The need for transparency over Budget fundamentals

Monday, 25 November 2013 00:03 - - {{hitsCtrl.values.hits}}

An Appeal to the Executive, business and academia, who saw light at the end of the tunnel

The Right to Information Before endorsing the expressions of confidence in the clear medium term value adding focus of the Budget 2014, as reported in the media, quoting the Executive, business chambers and some academics;

the present state of affairs of economic fundamentals,
the effectiveness of the budget review processes, and
the practical application and effective implementation of the policy pronouncements,
the key fundamental checks, balances and integrity of data and estimates

all as impacting on citizens and business, require transparent disclosure and intellectual debate. CHOGM-led commitments supplement ‘Mahinda Chinthana’ With Sri Lanka hosting the CHOGM 2013 and assuming the Chair for the next two years, CHOGM led commitments must now supplement the Mahinda Chinthanaya. There is thus, an accountability to ensure that the Budget 2014 presented, almost soon after CHOGM is fully aligned to the aforesaid commitments, especially those linked to nachieving growth with equity and inclusivity (including vulnerable groups, women, youth and differently abled with meaningful social protection for all),

nimproving access to productive employment, ensuring sustainability of natural resources, nthe need to strengthen public administration and institutional capacity and reinforcing accountability, and nmaking use of public private partnerships. The Kotte statement reiterates support for regional trading arrangements that complement and support the multilateral trading system and encourages on-going regional integration efforts involving member states of the Commonwealth, in the belief that the unity of markets breeds strength and enhances global competitiveness. During the Committee stage review of the budget, the Executive must transparently demonstrate how the Budget 2014 facilitates advancing these commitments and also clarify the steps being taken for early finalisation of CEPA negotiations and concluding new trading arrangements with other South Asian countries. Transparent disclosure of the fiscal gap Should the citizens not know where the country stands today, in terms of its future obligations before they review where the country will be or want it to be in the medium term future? The transparent disclosure of the ‘fiscal gap’ must therefore become an essential feature of the budget. The fiscal gap must be required to be disclosed annually, under the Fiscal Responsibilities Act. The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt and pension commitments) and projected revenue in all future years. This disclosure is critical for effective transparency, good governance and efficient macroeconomic management. It is essential that the fiscal gap disclosures relate separately to the Central Government, as well the independent government entities with substantial impact on the consolidated fiscal position of the nation. These are today represented by the undernoted key hubs of the Government;

Aviation Hub (operations of Airport and Aviation Services Authority, Mattala and Katunayake International Airports, other Regional Airports, SriLankan Airlines, and Mihin Lanka)
Maritime Hub (planned new entry into shipping and maritime operations)
Port Hub (operations of the Sea Ports of Colombo/Hambantota/ Trincomalee and other regional ports and Ports Authority)
Power and Energy Hub (Ceylon Electricity Board and other generation and distribution entities, Petroleum Corporation and refineries and oil/ energy prospecting operations)
Transportation and Road Infrastructure Hub (Railways, Transport Board, Road Development Authority)
Security and Urban Development Hub with the largest allocation of budget resources
State banking and financial services and the Pensions and Provident Fund Hub (Bank of Ceylon, People’s Bank, National Savings Bank, State Mortgage and Investment Bank, Employees’ Provident Fund, Employees’ Trust Fund and all State and State-established Pension Funds, whether independently funded or not)

Audit of GDP computations With the GDP computations, actual and estimate, having a significant impact on the assessment of growth, development, fiscal outturns and the effectiveness of budget management, the Executive must arrange an independent due diligence audit validation of the GDP computations, basis, estimation processes and information sources. This audit must be conducted by a recognised and competent team from the International Monetary Fund or other consultants. The scope of this audit must cover the results of 2012, estimated 2013 and medium term 2014 - 2016. These audit reports should be transparently published and debated. It is beneficial if this due diligence is extended to validate in addition the per capita GDP and the sectoral composition of GDP as well. Fiscal Management Report (FMR) must not only be a tabled document; assess risks and sensitivities Will a professional and critical review be undertaken during the budget debate/Committee stage review to validate the credibility of medium term fiscal outturns 2013-2016 (refer page13 of FMR) relying on revenue enhancements, possibly linked to expected growth in the economy, planned reforms, systems development, institutional capacity building, etc? Does the track record of the past achievements raise confidence (including actual outturns of 2013 – refer Page 36 of FMR)? It is interesting to note that 33% of the State sector employees are engaged in the field of security, law and order. The Government being committed to an overall investment ratio of 33-35% to achieve an 8% growth depends on the domestic private sector and FDIs bringing in 80 % of the new investments. Here the dependence is also on State Owned Business Entities (SBE) raising debt capital and new PPPs. It is hoped that the key SBEs will continue to improve their profitability. Can the reliance on good weather and imposed price increases be the only strategy for improved performance of the electricity and petroleum sectors? The deterioration in the profitability of Sri Lankan and Mihin to a whopping Rs. 28 billion estimated loss must ring alarm bells, despite positive SBE performance highlighted in the Budget! If this strategy is continued, how many domestic private enterprises will retard their growth momentum? The high borrowing costs and risks associated with external borrowing by development banks, State banks and commercial banks, some of whom swap these dollar borrowings with the Central Bank, and its implications on banking sector stability appears to have escaped high officials of the Executive who have in post budget statements ridiculed these institutions for failing to meet government imposed external borrowing targets. The planned medium term fiscal strategies and implementation actions, and the likely associated sensitivities and risks need careful evaluation and intellectual debate. The contingent off balance sheet liability of Rs. 442 billion guarantee liability and its effective risk management must receive attention. End September outstanding external debt of US$ 18.9 billion and the annual 2013 debt service of US$ 1.43 billion demonstrate the priority need for fiscal gap computations to be publicly debated. The reducing trend of private sector credit growth and the apparent failure to effectively grow the export sector in the face of continuing trade deficit does not augur well for the medium term outlook. The Budget assumptions, sensitivities and risks noted in the FMR need to be intellectually debated. Informal economy/parallel banking/money laundering/smuggling and narcotics trading There is a priority need for validation whether the Budget has set in motion process and effective system to be implemented with commitment for assessment, identification and control of the informal economy, the parallel banking system, money laundering ,duty and excise avoidance and narcotics trading and export of banned items, as borne out by the following; 1.The common perception that Sri Lanka has an annually growing shadow economy of a significant size in relation to the total economy, estimated at 30.4%, 35.3% and 43.7% of the official GDP in 1989/90, 1994/95 and in 2000/01- “The Size and Development of the Shadow Economies in the Asia-Pacific-” http://www.econ.jku.at/members/Schneider/files/publications/ShadEcASIA2Bajadadraft1.pdf 2.The perception that Sri Lanka faces significant challenges in curbing the risk of money laundering. It is reported that a US congressman has warned that for long term stability in the post conflict era, it was important to put an end to the international money laundering or face a “vexing and problematic for the future.” http://www.infolanka.com/news/IL/dm619.htm 3.Drivers and passengers of vehicles, which come to a halt over bridges entering and leaving the city of Colombo, especially near traffic signal lights, being exposed to informal, verbal and written communications, promoting and offering short term financial facilities for business and personal requirements without collateral – a clear indication of the existence of a parallel informal economy and linked financial services sector. These brief but effective communications encourage the targeted persons to engage with a customer help desk via mobile phone numbers listed in the marketing material. These communications offer loan facilities at commercial bank rates and terms, but free of any collateral, being granted merely on handing over five or six repayment instalments by way of post dated cheques. When contacted over the phone, the offer is further promoted, based on a one day loan services, with delivery of funds at the residences of the targeted customers, a unique selling proposition. Loans up to Rs. 5 million are available for business purposes (excluding agriculture and poultry business) by merely handing over the post-dated cheques, computed at the rate of Rs. 22,000 per cheque for every Rs. 100,000 of funds released. There are no prior information obligations for assessment of project viability, repayment capacity and customer financial standing. This service is via tele-marketing only, with no designated registered place of business or a registered business name. All transactions are completed at the residence of the borrower, with full anonymity and without any declarations to tax or other governmental agencies. 4.Recently reported mega scale attempts at smuggling in dutiable and excise payable items and exporting banned items with the largest South Asian haul of narcotics. Socio-economic justification of key spends and revenue concessions Validation whether a process will be established and in place to assure that all key revenue and capital spends and revenue concessions for strategic development projects, say in excess of Rs. 5 billion per project, will pre-commitment/approval be justified in a transparent manner before the legislature , demonstrating;

growth with equity and inclusivity
improving access to productive employment
ensuring sustainability of natural resources
resultant cost benefits and positive social outcomes
processes to assure economy, efficiency and effectiveness of project implementation and sustainable operations
sustainable investment returns and free cash flow returns
National socio economic long term project profitability

Alongside this validation the Auditor General should be requested to conduct post audits on the net national economic and social value addition, from allocations in excess of Rs. 10 billion per project made during 2013. Will the Budget 2014 spur FDI, technology transfers and PPPs? Transparent disclosure is required that the following strategic actions measures will back the budget implementation, if value adding FDIs, technology transfers and PPPs are to be realised;

Rule of law and democratic good governance prevails across the country
Freedom from arbitrary take over and no controls over operational freedom in the conduct of legitimate business
Independent and effective judicial systems and arbitration processes for speedy settlement of disputes
medium to long term macro-economic and monetary stability risks are effectively managed
Policy consistency and clarity are assured and bureaucratic barriers minimised
Power capture corruption is effectively controlled
Effective strategies and action steps are in place to rapidly advance Sri Lanka’s position in the ‘Ease of Doing Business’ and ‘Business Competitiveness’ indices
Infrastructure services are efficient and cost effective
Regional trade agreements and free trade options are available
Effective foreign policy led international relations realising positive global image

It is essential that the Executive assures that policy implementation integrity and consistency will deliver the expectations of all investors , matching the commitment of India’s Finance Minister Palaniappan Chidambaram, who pledged to clarify tax and other laws and regulations and to take measures to boost investments in the Indian economy, by recognising that “since investment is an act of faith, we must remove any apprehension or distrust in the minds of investors” and “clarity in tax (and other) laws, have a stable tax (and operating regime), a non-adversarial tax (and public administration), a fair mechanism for dispute resolution and an independent judiciary will provide great assurance to investors.” Effective Parliamentary control over budgetary allocations and external debt commitments Will a productive budget debate, especially a professionally approached committee stage review bench marked to international best practices of budget approvals, raise the level of confidence in the Executive and the Legislature? Will the Government and the Opposition be able to reach an acceptable transparent oversight process over in switching of budget allocations, use of contingency provisions and pre commitment review of additions to the external debt portfolio? The justification, priority and expected beneficial outcomes must be demonstrated in respect of all spends in excess of Rs. 500 million per project/activity. Effective Parliamentary oversight over public institutions and key regulatory agencies In addition to COPE and COPA a Parliamentary Committee should be established to exercise independent oversight over the transparent good governance, and efficiency and effectiveness of public institutions (Bribery/ Police/Public Services/Elections/Human Rights Commissions) and key regulatory agencies (Central Bank/SEC/TRC/Consumer Protection/Public Utilities/ Financial Investigation Unit) to ensure they are independent, capable and discharge their roles without interference, conflicts of interest and with fairness. Commitment to contain power capture corruption Will processes be in place to deliver transparent good governance to all economic entities and citizens and implemented with leadership commitment in minimising opportunities for corruption and especially, eliminate high level policy capture led perceived mega corruption now associated with doing business in Sri Lanka? Conclusions Unless the Budget fundamentals noted herein before are transparently reviewed, debated and effectively demonstrated, the Budget 2014 may be identified as well crafted picture covered by the ‘Emperor’s New Clothes’. (The writer is a good governance activist and a former chairman of the Ceylon Chamber of Commerce.)