Using crisis for change

Former telecoms regulator and founding chair of LIRNEasia Professor Rohan Samarajiva delivered the keynote address at the Colombo MBA Alumini Association and Daily FT forum titled “Reforms: The Way forward for Sri Lanka.”

Given below are excerpts from the speech.

We need to think about exports. When I was in school they used to talk about tea, rubber, coconut. I think they still teach this rubbish. What we now have are things like this phone, the chips were done in one country, the glass and software were made in different countries and the whole thing was put together god knows where. So this is the new world, where you have different parts of production processes in different countries and the whole thing is put together and that is what exports mean. Now we are not strangers to this, our apparel industry, which is the highest exporter, is part of the global value chain. We don’t make the zips, the buttons, the thread and textile that go into the garments that we produce; so we are part of the value chain. So if you think about our rubber as much as 75% goes out of the country as processed. In fact from 30 years ago we have made huge progress and you take something simple like the CEAT tire that is made from our rubber in Kalutara, is part of an automobile value chain where the greatest concentration of vehicle manufacturing is right across the water, for some reason even I don’t understand, it is in Tamil Nadu where most of the vehicles are manufactured in the world, now they are even bigger than Detroit. So we need to think about global value chains and how Sri Lanka can participate in them.

I think some of you may remember when there were floods in Bangkok several years ago. I think it’s very topical because we are also under water now and when Bangkok was under water there were shortages of unbelievable things in Japan and other places because the value chains were running through greater Bangkok and when those things were blocked the whole value chain stopped functioning. No one can control the rain, which we understood yesterday, but people can control what governments do, what legal systems do, whether promises are kept and contracts honoured, that is what can be done. This is what I mean by certainty, not certainty about the weather. 

In some cases countries rely on low cost labour. Despite what some international media have reported about Beyonce’s clothing line and underpaid apparel workers in Sri Lanka I know what Bangladesh pays and what Sri Lanka pays and our wages are far better. So we are not a low cost labour country so we must have more productive and skilled labour. So we need human resource reform, which is some of the most important we have to undertake because this is our resource. We don’t have oil under the ground, we might have gas but let’s take what is actually available. We need a big enough pool of workers. I was involved, with many others, in creating the BPO industry of this country, when HSBC came to Sri Lanka we were still in the middle of a war and we were trying to get simple answers. They wanted a 4000 seat facility but I don’t think they ever filled the 4000 seats, though they went up to 2,500. So this is the kind of thing people want to do on services but we can’t fill the seats. 

We have a problem of a big enough pool of skilled labour. We need to do educational reforms. We need to do agricultural reforms because the next generation who are from the rural areas, they do not want to spend their time in the sun. When I go out I hear youth tell me, “Sir, give us a job where we don’t get burnt by the sun and wet in the rain.” So that is the attraction behind going to South Korea and Government jobs, we have to understand these aspirations. The people in this room will not send their children to work on the fields or under the hot sun on the roads. So we have no right to complain about others who don’t want to do that. We are also one of the lowest labour force participation for women in the world, so we need to do something about that. State Owned Enterprises have almost doubled the number of people they have taken in, when President Rajapaksa took over we had about 600,000 people, when he left it had grown to about 1.4 million but I think that is an undercount because if you count the army we might be closer to two million. This is sucking out the labour that would otherwise be available to the private sector. So State Owned Enterprise reform is also needed. 

I’m going to cover two points. One is the need for policy stability and the other is about loss making State Owned Enterprises. We all know that the optimal solution for development is multilateral liberalisation, which is what has given us these comfortable lives that our parents didn’t have. Ideal solution is that everybody liberalises but we know that Doha is dead, at least it looks dead to me because it is not running. What is actually going on is that countries are entering into large numbers of pluri-lateral (more than two but not all) trade agreements and bilateral agreements. The Association of Southeast Asian Nations (ASEAN), which is one of the world’s largest markets is moving towards a single market where tariffs will be lower for inter-ASEAN trade but in addition they are doing something called ASEAN Plus where they are trying to bring China, India and Russia into one trade deal called Regional Comprehensive Economic Agreement (RCEP). On the other side the US is starting a process called the Transpacific Partnership Agreement where the signatures have been placed on paper. These two are in a way competitive because in the TPP China is excluded. Not everyone who is in the RCEP is in the TPP. So that’s the way the world is going. If you are inside one of these clubs or you are outside and trying to compete then what are your chances? Nobody has invited us to commit to the RCEP or TPP and in my opinion we are not at a level of sophistication to enter the TPP, which is an extraordinarily complicated and intrusive agreement that we are not ready to sign. We must walk before we can run. 

All we have are bilateral agreements. India, China and Malaysia want to hold discussions with us. Today many will accept that Vietnam is a credible competitor to Sri Lanka. This is something that I look at when I see comparative tables. They are head of us in my area of ICT and they are ahead in many other areas. Vietnam joined the World Trade Organisation in 2006 but we joined 1995 when it was first established. Yet what have they done since then? Their trade and industry sector has been running at full tilt while ours has been put in cold storage since 2008. We have not been exercising our muscles with regard to trade agreements. TPP has been signed by Vietnam, they also have a deal with Russia, Kazakhstan and Belarus. President Putin is a friend of many non-trade people but even he is entering into trade agreements. ASEAN, obviously they are part of, ASEAN-Australia they are part of, ASEAN-India they are part of ASEAN-Japan they are part of. Now what are the results? If you look at their foreign investment in the last 14 years it has increased by about 7% while ours has also increased despite our moaning of lack of FDI but their exports increased over sevenfold while ours only doubled. This is because our investments came for housing projects, our FDI came for non-tradable sectors. I’m not saying apartments and hotels are bad, they are good, but our exports do not show the results of whatever investment we received. So it’s not investment that is the issue, it’s because markets opened. Vietnam is part of the TPP. Sri Lanka is heavily dependent on the US for its exports but would the US prefer to do business with us or Vietnam? Trade agreements are something that this country needs. Detractors don’t understand that they are shooting themselves, shooting the next generation in the foot by objecting to Sri Lanka entering into what agreements we can enter into. 

The top five State Owned Enterprises made Rs.605 billion in losses. This is 18% of Sri Lanka’s GDP and 81% of the current Budget deficit. The “monsters” are here. You can see the damage the monsters are doing to you. I wrote a book about this in Sinhala and was very pleased when a JVP MP understood what I was saying when he read it and he admitted it is unreasonable for the people of Siyambalanduwa who never get on a plane to pay for people who use the airline. Creation of State jobs should not be at cost to the ordinary taxpayer of this country. 

So let’s look into an enterprise that is in the news these days-SriLankan Airlines. Mihin Lanka is also included into this data because in actual fact they share all kinds of expenses; it’s actually one airline with two faces. If you look at the Central Bank reports and the SriLankan Airlines reports as well as other sources you will not get the same numbers on losses so we have taken SriLankan Airline data. Before 2008 when it was run by Emirates it was making decent profits, it doesn’t look very impressive, but it was still making about Rs.5 billion. Then we had the famous incident of the previous President and the subsequent renationalisation of the airline. Now we paid them money in order to accrue astronomical losses. We increased the number of people working at this airline by 30%. Currently we have 333 people per plane at SriLankan though there are airlines with just 76 people per plane. Pakistan leads South Asia as the highest number of employees per plane but we come a close second.

I believe that Samurdhi is an important infrastructure. I think that a country that does not look after its poor is not worth living in. In 2014 Sri Lanka spent double what it spent on Samurdhi just to cover the operational losses of SriLankan Airlines. What kind of priorities does our country have? When the 1.5 million families that are on Samurdhi are given so little that we have to increase these numbers. They are getting only half of what we are shoveling down the black hole of this one big State enterprise. 

Crisis is important. Crisis should never go to waste. Other countries have dealt well with crisis. Indonesia implemented a slew of reforms in the 1990s and we could do the same. Over the last few months we have had three nationwide blackouts and we might be able to fix the electricity sector as a result because the guardians of the status quo has shown their incompetence so they are on the back foot. What I have to say, and I’m not in government so I don’t have to be politically correct, is we need to open up to competition wherever possible. We have to remove barriers to entry, we have to where necessary have regulation. Many people know me as a regulator and I can tell you we can’t both own and manage entities. If an umpire has his son on the team he is not expected to be fair, though he may be so. But the perception is there. Even with regard to our ports, where Sri Lanka Ports Authority is regulator, price setter and operator. At the airports we give favourable treatment to SriLankan Airlines. What we should do instead is give it over to competitors and the State should become a regulator. 

In response people ask me why can’t the Public Utilities Commission be punished for the CEB blackouts? I tell them I have put all the provisions in the Act, they can be fined; technically their license can be withdrawn for what they have done. What is the point of one government organisation fining another government organisation? It’s like taking money from one pocket and putting it in another pocket. There are no consequences to anybody so regulations have to be implemented. 

Privatisation is a prohibited word but I as an independent person am using it. We have the best, second best and third best solutions before us. I sometimes think my job is to prevent the worst solution from being implemented. Failing privatisation the second best solution could be the Temasek model where commercial State enterprises are held under one holding company. I’m a bit worried about this because I have seen how the Temasek model was implemented in Bhutan and implemented badly. Just because something works in Singapore doesn’t mean it will work anywhere in the world because conditions can be different. Under this system only the purely commercial companies should be placed, where you have other social objectives don’t put them under Temasek. For example even Singapore did not put their housing company under Temasek. SriLanka Airlines and SLT can definitely be put into this structure. Then commercial decisions can be made. Everyone complains about government appointments of brothers and brothers-in-law, I think you are filling in the blanks as I speak. Why can’t the sisters also get appointed? This is really discriminatory. If you can think of a sister who has been thus privileged, let me know.

Appointees to State Owned Enterprises need to be given performance contracts. Even if they are family. Even if they are trusted. If they deliver on the performance contract they can stay. John F. Kennedy had his brother Robert Kennedy as his Attorney General and no one complains about that. But they should have performance contracts. Directors of Temasek have to deliver because they are not government appointees and if not they are thrown out. But even competent officials cannot deliver profit year after year, even in a horrible monopoly, so some shares are listed in the stock market. For example everyone talks about Singapore Airlines being one of the best companies in the world but they are in trouble this quarter, but the stock market performance will help steady them. It’s a good solution to have part of Sri Lankan State Enterprises listed on the stock market and managed by professionals. I don’t know if all this is possible but we will see. I’m not sure if I would invest in any of these companies even if they are partially privatised but I could be persuaded. 

However, there are a few problems. The issue is we can have good performance indicators in the contracts that we give to the mangers of these companies but how can we enforce performance in the directors of the holding company? Temasek has shares in Standard Chartered Bank, Bharati Airtel, Optus Australia making a good mix of investments and they get rid of shares in loss making companies. But the challenge still remains. How do we set performance for the people in the holding company? I’m hoping somebody else will come up with that answer. Perhaps it can be done with benchmarks related to performance but that is still not enough as the world is an uncertain place. Even Singapore is experiencing negative growth and that will affect Temasek. Are you going to fire the CEO? That is one of the issues that we have. Hedging is a good instrument but for the government to do it is tricky because if it goes against your interest then everyone starts screaming for your head. In the same way Temasek Holdings would have trouble in weathering the storms. I talked about brothers and brothers-in-law, now I’m going to talk about a wife. The boss of Temasek is the wife of the Singaporean Prime Minister, which provides her with significant insulation. It’s one way to look at resolving the crisis before the Government. Thank you. 

– Pix by Daminda Harsha Perera and Upul Abayasekara