach ahead of that. But the industry together with the Government has set a much more ambitious target for 2022, which is to make a $ 5 billion industry with 200,000 people. The plans are in place. However, the export revenue is set for five times but the workforce is set to only double. Again we will have to move from a cost to value arbitrage where we earn more and provide those high-end value added services to reach that target.   Q: If you were to list three challenges towards this 2020 target that need to be addressed, what would they be? Dewapura: The way we have planned the 2016 target, we are all set to reach it, but yet to get to the 2022 target of $ 5 billion. There are many things to be done and the biggest challenge is the resources. Even to get another 200,000 people, we need to make sure there is a resource pool of talented individuals coming into the sector. I think that is the biggest challenge. We are working on that in the sense of first building the foundation. We expect the entire Sri Lankan population to be IT savvy in the next five years. The second is land and office space. If we were to grow the market by 150,000 people at a very conservative estimate of 70 square foot per individual, we are looking at about 10 million square feet in the next five to six years. We need to work on that right now in terms of building IT parks and IT buildings to make sure infrastructure is in place to go forward. Third is the cost of electricity and connectivity. The cost of connectivity has been high but it is coming down. There are a number of initiatives we are adopting to ensure the cost of connectivity. I am glad to hear that the cost of electricity will also come down and that will be a great boon to the industry. The cost of electricity will be a big factor in the IT/BPO sector just like other areas. This has to be taken into consideration and will be put in the plans when we are moving forward to achieve the targets. Q: We are coming to the critical aspect of human capital empowering all the sectors. But there is this view in the private sector that those who come out from universities are not employable. Would you agree with that statement? The other is the number that is coming out. Getting into State universities is a problem. How would you respond to these challenges? Prof. Abeyratne: To be fair, we need to look at all the major dimensions of the issue. Universities are not something that you can take in isolation from the rest of society. So you need to see outside the universities, the issues, complexities in this society and the public sector. What you see in this sector is that it has not undergone reforms for many decades though we started the policy reforms in 1977. I think it is halfway through. Although the terms of trade liberalisation were dramatic, to go along with that there are many other areas that didn’t undergo any substantial reforms. We had a lukewarm attitude towards reforms. And universities are a special category in that sense. Now we don’t select the students to the universities, it is someone else who does this. So to make the output better, the input should also be better. That is one aspect but I am not saying that the students coming into the universities are bad. The particular sector represents all the social categories. There is a fair representation. I don’t know if that is represented when the private sector hires the employees. When we come to the operation side of the university, we don’t have competition. All the illnesses in industries operating in a highly-protected monopoly market, all those issues are there in the university system. This is because universities are operating in a highly-protected monopoly market. But nevertheless, the bigger problem is that there is no competition. As an individual there is no competition; as individual universities they don’t have competition, there is no incentive to be competitive. Suppose Dilmah was in that situation back then, it will not enjoy the situation it is in today. We have this free education and in that name we have closed down freedom of education. About 250,000 sit for the Advanced Level examination. I don’t think it is the examination that should be used to select students; the university should have its own entrance exams but at the moment that is the system. Of the number of students who sit the examination, 50% are qualified to enter university and that is about 125,000 annually. But State universities can accommodate only 20,000. Q: Getting back to the GM of CEB, you are going for a low price environment. On Management Accountants (MA), how many are employed at the CEB? W.J.L.S. Fernando: We have about 800 engineers and close to about 100 accountants with various degrees. So may be out of that I would say 50 to 60 are qualified MAs. I think that is a good enough number. When I joined the CEB there were zero qualified accountants and six part qualified accountants. There is an upsurge of accountants and I think we have a critical mass of accountants and they are doing their job properly. You might not agree with me on the bottom line since they should have done much better than that if we had prudence. As I explained, sometimes our hands are tied for prudence. We are doing our best to get our act right and I think we are falling in line with what we are doing in the sector. We are very much aware and more conscious. The performance of our sector has an impact right across the social fabric and on industrial and commercial needs. We have been able to decouple GDP growth and electricity. When I joined the CEB for 1% growth in GDP we had to have 1.55% growth in electricity, now marginal growth boosts GDP in a big way. This shows the importance of steady growth of GDP and we are still in lower consumption per capita and we are doing alright comparing to the region.   Q: Every time we don’t have rain, everyone is worried. When will we graduate from this anxiety where we anticipate power cuts whenever there is a drought? Do you think in the next five to 10 years, with the plans that are in place, Sri Lanka will not have to worry about power cuts in the event of drought? W.J.L.S. Fernando: If you look back, we have not been concerned about drought for a long time, except for a couple of years here and there. We did have concerns this year but we know how it works out and we are geared to meet that kind of situation. The problem is that people don’t see this kind of situation. I must also add that there will be more social repercussions of not having water than electricity. In late April we were supplying water just to keep water on tap in Colombo. So we had to keep releasing water from our dams just to keep the water going. Q: The Indian system where colleges are affiliated to State institutions can solve the issue of the majority of the youth not being able to enter university. Do you think colleges can start linking with universities? Prof. Abeyratne: There have been links, but not substantial efforts. There are many affiliated institutions, but it is not enough to cater to the demand. As I said, the system cannot accommodate the students. The system should be competitive to accommodate the students. Q: The university system has been protected for decades. Has intake increased? Prof. Abeyratne: Very marginally. Some universities have been established by different governments so as a result there has been an increase. We also don’t cater much to international demand because of the limitations. According to the current system it is not the university that chooses the student. It is the University Grants Commission that does this. According to that, if foreign students select universities, the quota system that is in place is going to be affected. Those are issues. Along with education, in many other areas we don’t see deliberate effort in addressing the fundamental issues in reforms. Q: Will allowing foreign universities to set up here solve part of the problem? Prof. Abeyratne: Partly yes, but I haven’t seen the kind of private universities that have emerged in other countries. Such universities are yet to emerge in Sri Lanka. Q: Are accountants playing a lead role in the BPO industry and what are your expectations from professional management bodies towards reaching the 2020 goal of $ 5 billion export revenue? Dewapura: I think financial and accounting outsourcing is actually the cornerstone of our BPO industry because we have a huge number of qualified accountants and students in accounting bodies. I did say that the key for any of these sectors to succeed is in having a good resource pool and we have that in the accounting sector. If you take the global scenario, the financial and accounting function is common one across any business and therefore the financial and accounting outsourcing is a growing discipline. Currently in the global BPO market the financial and accounting segment value is about $30 billion. But in the next three years it is expected to double and by 2020 it is expected to go to $ 100 billion. For a country like Sri Lanka that is already recognised as a centre of excellence, if we can grab $ 1-2 billion in that growth, we can easily reach the $ 5billion mark. In Sri Lanka the number of students enrolling for accountancy and the number of members in those bodies are also on the increase. In 2008 the total student population was only 80,000, now it is 120,000 and the total membership it is 13,000. This is one key area that will really boost the BPO industry. Q: We are moving towards coal power generating 60%. What about the environmental issue from coal power generation? W.J.L.S. Fernando: We have 600 megawatts running. It is obvious that people will be concerned by the environment, but what do you mean by the environment? Environment means having fresh air to breathe, clean water to drink, greenery and vegetation. What else do you want? The environment is regulated by regulatory standards and all these power plants are state-of-the-art and strictly compliant with Government standards in terms of emission levels and ambiance quality standards, etc. In countries like Hong Kong there are huge numbers of coal power plants right in the middle of the city. So coal power plants can be built. They are manageable and are environmentally and technically friendly. There are no issues to the environment because of the coal power plants and it is only misinformation and a situation created by those who simply twist matters and scare the public. Q: There has been a suggestion for regular tariff revisions, with one engineer saying it should be done every six months; what is your perspective on that? Who is responsible for the revision and when can the next revision be expected? W.J.L.S. Fernando: We are legally allowed to revise the tariff annually and we are legally allowed to submit our tariff filing every six months. But we do this only once in three years. This, as a rational thinking person, is not correct and annual revisions are good so you smoothen the shocks. There are other models but we are still too early for that, such as the once-in-three-years revision which also doesn’t happen regularly. We have this anomaly situation created throughout where people perpetuated, this is bad. We have a well-regulated rational tariff right across having in mind the social needs, the realities of society and also the productive and non-productive sectors. We also have to be realistic in relation to cultural norms and we can come out with a good tariff that can be accepted by the people. Q: What are the new instruments that can be used by the private sector to raise money? Kulatilaka: We call it finance and engineering. We have to design instruments to suit the risk profile of the investor and the issuer. There is no one instrument that can be thought about. I was personally involved in designing the securitising product suitable for Sri Lanka. The local law didn’t allow the designing of a real securitisation product like those done in the US and other countries. When that was developed, a lot of people laughed at me saying there is no true sale in this, but we went on doing it. This is one of the most popular instruments in the country. So an instrument is not something that will allow us to say what to do. An instrument is what we have to design to suit the issuer and the investor. There is no hard and fast rule. So based on the regulation is how we have to design instruments. Q: We are going up on the IT literacy scales, but the issue is in PC penetration. Actual households owning PCs plus internet rollout and the cost of internet are two issues that haven’t been really addressed. What is the industry doing about it? Dewapura: PC penetration is low but has been increasing and now the entire thing about PCs and computing is the fact that there are mobile devices and with this increase, the requirement to have a PC at home would not arise, because with mobile devices you can have access to those services. I think internet penetration which was also low has seen huge growth in the last three years because of mobile broadband. But I do agree that there are areas where people don’t have mobile devices or PCs and we still need to continue to provide access to those people. That is why having an initiative which is like a local tele-centre, where people come and access IT is important. We have about 800 centres and we hope to increase it to 1,000 by the end of this year or next year, ensuring that people have access to IT. On the cost of the internet, individual broadband tariffs are the lowest in the world. But when it comes to providing lease lines to big companies and connections of that nature, there is still a problem with price and for that we are working with the regulator. Weerakoon: According to the data published by the TRC end of last year there were two million broadband subscribers. That is about 10% of our population but according to internet world statistics we have 3.2 million internet users as of 2012 June. And according to current stats it is about five million and the mobile industry has played the main role. More than computers, most of the people are used to accessing the internet through mobile devices. We played a huge role in bringing internet to everyone. Now people can buy smartphones at reasonable prices that will allow access to the internet. When you take the cost of data, we have the lowest cost of data access in the country, both fixed and mobile, and in fact the regulator is trying to control the price war. Earlier the regulator was trying to control the price war for voice. They had to bring a ceiling on the low price. Now they are looking at the broadband prices since it is too low. Q: If you promote competition, people will have to pay a higher price for universities. In that context, why can’t Sri Lankan universities expand? Prof. Abeyratne: Let me ask you this question. We select 25,000 out of 250,000 and give them free education. Is it fair for us to restrict the education of the other 230,000? That will answer the question. I know the political reality behind this free education system and I don’t think we have to dismantle this to expand free education system. While protecting it, we can give the grant to the student and not the university; let them have the choice. The issue is that there is a centralised administrative system and hence autonomy. They should enjoy the autonomy. Looking at why the private sector is reluctant to employ university graduates; my question is, how big is the private sector? Still the main job supplier for the university graduates is the Government sector; this is also because the private sector is too small. Q: This suggestion about rebranding universities and making academia and lecturers exclusive; why can’t this happen? Prof. Abeyratne: There are many exclusive universities and in Sri Lanka there are some like that. But some other faculties are more general. The current trend is now that those from other fields are coming to the economics field and are employed by those fields. Q: How would the proposed financial sector merger affect the economy? Prof. Abeyratne: Consolidation has happened in the world according to historical experience when the economy was in a bad phase and it was a choice in most cases. But both these reasons are not applicable to our case. According to the rationalisation, the CB says the economy has been growing fast so the financial sector should be big enough to cope with that. I don’t know why the economy has been growing that fast, leaving the financial sector behind. Q: What in your opinion is critical to fast-track the economy? W.J.L.S. Fernando: Just producing electricity won’t do. The industry has to use it wisely. We will do our best to ensure that we have a reliable and high quality supply of electricity, which is vital. I think we are on the right track with a lot of coal power plants coming up. Those who are influential should put thoughts together on the rational part of development. Dewapura: I think the growth of the IT/BPO sector will be significant to economy and will be a boost to the country. We need to ensure that the Government and the industry address the challenges and ensure that the sector grows. It is a 100% value added sector. The assets are the people and we need to make sure that a good flow is coming in. Weerakoon: On the mobile sector we were able to contribute the cost of the economy by reducing the cost of travel and by saving time. Increasing voice penetration, we were able to contribute 1.2% for the GDP. One area we need to concentrate on is internet penetration. 10% penetration in internet will have 0.5% to GDP growth. We are working on this. Kulatilaka: One thing I see from the history of this country is that from about 1994 to 2004 the world was growing really fast. A lot of countries overtook us. When we finished our war the world was having an economic war. When Sri Lanka started to pick up post-war the world was recovering from the financial crisis. There had been an overlap in phases of global and Sri Lanka recovery. Outlook for Sri Lanka remains positive so I think we have to build our institutions. We have to do a lot of things to catch up and as a county we have to rethink our strategy and build intuitions and scale. Fernando: There is a concept called nation branding. It is the general awareness consumers have of the country and that is ideally created not by some artificial PR campaign but by some of its goods and services in terms of the product we export. Tea and apparel help in that. Tourism can help. Nation branding is important in the backdrop of the current issues we are having internationally. If we can value our products and get them to the consumers in these markets, it creates a totally different impression of Sri Lanka. Prof. Abeyratne: I think in Sri Lanka the potential for growth is yet to be realised. There are areas to be improved. We are not yet on that fast track. One thing I want to highlight here is that Sri Lanka as a small country cannot move forward without integrating with the rest of the world. If you look at external integration, the current account and where it has to be, exports have to grow fast. In the financial account it should be FDI, not Government borrowing. Pix by Upul Abayasekara