By Charumini de Silva

Recognising the urgent need for third generation reforms to improve the business climate and achieve higher and sustainable socio-economic growth in Sri Lanka, the Daily FT and the Colombo University MBA Alumni Association in a joint initiative held a first-of-its-kind forum titled ‘Reforms: The Way Forward for Sri Lanka’ last week in Colombo.

The forum was an ideal opportunity for both the public and private sector to be enlightened as well as share their ideas on the way forward in terms of reforming relevant sectors and thereby Sri Lanka’s economy for the future good. The relevant sector minister and his secretary and public and private sector leaders were invited to share their views. DFCC Bank was the strategic partner for the Forum.

The final session on trade, industry and services, focusing on ease of doing business saw key observations of institution heads, business leaders and a highly prolific panel discussion moderated by Daily FT Editor Nisthar Cassim. 

The panel members were Board of Investment of Sri Lanka (BOI) Chairman Upul Jayasuriya, Sri Lanka Export Development Board (EDB) Chairperson Indira Malwatte, Ceylon Chamber of Commerce former CEO Mangala Yapa, Camso Loadstar Chairman Pierre Pringiers, LAUGFS Holdings Chairman W.K.H. Wegapitiya, and DFCC Bank Plc Deputy CEO Lakshman Silva.

Policy consistency

EDB Chairperson Indira Malwatte opened the discussion by voicing an overall observation about the export sector, stating: “We must have consistent Government policy to enhance exports.”

Despite the Government preaching on export-led economic growth, the ‘sudden’ policy inconsistencies are greatly affecting the efforts in the process of achieving the ambitious export target of $30 billion by 2020, she pointed out.

Noting that the continuous sudden policy changes are distressing the export community, she stressed that apart from the Budget and the VAT issues, the recent regulation imposed on 90 days of collecting export earnings was ‘unnecessary’ by the Government.

“Collections of export earnings are terms of payment which an exporter decides and I don’t think it was necessary for the Government to get involved in that,” she explained. However, Malwatte said during her discussions with the Finance Minister she voiced the concerns of the exporters and the Government was now giving some consideration to their issues on a case-by-case basis.

She said although exports had been falling in the last few years, EDB was ambitious of realising the set target of $30 billion by 2020 and urged the support of Government policymakers, trade and chambers as well as exporters.

Confusion in direction

Outlining the circumstances in which trade has to operate currently, Ceylon Chamber of Commerce former CEO Mangala Yapa said there is high level of protectionism and subsidies to the agricultural sector which has encouraged production for domestic consumption rather than exports, while having a plethora of tariffs and para-tariffs which are introduced to fix the Government revenue and Budget proposals.

Echoing the EDB Chairperson’s sentiments, he said: “A trade policy will give coherence, consistency and the clarity on the direction in which trade is happening,” he pointed out.

Noting that the current Government’s thinking is on export-led economic development, he asserted that the policies need to be created accordingly. 

“We need to create a clear and stable policy environment where all stakeholders would work in harmony and in the same direction. Sadly, at present the signals are taking place in the other direction, leaving confusion and removing confidence from exporters as well as the industry,” Yapa pointed out. Speaking of protectionism he said although it is tough, the gradual consolidation and elimination of para-tariffs were imperative. “It is a two-way sword. The moment you remove the para-tariffs that will remove the protection and Government will also have revenue collection problems. Hence, it should be carefully craft and managed,” he explained.

He said instead of having an over-valued, biased exchange rate, an effective and competitive exchange rate needs to be in place, which supports imports rather than being biased towards exports only.

Ease of Doing Business

BOI Chairman UpulJayasuriya said Ease of Doing Business is one of the key elements that need reforms as they are two sides of the same coin – existing investors and those who are looking at Sri Lanka as an investment destination.

He pointed out that it was crucial to make the existing investor comfortable and take away the constraints for them to move on as an industry as it is that information which goes from them to prospective investors who are dependent on them to decide whether they are going to come here or not. 

Jayasuriya explained that the attitude of decision making public officials and the interpretation of certain legal provisions were two major challenges they face.

Citing a recent example, he said: “The Forest Conservator stated that even rubber woods would fall under the category of forest produce. All he had to obtain was a good legal opinion. His interpretation was that even grass would fall under the category of forest produce, which I deferred. But however much I was trying to convince he was not willing to take my recommendation. As a result of this he has given instructions to the Customs Department to stop the exports of 17 companies which were exporting rubber wood products. Now this is disaster for the investors.”

He said such interpretations and attitude among officials was common, but emphasised that fact that it should be changed in order to facilitate the investments that are already in the country. 

In addition, he acknowledged that the availability of land was a huge problem that the BOI envisaged as decisions were being taken by multiple ministries and institutions. 

“Local Authority approval is a nightmare. For an infrastructure project you have to obtain some 70 plus approvals from different institutions and it takes up to two years for the approval process only. This cannot be done only by BOI approval related agencies being set under one roof; but they should be given a timeframe to provide approvals. With the BOI having the power, these are the things that need to be streamlined,” Jayasuriya stressed.

Blue ocean opportunity

Noting that Sri Lanka should stop promoting itself only because of its location and highly-developed human resources, Camso Loadstar Chairman Pierre Pringiers stressed that the country should rather focus on Government-declared thrust sectors like tourism and related business.

“The Government declared boat building and tourism industry as thrust sectors, which is an ideal combination to build charter boats to be utilised by the tourists and make Sri Lanka the blue ocean in this part of the world,” he said. 

Despite his efforts to get this new venture going for the past two years to promote boat/yacht building and operating business, complexities in taxation and approval processes has left him without a solution.  “We had to set up three companies; one local company to service yachts, and two BOI approved companies for boat building as well as for operation purpose. Now this complexity is something which is very inefficient because in every transaction we are being taxed. It is like asking a newborn baby to cover almost 30% of the capital investment, which is unfair by the investors,” he explained.

He pointed out that if the Government declared thrust industries, it must then pave the way for investors by providing streamlined taxation and approval process to move on with the prospected investments. 

“We are not objecting to taxes, but under this complicated taxation system you cannot have a globally efficient organisation. What I request is Build-Own-Operate-Sell (BOOS) status to carry on this project,” Pringiers noted. 

Doing business not an easy task

Rather than bluntly proposing reforms, LAUGFS Holdings Chairman W.K.H. Wegapitiya said: “Doing business in anywhere in the world is not easy at all.”

He went on to say that a business friendly environment is imperative for the economic growth of any nation and a favourable investor friendly environment will make any country a desired investment destination. Hence, countries are exploring various options to be ahead of one another.

Despite technology advancements doing away with the barriers between nations for cross-border investment and trade in this complex geo-political environment, countries are still finding it a big challenge to make their economy more attractive than the other, he explained. 

Sharing his opinion on the World Bank’s Ease of Doing Business index, Wegapitiya said: “I doubt their sincerity and if they are genuine. They check these 11 key elements based on two main factors such as cost and time, which are quantitative assessments. However, if somebody wants to create a business friendly, investor friendly environment they have to look at the qualitative aspect of it. In this, they are assessing on starting a business and not the situation before.”

Furthermore he stressed that the term Ease of Doing Business goes along with other terms such as investor support institutes, exports and financial assistance. 

“When you look at the background of making it easier for entrepreneurs, the biggest challenge we face is not having those 11 key elements that are in the World Bank Ease of Doing Business index, but something which we need to look at from a broader perspective,” Wegapitiya noted.

Way forward reforms 

DFCC Bank Plc Deputy CEO Lakshman Silva outlined three major areas reforms required and shared insights into what Sri Lanka needs to prioritise on trade, industry and services, focusing on ease of doing business.

According to him, the three major areas were reforms in regulatory, tax as well as consistency in fiscal and monetary policies.

Being an intermediary financial institution to a premier development bank and now as one of the leading commercial banks in Sri Lanka, he subscribed to most of the issues raised by the co-panellists. 

“The regulatory framework in Sri Lanka needs major reforms. On a day-to-day basis we meet prospective customers as well as existing clients to meet their financial requirements. These SMEs, medium-sized and large-scale entrepreneurs coming to start business under the BOI or export concessionary schemes undergo many difficulties and as bankers we see it every day,” he stressed.

He pointed out that when a start-up company has to obtain 70 plus approvals itself it diminishes the interest of an entrepreneur, adding that this was one of the key areas which required reform in going forward. Silva also highlighted consistency in fiscal and monetary policies as well as tax reforms to maintain successful enterprises in an economy. 

“As the Finance Minister mentioned, the money is required, but whether those reforms on tax regulations prevail for a longer period of time is a question. Because any entrepreneur who comes to do business would look at a longer tenure when they deal with us for financial assistance and if the policy is suddenly changed, people get disheartened,” he explained. 

Sharing a concern of bankers, he stated that despite their long-term requests for certain legal reforms, nothing has happened thus far.  “If the legal system is not supporting the banking system, banks practically tend to take a back-step when analysing projects or identifying the customers, especially when it comes to recovery of loans and other litigation matters,” Silva noted.

Q&A session

Q: Given the targets that you all have to achieve in terms of exports, are you considering moving away from traditional exports to other non-conventional items? Instead of depending so much on EU and the US, are there any other countries, in Asia specifically? 

Malwatte: Traditional exports were led by tea, rubber, coconut and apparel. We are trying to move to vertical exports where there will be maximum value additions given to our products such as virgin coconut oil, ready-to-drink tea, tea tablets. One great move we have done is signing up with SLINTEC. At present, part of it is housed at the EDB where they conduct science clinics for prospective as well as existing exporters to help. We are also trying to put in a new budget proposal on wealth creation as well as boat building as Pringiers mentioned before. 

In terms of the fisheries sector, rather than relying on ocean catch, we are moving towards sustainable fishing into cage culture. Very recently we started a project in Trincomalee for common modha fish. Moving one step ahead we are now trying new technology to get gold fin tuna, which Japan is looking for and for which we have the conducive conditions. 

Another area is the ICT and BPO sector, which is already established; what we are trying to do is achieve higher targets in those. A special sector we now look at is ‘feminist trade policy’, to empower and enhance women — because if you look at most labour that is being used, there is so much working in the apparel and the plantation sectors. 

In terms of markets, we have ‘Asia Focus’, of course while having the two major markets in the US and EU. With the FTAs that are coming up, we are now looking more into Asia. We are in the third round of talks with China and also working with Singapore. With this Asia Focus which, is a growing market, all our exports won’t be in one basket. 

Q: I think the country needs to prioritise in R&D with regard to the industrial sector, because without it innovations would stagnate. What are your views?

Jayasuriya: The local companies have so much capacity to spend on R&D. We have tea, rubber, coconut and paddy research centres and the people there are top scientists. I think they should have been part of this discussion too, because they are the people who should be given this mandate and the challenge to make something for the needs and the demands of the world. 

Now, when there is excess production of paddy, we tend to look around and give it for animal feed; we don’t think of adding value and making rice wine or some value added product like that. We have a very few industries like that, but most of these items are being exported in raw form. If those scientists don’t have any incentives to conduct that kind of research, by introducing reward schemes to encourage them, I think we can come up with some great export products.

Ranel Wijesinha: The R&D incentive from a Government perspective is already there. These incentives were given in 1989 and 1990 based on Malaysia — double deduction for R&D. Regrettably after about two years partly because private sector didn’t respond to it, partly because IRD didn’t know how to interpret it, partly because the accountants and auditors didn’t know how to present, it was withdrawn. It was reintroduced by Prof. G.L. Peiris when he was Deputy Minister Finance. It remained outside the statute book till 2010. In 2010, when the Taxation Reform Committee began working, some of them explained why it was introduced in ’89 and ’90. Incentive is there, it is up to the private sector to make use of it. Don’t look for the Government to do anything more. 

Upul’s point of whether companies have the capacity of finance and the funds, that is why there is a triple deduction. What more can a Government do?

On Virgin Coconut Oil (VCO), let me connect up with public sector reform. If you take the Regional Plantation Companies (RPCs) which have made Rs. 19 billion losses, Kurunegala and Chilaw are making profits. They are all in the coconut triangle. If Gordon de Silva can do VCO for the US market and he is doing an excellent job, I want anyone to look at VCO or Gordon Silva’s operation. Today we have various types of VCOs. Both Chilaw and Kurunegala come under the Public Enterprises Ministry; I want to ask the Government, ‘What are you doing?’ The Government is perpetuating these two as it is. Maybe someone should facilitate Public-Private Partnership (PPP) or clubbing those institutions. I’m sure you can create a critical mass of coconut by very good value-added VCO, may be LAUGFS Holdings can consider doing something.

Wegapitiya: When you look at the ‘Making India’ program and Russia, they only spoke of one common subject – making investor friendly laws and regulations is a breathing ground for new innovations and entrepreneurship. It applies to all nations. Despite the very complex geo-political environment, especially as a result of technology advancements doing away with barriers between nations for cross-border investment and trade rules and regulations, Asian countries have not changed their rules and regulations that fast. If those rules and regulations change according to new innovations, entrepreneurship opportunities will come up. 

Q: A few years back a US investor was interested in a cable car project; what’s the latest situation on that? 

Jayasuriya: Some of the projects which started before January 2015 have disappeared with no reasons. We would like to invite them to come to Sri Lanka as we are ready to facilitate those projects. As I mentioned before, our criterion would be met on transparent procedures and on merit and merit alone, be it cable cars, monorail or submarines. 

Q: Prof. Rohan Samarajiva said the BOI is getting investments, but it’s not export-oriented business. Secondly, the Finance Minister says only 30,000 companies are paying tax and the BOI is giving concessions upon concessions for companies. So two different questions, how do you look at these?

Jayasuriya: Regarding the tax concessions, I think now there is a change where future tax concessions are being given only by way of reducing corporate taxes that have not been introduced through the Budget. Other than that there will be lump sum depreciations and all that. 

To answer the second question, to some extent it is correct, because with regard to investments into the country in 2015, mostly they were infrastructure projects and they were not export-oriented obviously. But we must carry out the message to the world; how you are going to deliver that message is not by trade fairs, conferences and seminars. In other countries there are high advertising budgets, which we cannot afford. You may not aware of it, but these are not in the public domain. There are so many electronic items; very sensitive items are being implemented. Last Monday (16) we signed a document with the London Stock Exchange (LSE). That was not export oriented, but so much is happening where we earn foreign exchange.

Yapa: We have been talking for long about some of the concepts that have come out from this discussion on policy consistency. I think the Government is also working on it. One of the priorities is bringing in certain policies, be it R&D, innovation, investments, taxation, revenue generation, or other development areas. Some of the ground work is being done to come up with policies that will guide the economy in the medium to long term. So, rather than looking at various incentives and tax reductions on an ad hoc basis, today we are somewhat looking at a policy-based approach.

One area with regard to investment is also facilitating trade. I think the FTAs that are being envisaged to be executed are to create that market space. There is lot of debate and discussion but we need to find the right way forward by taking all that into account. India is a growing market. China definitely is an equally large and growing market. We are looking at trade agreements with both India and China, which would create larger market segments to which exports can take place and from which investment can come in as well. It is not only exports going out but also investments coming in from those markets. Maybe even to cross trade between the two economies, where Sri Lanka can play a vital role in logistics and other service facilitation. Also creating the right investment eco-system for both local investors and as well as for foreign investors to establish and operate their business in a stable policy network. 

Towards that end, as Lakshman said, many regulatory and legal reforms will have to take place at once. If you look at this whole gamut of things, it is not an easy task. It involves many reforms having to take place at once. Development of policies, identifying the legal reforms, engaging in negotiations and establishment of favourable trade agreements, attracting investments, and organisational reforms have to take place. Like someone said, in Malaysia you go through the process and you get approval. Looking at the whole gamut of things, I think it is a humongous change that has to take place. I think that is the process that is being envisaged and going through. Personally, I think we need to be faster in doing these reforms. As intellectuals we all have to focus in a constructive and scientific manner to implement these as a nation. The whole economy will have to be restructured with these reforms and with that the industries and the private sector will also have to restructure to get across this situation.

Q: We talk of FDIs. I know there are a lot of FDIs committed, but then the banks from the other side line behind the entrepreneurs and flood the investor with financing. Does it mean we have a positive inflow of foreign exchange which supports our Balance of Payments (BOP)? Should we still entertain banks funding these entities? What do you think is the right mix?

Jayasuriya: As far as the BOI is concerned, we have a ratio. It should be 70% investment and 30% bank borrowings. It can be done in the right way. 

Silva: I don’t think the banks can lend as they like, according to Exchange Control Regulations and BOI conditions as well as other regulations. There are certain rules and regulations if BOI companies need to borrow.

Suggestion: The BOI Chairman said for an infrastructure project 70 approvals are required. In Malaysia, approval giving agents are all sitting in one building, where in one go the investors could get the green light for a project and it is in close proximity to the airport as well. Since Sri Lanka is planning to become a financial centre, may be it would be good to have a thought about it as well.