Five hubs: Fiction or reality?

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Can Sri Lanka juggle five hubs and tourism at once?
Singapore-based World Bank expert sheds key insights with global and regional lessons

By Cheranka Mendis Introduced in 2010, the ‘five hub + tourism’ concept, around which Sri Lanka’s future development is woven has been a key topic of discussion in the recent past, with the large scale planning and goals that are repeatedly projected through various modes of communication.

Launched as part of the ‘Mahinda Chinthana: Vision for the future’ by President Mahinda Rajapaksa, the aim is to make Sri Lanka a dynamic global hub, transforming the pearl of the Indian Ocean in to a strategically important global economic centre. Initially made up of maritime, aviation, commercial, energy and knowledge, the hub concept recently included tourism as a key strategic area for development. At Tuesday’s ‘Five hubs: Fiction or Reality’, full day forum organised by Daily FT in partnership with the Colombo University MBA Alumni Association, a large base of public and private sector experts came together for the first time to share key insights into the country’s five hubs strategy. Over 20 experts drawn from the five hubs highlighted key opportunities as well as challenges during the session. The Chief Guest at the event was Economic Development Minister Basil Rajapaksa. Enhancing Sri Lanka’s competitiveness Breaking away from the everyday perspective that unfolds at most of the forums and interactive discussions that take place in the country, the World Bank Group’s Lead Private Sector Development Specialist for Competitive Industries

Practice based in Singapore, P. Tewari presented an interesting twist to the state-of-affairs by questioning the need to focus on six hubs (inclusive of tourism) at one given time. Defining competitiveness Comparing Sri Lanka with Singapore, where he is currently based, Tewari assessed the current buzzword for Sri Lanka; our ‘competitiveness’ by the real GDP, population and land-mass. As such, Sri Lanka’s real GDP was stated at $ 65 billion, with a population at 21 million, bringing GDP per capita close to $ 3000. Singapore, on the other hand has a GDP of $ 270 billion with a population close to 5.3 million people, summing up a GDP per capita is around $ 52,000. While the gap between the two

countries remains wide, Sri Lanka is also said to be 92 times bigger than Singapore. “This deferential of about 70 times the GDP per capita is what I define as competitiveness,” he said. So how does the country create, capture and trade value with almost similar settings – or rather, better endowment in terms of strategic location, land mass, energy, tourism endowment, etc. Compared to Sri Lanka, Singapore has pretty much nothing within the above criteria. Outside-in observation Tewari acknowledged that Sri Lanka has done extremely well in the recent past in certain key indicators, be it GDP growth rate, unemployment rate or GDP per capita. There has been a positive trajectory in Sri Lanka. However most of the GDP growth has been fuelled by public investments, i.e. government initiatives – which is a good thing; but his outside-in observation is that private investment has not kept in step with government investment.

“The country needs to think about how to keep the tango between public and private investments in lockstep,” he asserted. “There has been a slight FDI uptake but not enough. As a country you need start thinking about how to build investor confidence.” There needs to be a collective action on this, he assured. Putting forward another observation, he noted that despite the depreciation of the currency, export competitiveness is going down – it is around 17% of the GDP. Looking at similar figures for Singapore, the country’s exports are 200% of GDP. “This is an aspiration Sri Lanka should look at given the strategic location of the country,” he added. Some of Sri Lanka’s export numbers have been declining as well, he said. “There is reported negative growth on tea, rubber, etc. These need to be looked at as well.” However, the “story is quite nice,” with six hubs with the addition of tourism which Tewari noted as an important strategic advantage/strategic thrust of the country.

Six hubs, too much? While there is headroom for growth in each of these hubs, Tewari’s concern was whether six hubs are too much to handle at the same time. Consumed by so many initiatives, will the initiatives get the necessary attention required? “Is there a sequence of prioritisation of these hubs? Are there means to be made to figure out cross-cutting initiatives that will support more than one hub simultaneously before pursuing others?” He also remarked that the six hubs are not the be-all-and-end-all of the Sri Lankan economy. It is a current strategic thrust which will be evaluated. The Government should be honest in saying if some of the hubs aren’t working, he said. “Singapore does this – they have gotten into electronics and out of it, gotten in to textiles and gotten out.” Enhancing competitiveness There are five pillars of competiveness that should be looked at when assessing competitiveness of countries, he said. This together covers 80% of what makes economy competitive.

1. Regulatory environment: The ease of doing business is a key indicator to investors outside and within to set up business. Single window clearance, reducing time to register, having good bankruptcy laws so exit becomes easy, are some of the areas that should be looked at. “80% of firms die within the first seven years. You need to have easy Chapter 11 Bankruptcy laws which are a bit of a problem as at now in Sri Lanka.” 2. Infrastructure: Quality and connectivity of infrastructure, ports/airports and living conditions/hygiene factors are to be focused as well. 3. Industry specific financing: Areas to be looked at are availability and affordability of financial services, risk capital, growth capital. 4. Skills and capabilities: To be concentrated here are higher education, vocational training and productivity improvement programs. 5. Technology and innovation: Under this, the country must prepare for expansion in capacity for innovation, business sophistication, tech readiness and institutional capacity. “These must be looked at on an ongoing manner,” he noted. How many know ‘Vision 2020’? There is clearly a lot of work happening, both on the intellectual side as well as the implementation side. “There is a Vision 2020 document, but I don’t know how many of the people actually know about it and have read it,” Tewari expressed. The importance of proper awareness of the content lies in the fact that some of the key items within that document needs to be shared aspirations – not only in government ministries but among the population and the diaspora as well. His advice was to better communicate the strategic goals aspired for. “The five/six hub plan is a great action item, but what are they driving towards?” he questioned. “Is the aspiration to

become a middle income country by 2020, to be the best shipping destination in all of Asia? There needs to be a collective effort from public, private sectors as well as other stakeholders and they must all work towards a single goal – which at present, is not very clear.” Check list of items that will help Sri Lanka make sense Tewari presented a check list of items that will “be helpful in each of the hubs to figure out what makes sense and what doesn’t.” 1. Sound and smart design: This, he said is key. While keeping in mind the competitive advantage of Sri Lanka, when designing these hubs it is imperative to be conscious of smart design of the hubs, from the implementation and blueprint level itself. The design should be flexible, dynamic, and responsive to market signals and have a long term perspective. Citing Singapore’s Jurong Island, a petro-chemical hub as an example, Tewari noted that the hub has been designed to house some of the top oil and petrochemical firms on one island, cutting down cost of operation, transportation and logistics. “Anything coming out of the island has a greater margin than goods manufactured anywhere else.” 2. Open dialogue between the public and private sector: This is something he still does not sense in Sri Lanka, he said. Sri Lanka could do well to examine and learn from Malaysia which together has created many opportunities and employment for its people. Just as the PEMANDU – Performance Management and Delivery Unit in Malaysia, Sri Lanka could do well to establish a central agency tasked to monitor and deliver on the industrial roadmaps that are currently being designed.

3. Clear rules, processes, transparent execution: Radical and transformational approach. There should be an apex coordinating body with vision and authority. 4. Coordination at multiple levels 5. Accountability, Performance measurement Lessons from Singapore Tewari reflected that one thing Singapore does extremely well is market sensing. “Policies are designed market-backwards, rather than supply-forward. This translates in to a shift in the country’s focus every five to seven years.”

Like the CBSL Governor said ‘Sri Lanka Inc’, Singapore actually calls itself ‘Singapore Incorporated’ he said and does market sensing on an ongoing basis. This has helped Singapore move from an import substitution to working on innovation and technology based industries. At present, the country is moving towards knowledge, non-linear industries in the strategic line. “GDP per capita has increased by 80 times in 50 years.”

The country also has clear rules, processes, transparent execution. “There has to be a single player to avoid coordination failures across ministries, statutory boards and other areas in making things happen.” To make things happen at these hubs, effort must come at several levels. There has to be macroeconomic policy work – “macroeconomic key indicators look very strong and positive for Sri Lanka beside a few like depreciation of currency and export competitiveness, good investment perception, good investment climate”, firm level engagement – participating, contributing and making investments which are high RRS, etc; and at the mezzanine level the work done by governments to unlock value in those clusters of industries etc. KPIs are also imperative to both government and private sector to keep each other honest.

Singapore in the last five to seven years has made a huge change on policy, education, investments in sunrise industries. They have now created two clusters, Biopolis and Fusionopolis where they create incentives to attract entrepreneurs, academics and scientists to come for R&D. The Public Statutory Board (which is part of the ministry) and private investors are situated at the same location, creating better cross-coordination. “The good thing is that the governance structure of Singapore is quite clean, so you can do these things and not get in to capital issues etc with transparency. With absolutely zero land-mass, zero energy reserves, Singapore commands 2.2% of the global trade which is astonishing,” Tewari said. “Sri Lanka is better endowed and better located than Singapore, so the headroom for growth is quite phenomenal.” The Five Hubs Forum was supported by John Keells Holdings, Standard Chartered Bank and Sri Lanka Ports Authority as strategic partners whilst OfficeMax was the official printer, SriLankan Airlines the official airline, Triad the creative partner and TV and FM Derana were the electronic media partners. Pix by Upul Abayasekara and Lasantha Kumara

How the five hubs + tourism came into being

Central Bank Governor Ajith Nivard Cabraal, describing the rationale behind the five hub + tourism concept, noted that the idea stemmed from President Mahinda Rajapaksa’s aim of creating a

conducive, sustainable economic growth that does not halter or fall back on its move forward. Maintaining a growth of 4.5% on average in the years since independence, many doubted the country could do better due to the insufficiency in savings and investment until proven otherwise in the post war country. Under the Mahinda Chinthana, the country began enjoying an 8% growth, as anticipated by President Mahinda Rajapaksa. “We needed to find investment – we had to energise local investors while attracting foreign investors,” Cabraal said. “This is the first step for sustainable economic activities.” "In each of these six hubs, Sri Lanka has a massive competitive advantage. These six hubs provided an ideal platform for the receipt of the massive investments that would spur Sri Lanka’s economic development for the next several decades – Central Bank Governor Ajith Nivard Cabraal" Six strategies for investment Six key strategies were designed to ensure there is a continued pipeline of investments coming in to the country, he expressed. They are: 1. Heavy government investment to bring peace to the country – All investors were conscious of the war. To overcome this long standing challenge, the Government carefully funded and invested heavily in the war, followed by investing in the humanitarian exercise. 2. Infrastructure improvement by Government – Investment in roads and power plants, etc started well before the end of conflict. 3. Achieving and maintaining political stability despite both internal and external challenges to disturb the stability while understanding the importance of its continuity for development. 4. Maintaining macro-fundamentals at benign levels by taking required tough and long term decisions. Even though unpopular at one point, moving to a 6% growth from 2006 to 2009 and then to a 7.5% growth path; with debt sustainability, low inflation, high reserves and well managed public utilities. 5. Dealing with massive negative propaganda of the opposition and disgruntled overseas elements through continuous communication by carrying out some ‘incredible’ feats under humanitarian operations, re-settlement, de-mining, livelihood development, reconstruction, which many thought were not possible. 6. Creating new channels for investment to come in – by opening out government T bills and bonds to investors, issuing international sovereign bonds (of about $ 3.5 billion so far), allowing the banking sector to issue overseas bonds and borrow internationally, based on the strength of their own balance sheets, thus encouraging big corporates with sound balance sheets to seek direct investment in the form of equity or debt from overseas sources, creating a conducive platform for investments to enter into stock exchange and property market, creating new impetus for the corporate bond market to develop and grow, attracting PPP, creating opportunity for multi-lateral agencies and development partners to invest in Sri Lankan infrastructure and encouraging strategic investments. In effect, the “supply” of investments was facilitated. New stars for Sri Lanka Inc. However, for the supply of investments to take place, a demand for investments in the form of a steady project pipeline also had to be created, the Governor said. In order for this to happen, a set of new stars had to be created to supplement the dying areas of investments in “Sri Lanka Incorporated.” These stars, now known as the ‘five hubs+tourism’, will be the cash cows of the future. “In each of these six hubs, Sri Lanka has a massive competitive advantage. These six hubs provided an ideal platform for the receipt of the massive investments that would spur Sri Lanka’s economic development for the next several decades.” He noted that the country has done right by introducing new stars while existing cash cows (tea, plantation and apparel) were doing well. This would ensure that investors would remain in the country without shying away, maintaining the momentum. Sector growth projections Just as the apparel sector grew in 30 years from $ 20 million to a $ 4 billion industry, the new stars have the potential to grow as much, or substantially more, over the next few years. Today, values of maritime and aviation activities are growing substantially. Tourism has grown from $ 400 million in 2005 to $ 1.4 billion in 2013 and is expected to grow to $ 3.1 billion by 2016, and $ 5.1 billion by 2020. He also added that IT/KPO/BPO industry has grown from $ 83 million in 2005 to $ 600 million in 2013, with a growth expectation of $ 2 billion by 2020. Transportation services (including maritime and aviation) have experienced a growth from $ 70 million in 2005 to $ 1.9 billion in 2013. Growth projection is $ 6 billion by 2020. “This is not fiction,” he reiterated, “This is the reality and this is the new Sri Lankan economy that is unfolding before our eyes. Challenges for the future What of the future? What would be the challenges that we will have to deal with, as we go forward? The country will have to handle the transition to an upper middle income country status, Cabraal said. This will bring about many issues, particularly the re-alignment and re-training of labour, and the migration of labour to new higher paying sectors. “We will have to improve the productivity levels of our existing activities, particularly the agriculture and industrial sectors. Such sectors will have to develop higher levels of efficiency and capacity utilisation.” New technology in agriculture would have to be introduced and the benefits of sub-contracting in SME sectors will have to be utilised. A similar model as used in Malaysia for doubling capacity with half the workforce will be looked at for Sri Lanka as well. In short, the challenge is to ensure that the country does not fall prey to the middle income trap which ensnared several countries. For this, Sri Lanka will have to maintain political stability by ensuring that poverty remains low, with low unemployment and balanced regional development. What have we got right? In the march forward, Sri Lanka has got many things right, Cabraal assured. He listed the following as vital components of steps taken in the right path, so far: Not getting trapped in a single economic doctrine, as proposed by various academics. “We picked the right policies that would work for us, not going by other successful regimes. We had no dilemmas as to whether the chicken or the egg came first. We worked on all fronts simultaneously.” Looked at a ‘pro Sri Lanka’ practical policies. “We did not worry too much about economic theory only, but at what is practical.” Maintained momentum in the economy by ensuring sustained growth and benign macro-fundamentals all the time. Collaborative efforts in policy-formulation and policy implementation by the Finance Ministry, Economic Development Ministry, and CBSL. “The five hubs are deep rooted in our economy. I hope you continue to be inspired and in turn, partake in our development journey,” Cabraal expressed.

Q&A session

A question and answer session followed the inaugural session where the members of the audience, numbering 300, were given an opportunity to raise questions to the speakers. Following are excerpts of the session: Q: How do you bring together the concept of the hubs? Tewari: What is most important is the mindset – understanding that knowledge is nonlinear, but that it yields good returns. Mindset education and the freedom to let 1,000 flowers bloom is what is important – an environment where people can try different things which is nonlinear. It is having the space to have 1,000 ideas bloom, which is important. The cultural issue is also something we need to move away from. We have to move away from the culture that doesn’t allow the child to experiment and learn in the economy. Q: Thoughts on Sri Lanka privatising hubs? Tewari: I do not know enough of what is happening, so is not very well versed, but I do think that sometimes less is more, because six is a lot. Cabraal: To a poor man it doesn’t matter from where his income comes from. That is the important factor here. We may have various theories as to how we are positioning the country’s economic structures and how it should be, but what we want is to touch the lives of every single person through these hubs. We are creating space for all those elements to function and the Government is also giving its full support for those hubs to develop and operate. We still have 6% of the people living below the poverty line, and for those, we cannot say we are only concentrating on one or two hubs which will not touch them. The concept that has been set in motion is to touch all different elements of the country. Q: Is there internal consistency in the approach of the six hub strategy when the number of people migrating is rising. Will human resource be the binding constraint one needs to address? Cabraal: This issue has our close attention as well. It is one of the challenges we will face in building the hubs. We understand that the total labour force is limited. In order to manage all new developments taking place at the levels we are envisaging that we would need some serious improvements in our productivity levels. We will also have to work on retraining and repositioning, as well as innovation in order to piggy back on the developments that are taking place globally. We will listen to the experiences of others and design our own model.

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