Private sector speaks up before 2014 Budget

Wednesday, 9 October 2013 01:24 -     - {{hitsCtrl.values.hits}}

  • Big draw and key suggestions at unique forum jointly organised by the Daily FT and the University of Colombo MBA Alumni Association
By Shabiya Ali Ahlam A group of top industry leaders yesterday presented key proposals for the 2014 Budget to Treasury Secretary Dr. P.B. Jayasundera and his Finance Ministry team at a two-hour engagement titled ‘Speak up for your future: The pre 2014 budget forum’ at the Hilton Residencies. Organised jointly by the Daily FT and the MBA Alumni Association of the University of Colombo, the forum sponsored by the Standard Chartered Bank and moderated by Daily FT Editor Nisthar Cassim featured 17 leaders across diverse sector presenting suggestions that could be incorporated into the upcoming Budget that would help further develop their respective industries. Given just five minutes to present their thoughts, the speakers listed three recommendations which in their opinion are crucial for the 2014 Budget. Agriculture: Hayleys Agriculture Managing Director Rizvi Zaheed Zaheed kicked off the forum by presenting a few issues prevailing in the agriculture sector. The first was the area of food security. “From a national perspective, particularly in food security, crops such as onions and potatoes require a lot of changes in terms of output, income of farmers and long term food security. Therefore this requires a long term strategy with regard to increasing agricultural capacity,” he said. Zaheed stressed that there is a requirement for long term structural change since the “phenomenal” amount spent on importing key crops is extremely high. He said that the sector needs to have a structural approach along with short term requests. He added that planting material capacity has to be improved as it is the starting point of agriculture. Noting there is an issue in gaining access to seeds of potatoes, onions and chillies, he said instead of importing the same the best way get about this is to produce them locally, which will support local players who can integrate with small holders and out growers. In addition, Zaheed said the sector requires at least 50 acres of land, free of bacteria and diseases, for crop rotation and to encourage outgrowers to come to those areas. “We need to have a focused holistic view and must have all stakeholders to come to a way to find the right land and we need to the right technology for seed production. We need strong committed stakeholder engagement which is in line with the vision of the Treasury and the country,” said Zaheed. Pointing out that the Department of Agriculture has diminished capacity to do agricultural extension work, he said there is a need to extend subsidies which are spent on fertilisers to some of the key priority areas to rebalance the subsidies. “There needs to be an area for providing subsidies for agriculture extension work by engaging the public sector. The private sector should have the leadership since it has a track record for having very effective extension services.” Zaheed observed the need for microfinance as currently heavy down payments are required and the interest rates are high. “If the agriculture sector needs support, we have to find some method to allow the farmers to mechanise. There is a VAT and cess component which also needs to be looked at,” he stated. Apparel: Quantum Clothing Lanka Country Manager Yohan Lawrence Lawrence said the apparel sector has been looking at three areas.  First is in terms of penetration of local apparel into emerging markets. Looking forward to the country’s forthcoming FTA with China, he said to gain access to new markets Sri Lanka needs to look at having FTAs with other BRICs countries such as Japan. The second area he noted was in relation to capacity building. Highlighting three areas he said capacity should be build in alternative energy, electricity and the NBT imposed on machinery imports. The third is terms of credit. “Most of the buyers demand a FOB contract. However we actually hand cargo to a clearing agent. The Inco terms as of 2010 have recognised this and there is draft legislation. It is an accepted principle that FOB is not relevant for container shipment in today’s context and this should be addressed so the industry can go in that direction,” pointed out Lawrence. Banking: NDB Director and CEO Rajendra Theagarajah Appreciating the adaptation of the SLFRS which was beneficial in terms of a tax reduction, Theagarajah opined that the tax treatment under that regime is not clear. “One area worthy of noting is the treatment of collective impairment of small and medium size loans. Increased clarity in that treatment will help the banking sector to be fully engaged in supporting the micro and SME sector,” he said. Pointing out that the 2013 Budget included the sponsoring of the municipal bonds, Theagarajah brought to light that no progress has been shown in that arena. He said from the capital market’s point of view, banks will support if some sponsorship is given. He explained that when looking at the urban development within Colombo, transport levy or licensing could be used as securitisation for these bonds instead of having the Treasury as a grantee. Commenting on a recent road show where two local banks were featured, Theagarajah observed that while there was excellent visibility for the two banks, a constructive comment that came up was that both these banks were commanding a market share individually of less that 5%. “Questions were raised in terms of the two banks being systemically important. So whether this is in Sri Lanka’s current development roadmap or whether there is room for the Treasury or the Government to promote a large private sector bank which is able to take on a true development agenda is a question.” He stressed that the need of the hour is some sort of consolidation. BPO/KPO: AMBA Research Vice President Sanjay Kulatunga Kulatunga said that with the massive tax benefits the IT/BOP industry has received, the sector is hopefully that it will achieve the billion dollar mark as targeted. To reach that target and beyond, he said support is needed in terms of education. “Since we need more data scientists and more engineers with the quality required to do a certain kind of work, it is necessary that we have the support and drive towards tertiary education. We need to modernise the State universities so they are influenced to enter into Public-Private Partnerships (PPPs) at a broader macro level. This is important,” he expressed. Kulatunga added that for infrastructure development, it will be appreciated if the Government can support the building of quality commercial space, on the lines of IT parks. He suggested that this can be done by removing the present 15% tax imposed on foreign companies leasing office space. In addition to the above, he stressed the need to brand Sri Lanka as a knowledge hub. Consumer Retail/ Healthcare: Softlogic Holdings Chairman Ashok Pathirage Commenting on the healthcare sector first, Pathirage said the corporate tax being reduced to 12% in the previous two budgets has helped the sector to move forward. “This is a capital intensive industry, therefore we would like to request VAT deference or if certain expenses can be set off against the VAT component. Doing so will allow the purchase of more equipment using the funds and will help expand our services,” he said. Pathirage requested the establishment of a PPP in terms for preventive medical care. This he said is a critical aspect which in the long run can help the country save a lot of money. “There are some areas where the private sector can get engaged, especially in terms of laboratory facilities. In the diagnostic side we can establish joint venture partnership with the Government,” he noted. Pathirage also requested the Government to extend concessions for energy saving consumer electronics as it will allow the consumers to save since at present approximately 60% tax is paid for the same. Furthermore, he touched on the branded apparel sphere. Noting that this is linked to the tourism industry, he said in five years, over one million square feet of retail space will be added in Sri Lanka. To fill the same in a profitable manner he said the country needs to prepare, starting now. “We are attracting about 20% of tourists where we are selling to foreign consumers such as those from the Maldives. We are looking for a reduction of taxes levied on this as cumulatively we are paying approximately 40-50% tax on this sector. In the region, even in India, the taxes are low. By reducing the tax I am sure it will open opportunities to many other companies and investors,” observed Pathirage. Conglomerate: Hayleys Chairman Mohan Pandithage Pandithage started off by requesting the BOI projects to source locally manufactured goods. Moving on he pointed out the need for the establishment of development banking in Sri Lanka. Although at present there are limited options for development banking to provide long term finance for export ventures, he said the same established for this purpose have now become commercial banks. “It is proposed that the Government should establish a special fund to support exporters for long term financing,” he stressed. Pandithage also stressed on the labour issue faced by the industry. While the industry faces a shortage of technically skilled labour, he said that investments are needed in upgrading education at all levels and this must be a priority. “This can be done by partnering with the private sector.” Construction/Engineering: Maga Engineering Group Chairman Capt. M.G. Kularatne Acknowledging that the construction sector has been doing well, Kularatne said it showed a 21.6% growth last year, which is a steep increase from the 15.2% achieved in 2011, with the industry contributing 8.1% to GDP. He praised the Government for its work in the arena as it extended a number of incentives such as zero corporate and machinery import tax. For long term sustainability, Kularatne expressed that the key players in the industry will have to attempt to take the business to other countries as well apart from getting more business on local projects. “With regard to getting to foreign construction work, the requirement of a foreign currency account for projects and the restriction of movement between accounts should be removed. This will give an incentive for local contractors and also help them to compete with the international contractors by getting a better price,” he said.  “We also have a serious problem on the interest paid to banks. Our company pays almost 3.5% of our revenues to banks as interest which results in the increasing of the cost of construction. I suggest something should be done in this regard,” he added.  Kularatne also wanted  the shortage of skilled workers resolved.Although there are 30 skills training institutions, there is a shortage. The Government will have to find ways to produce at least 10,000 skilled workers for the sector each year. Dairy/Food: Kotmale Holdings Chairman Stuart Young Young stres-sed that it is a known fact that Sri Lanka is not self sufficient in milk production. However, he said the present Gover-nment has adopted a pragmatic approach in developing the dairy industry in the country, which in the recent years has made tremendous strides. The improvements include the country being able to supply one-third of its requirement (28%) as local milk production increased. To move the country to be self sufficient in milk, he said there must further support for large scale farming for which a program is already in place. “This is an important part of the mix which is done with low interest loans. I would urge the extension of these low interest loans to the small scale farmers as well,” he said. Young stressed the need for this industry to work closely with the Government. To ensure a close working relationship he said a committee should be put together which will help align the industry to work towards its objectives. To encourage local milk production, he said: “The milk duty needs to be progressively tightened as local milk becomes available.” Another area of support required he said is artificial insemination, which will help develop a quality herd. “We have Government agents out there who do this kind of work but we want to increase the number of artificial inseminations so we can strongly develop a herd,” said Young He added that the Government needs to have mandated groups for collections to eliminate excessive competition between the players in the sector. Financial Services/Capital Markets: NDB Capital Holdings CEO Vajira Kulatilaka Kulatilaka spoke of the venture capital and private equity scenario in Sri Lanka. He said by increasing the two, good ideas can be funded by venture capital and growth can be funded by private equity, which then can be taken to the IPO stage. “To develop this sector there needs to be some tax changes because the funds are subjected to capital gains. Capital formation has a huge problem because of the income tax that is applicable to the funds. If the tax can be removed, there will be formation of venture capital and private equity. From America to Japan, this is an important aspect that developed capital market and important ideas,” he said. Kulatilaka noted that fund management companies should be given the same status as unit trust management companies. “The funds must be tax free. This way we can form the capital to allow the expatriates to come Sri Lanka to invest,” he stressed. Another aspect pointed out was the municipality bond. According to him, there is a tax issue where all payments have to go through Consolidated Fund which make it difficult to differentiate loans. Noting new companies need more time he also requested extension of tax incentives offered in 2013 Budget for listing on the CSE Higher Education: APIIT CEO Dr. Athula Pitigala Arachchi Arachchi observed that there are concerns in the sector which include the questioning of adequate returns on investments made on public sector education and if education is aligned to meet the development of the country. “In my mind there is no doubt that radical transformation of the education sector is long overdue. In many countries funding is used as a lever to drive reforms in education. Arachchi suggested the linking of higher education fund allocation to performance. “A significant portion of funds given to the State universities should be allocated based on performance matrixes, such as graduate output, employability of graduates and quality of research. These could help drive education reforms. And I think we should get rid of the myth that all universities are the same and should be funded equally,” asserted Arachchi. He stressed that it is clear that the State alone cannot meet the expectation of the higher education and a substantial private investment is necessary to expand capacity. “Today fortunately we have the political will to support private higher education and a low tax regime to attract private investment. What is lacking is a legal framework to allow private universities to function.” To establish an independent quality assurance mechanism, he said by next year Sri Lanka should be able to pass a legislation to all private universities so they can grown within the quality framework and contribute to the national framework. Touching on the affordability of education, Arachchi said a loan scheme should be introduced to allow students to enter private universities. “The Government should consider on a small scale a loan scheme where the student can pay back when employed. This way private education will become free to the student at the time of education and only the graduates employed will repay the loan at a later date,” he noted. Insurance: Union Assurance CEO Dirk Perera Perera said that an issue the industry continues to face is that following the tsunami, over Rs. 6 billion worth of claims were paid for, which the Inland Revenue interpreted the VAT Act that insurance recoveries on such claims were VAT-able. While the element was exempted in 2011, few assessments were raised in the industry and this continues to be a “torn issue”. “In the spirit of exempting this aspect from 2011 onwards, if there is a possibility to consider a interpretation, it will help the industry move forward from this matter effectively since we have had so many of economic losses,” he said. The second he pointed out was the establishment of the local reinsurance called the National Insurance Trust Fund, which will help save foreign exchange. While there is a lot of support for the structure, he said the industry is concerned about whether it has the capacity of paying claims in the event of a large natural catastrophe. Perera suggested from a management perspective that if the fund can be structured overseas as an insurance arrangement, it would be cost effective and allow Sri Lanka to pool larger risk in the global market and manage the budget well going forward. “Ultimately we don’t want to have a budget deficit or a huge economic impact by the national insurance trust fund having to bear those losses,” he said. The third he said was allowing private insurance companies to access Government and State companies, which are currently placed with Sri Lanka Insurance. “In terms of capacity building, if we restrict the private sector from a large segment of the economy that is driven by the public sector, that is reducing capacity building. The industry needs to experience larger risks and opportunity to the private sector should be given to provide some services to State institutions without creating an artificial barrier,” he charged. Perera acknowledged that although there are challenges, from a regulatory perspective the industry is on the right track. Manufacturing and SME: DSI Group Managing Director Kulatunga Rajapaksa Rajapaksa stressed the need to strengthen the quality certification institution to prevent substandard products being brought into Sri Lanka. “We can have a lot of non-tariff barriers like others impose on our products.  When we import products from countries where they produce using child labour, which is cheaper, we are unable to compete in the local market. To increase productivity, we need to revisit the current labour laws since working on Sundays even in an emergency is prohibitive. If this is not amended, we cannot be competitive in the market,” asserted Rajapaksa. In the rubber market, he said there is a collection of cess in local production. “The cess fund must be pumped back into the industry to research institutions and laboratory since most of the rubber products exported need the certification. Such labs are virtually not available in Sri Lanka. So institutions such as the ITI and RRI must be strengthened with modern equipment and accreditation,” expressed Rajapaksa. Motor: DIMO Chairman/MD Ranjith Pandithage Pandithage stated that he wanted to highlight the serious issue of under-invoicing in the second hand import market by various parties. “Going by the transaction price of 18 Mercedes Benz vehicles imported in the recent past, on the duties alone the Treasury has lost Rs. 155 million and if VAT is applied on the true value, the loss of tax revenue is greater. These people use dubious and incomplete invoices. If one looks at the prices quoted in the Hit Ad depicting $ 40,000 for the latest Mercedes S Class, I feel even Mercedes Benz would like to buy their cars from Sri Lanka rather than manufacturing in Germany as it is below cost of production. When they register and re-register in one day, there is a 10% depreciation and within six months it is 20%. So a company like ours which has invested a lot in building state of the art workshop, enhancing valuable skills and capacities countrywide, we need a level playing field. Even when we donated two Mercedes Benz vehicles for a training school in Suriyawewa, we had to pay tax of Rs. 27 million. All that we are asking is a level playing field.” Plantations: Planters’ Association Chairman Roshan Rajadurai Rajadurai said land productivity and the sustainability of the industry is a challenge to the plantation sector and a strong commitment is needed by the Government with regard to land lease. “The tenure of the lease of the plantation companies has completed 21 years and there is a balance of 30 years. Plantation crops have long gestation, so for this we need a strong commitment from the Government that we will have a longer lease,” he requested. Secondly, he noted the ambiguity issue of the lease hold rights. According to Rajadurai, many inclusions are taking place on the lease hold rights as pieces of land are taken for other purposes. “It is a funny situation because we are the custodians of the Government’s land and we are contesting with the same Government where some of its institutions want to take it back. This is one issue that has an effect on the plantation management,” he highlighted. Rajadurai added that law and order for the lands should be established.  Stating that the tea cess money should be reinvested in the industry, he stressed the need for the timely availability of agricultural inputs, mainly fertiliser. He pointed out that currently State agencies are working at cross purposes and there is a miscommunication which has impacted the crop production. Another factor Rajadurai observed is the issue of harvesting fuel wood trees. “We currently have 20,000 hectares of fuel wood planted using an ADB loan and while we have conformed to the regulations and requirement, we see that it takes at least two years to get the permission for harvest from eight committees. If there can be a fast track method to have this assistance, it will be useful,” he said. Renewable Energy: Hemas Power Director/CEO Kishan Nayayakkara While non conventional renewable energy accounts for more than 350 mega watts in terms of capacity, Nayayakkara noted that hydro power plants alone would be approximately 250 mega watts. Stating that the sector generated 750 million units last year at a cost of Rs. 12.88, he said the industry is in its current position because of the excellent policy directive received in the past. He pointed out two issues which has been unfortunately put the segment into a limbo. The first is the NCI segment operating without tariffs for two years. “A tariff was proposed and announced by PUCSL nine months late, but that was not implemented. While the segment is into its second year, there are couple of hydropower projects operating and amongst it is a listed company,” shared Nayayakkara. He requested the Government to intervene in this matter to help achieve the clear target set in the President’s manifesto, which is to achieve 20% power generation by 2020. The second issue is the small hydro projects initiated 15 years ago that have completed the cycle of their term given under the power purchase agreement. To this he proposed two options. “The Government can either decommission the power plants or come up with a model to procure electricity from those plants,” he said. Provincial Business: Hambantota District Chamber of Commerce Consultant Azmi Thassim Thassim said from a regional perspective the policy of the Government to develop the regions are satisfactory. In terms of infrastructure, he said Hambantota has become an important growth centre of the country. Requesting more attention to the region, he said: “To encourage the private sector to come into the region, we would like to request the Government to look at the regional management when it comes to the local Government divisional secretaries so duplications can be avoided. This is a burden for the private sector in terms of regulation.” He added that more attention should be given to making land available on long term lease to the private sector. The second is planning and management. “Similar to what is happening Colombo, there needs to be more consultation with the private sector and civil society. The process has to be established and emphasis should be given to discipline. These have to be looked into since in time to come there will be chaos,” suggested Thassim. Requesting capital support, he said SMEs can be further improved by focusing on rice, fish and livestock.  “To put this together we need more support from the private sector in terms of technology,” said Thassim. Commending the Government for establishing district level chambers, he said with institutions such as NEDA in place, it must be ensured that efforts are not duplicated. Travel and Tourism: Jetwing Hotels Chairman Hiran Cooray Appreciating the benefits extended by the Government in terms of allowing borrowing in hard money and receiving payments from travel agents in US Dollars, he said the facility could not be fully utilised due to a lack of clarity in the announcement. “Unfortunately the wording that came out of the Central Bank is that they ‘may’ pay in dollars not ‘shall’. Because of that, we are finding it difficult to receive the money the travel agents get from the tour operators. This a crucial factor when it comes to paying back. This needs to be streamlined,” he said. While the Pradeshiya Sabha tax has been an issue for the industry for many years, although there is significant work done on the same, if expedited the industry will benefit, he said. “Tourism is in a second birth. There is a level playing field and there are new products coming into the market. With foreigners not being able to purchase land, this will impact companies like ours which want to do mix used development. Such initiatives had to be slowed done because foreigners cannot lease on a long term basis,” he observed. Cooray also requested relief for companies interested in investing in small scale hotel schools. He noted this will help develop a larger workforce for the sector since the hotel school alone cannot meet the demand of the industry. Stressing the need to promote Sri Lanka, he said: “Every day development is happening. This needs to be communicated to the rest of the world. If we don’t communicate and brand Sri Lanka, it will be difficult to sustain hotel development.  To take this forward, the tourism sector can take the lead in this regard.” Asian Alliance Insurance CEO Ramal Jasinghe Jasinghe, underscoring Union Assurance CEO Dirk Perera’s comment, said the industry needs to boost capacity building. “The industry’s insurance premia as contribution to GDP is stuck. Life insurance growth is 4% and it is 9% in General insurance. I would say immediate focus areas to drive growth is to promote individual private medical insurance via incentives and tax concessions; development of pension schemes and hedge those against long term bonds and encouraging micro insurance.” International Construction Consortium  Senior Vice Chairman Harsha De Saram De Saram asserted that safeguarding and promoting local building material industry is important. “Imports into BOI projects are filtering into the local market via leakages. The imported construction machinery over 10 years is also flooding into the country and there must be restrictions placed for such and allow imports of machinery which are 10 years old and below.” Standard Chartered Bank Sri Lanka CEO Anirban Ghosh-Dastidar Ghosh-Dastidar said for the bank, the word is growth. “I have personally been hosting more senior visitors (from SCB such as global heads) in the past one or two months than the last three years I have been here as CEO. We operate in more than 70 countries and it seems all are making a beeline to Sri Lanka. Clearly the growth prospects in Sri Lanka are exciting. This was manifested by the GDP data from the last quarter.” He said Sri Lanka also has great prospects with regard to FTAs, with one with China on the cards. “Regional trade corridors will be very important for Sri Lanka. The Standard Chartered Bank is promoting this aspect and during the upcoming Commonwealth Business Forum, to which we are a principal sponsor, we will be promoting bilateral talks between Sri Lanka and Africa and others.” With regard to the banking industry, one of the biggest challenges is credit growth, stated Ghosh-Dastidar. “Considering the optimism and potential, banks need to go out and give better credit and more credit. We also believe debt capital market and local bond markets are important and have great potential.” On a final note, communicating Sri Lanka’s potential and success to the outside world is important, he asserted. “As we are speaking, Standard Chartered Bank is hosting some of our clients in the US as part of the Lankan Ambassador’s initiative. I would like to promote a delegation to Myanmar where we opened recently and hopefully we will do a Sri Lanka road show in UK next year. Once foreigners come here and listen to corporates, it is a totally a different positive story. I think the bullishness is getting bigger and we see a growth agenda going forward.” Treasury Secretary Dr. P.B. Jayasundera Thank you for making this morning so well engaged on a subject that we are working on at present. I have taken every single word you have been expressing here. I have six pages of notes so I’ll follow them as a guide. I have an equally large number of files like this in the Treasury, with responses from a large number of individuals participating in the Budget making process. The President’s inclusive approach is working quite well.