Industries vs. the Government

From 1977 all governments in office kept on recognising private sector industries as the “engine of growth”. A few governments even went on to identify certain “thrust” industries and commenced treating them in a manner which ensured rapid growth.

Still, as industrialists, up to now we feel the Government has failed to properly identify industrialists. Some may say vice versa. Anyway we always hear from the Government that private sector industrialists have failed to create the required growth.

I do not think we have to spend time unnecessarily criticising the Government. As a private sector, we have to look after customers and stakeholders for our survival. So we must not look for a perfect Government and a conducive environment all the time. We in the private sector have a role to play to be smart and to take the initiative to use the available opportunities to make our task easy. The Government has to make a path for us to follow. The Government always says it is their duty to carry out the following changes to achieve success through the private sector.

1) Competition breeds success as such we have to open the economy and industry

2) To get out from inward orientation a wall of tariffs and para-tariffs has to be removed.

3) As Sri Lanka was known historically as a trading nation, along with free trade agreements it is highly necessary to move in this direction.

4) To facilitate this, Sri Lanka must develop its infrastructure plus logistics

5) Create a single window and trade information portals 

I wish to analyse each of the points one by one to understand whether the above will help to create rapid growth. We as industrialists have to identify what are the main industries that can succeed in our environment. The selection of industries must be done by considering so many geopolitical, social and economic plus factors prevailing in the country along with the goodwill we have developed.

Apparel industry ascension

At the moment we are successful in the apparel industry mainly due to the fact that it is matched with our available resources. At this sector’s beginning, the availability of female labour willing to get trained and work away from home helped to a great extent. In addition the “quota system” helped our industrialists learn through trial and error and gain experience to enter the international market. 

The availability of excess material also helped in an indirect manner for novice apparel industrialists to survive this difficult period. 

In addition, we feel due credit must be given to the creation of the ‘Pamunuwa Market’ as it helped in a tremendous manner to absorb all the waste and leftovers from the industry by creating another very profitable subsector. I feel this matter has not received proper recognition.  

Afterwards, with the loss of the GSP + facility the industry moved in the right direction by using the tagline ‘Garments without Guilt’ and proper repositioning was done by giving our products an edge by using so many innovations. Credit for this must go to the private sector. It moved away from a product where heavy competition was there in volumes and concentrated on the upmarket segment with so many R&D projects. 

In addition, getting closer to brands helped in a big way to get the material under synergy procurements and execute already predesigned products in a perfect condition of the right quality at the right time.

The above industry managed to sustain and develop itself as it had so many positive contributions from the State. As encouragement, most of the raw materials required were made duty-free. 

Opening the market was not carried out by removing duty on the finished products. A para-tariff was not removed! The above are two major factors the Government keeps on mentioning at the moment which needs drastic change. This helped to divert excess and second quality products to the local market. Even expatriate Sri Lankans commenced shopping for fashion wear in Sri Lanka. None of the competitors were invited to Sri Lanka to speed up or push out local industrialists. 

JVs were encouraged. For the growth of the apparel industry, all credit must go to local entrepreneurs and the governments of the time for nurturing the industry and facilitating it at the right time with the right policies. This is how this sector managed to achieve $ 5 billion in 2016 through exports.

Without learning from the above success story the Government is trying to adopt a policy to bring in competition and give “shock treatment“ to local players who are still trying to recover from the poor situation that was prevailing for three decades due to the civil war!

Footwear industry

We are in a big quandary over why our politicians are giving priority to the removal of para-tariffs and considering it the biggest bottleneck for growth. I wish to take the example of the footwear industry where I have gained experience. 

As industrialists we know that in 2000, when all the major footwear factories were doing their best to just hang on to their business, the then Government considered a proposal brought in by the industry to introduce a duty and CESS for imported footwear.

Along with this major change the particular sector managed to survive and sustain the sector. At the moment it has reached a level of catering to the needs of the local market with a market share above 70%. While based on the strong local foundation, some major players have already commenced exporting our products. 

In addition, due to the policy adopted by previous governments, 100% of the school shoe requirement is fulfilled by the local industries with very good quality at the right time. 

Now a footwear fair is held annually in Colombo attracting manufacturers representing all sectors. The 10th Footwear and Leather Goods Fair is scheduled to be held from 2-4 February 2018. Here we have to mention the role played by the Ministry of Industries and Commerce, the Export Development Board and Industrial Development Board.

I wish to invite all personnel involved in setting policies and guidelines to visit this fair and witness the growth we have achieved with the support of Sri Lanka’s political leadership. At the moment even this fair has become a Private-Public Sector Project (PPP).

The Ministry of Industry and Commerce has kept confidence, maintaining the CESS as a safety net up to now though footwear was suddenly made duty-free in the 2015 Budget. The EDB has contributed strongly to participation in foreign footwear fairs plus retaining specialists to provide technical knowledge. 

Furthermore, a few years back a footwear training centre was established mainly targeting school-leavers to be trained as designers, etc. IDB has taken the industry to villages as a cottage industry.

Now the time has come to step in to exports and the local industry environment has become suitable to grab available international opportunities. We feel at this current juncture the Government is trying to adopt a suicidal path. 

Indian and Bangladeshi experience

Our neighbours India and Bangladesh have moved well in this sector. The availability of leather has helped the success of India and Bangladesh in a big way. The point I wish to highlight is that although India has become the second largest footwear exporter in the world they still maintain a tariff and GST of 29.8% for imported shoes. Bangladesh maintains a duty rate of 60%-127.84% for footwear. I hope our policymakers in the related ministries and departments will take serious note of the above. Though they have duty for imports of footwear, both countries have a vibrant and growing footwear industry. Bangladesh has even managed to attract big Chinese investors for footwear production for export whereas Sri Lanka has failed to do so.

Although India is a member of WTO, it still maintains a duty drawback for all footwear exports ranging from INR 310.00 per pair. This may be unbelievable news for our policymakers. Under GSP+ though India has to pay 17 % duty for footwear, Indian Industrialists have managed to overcome this with a duty drawback above Sri Lanka with zero duty to enter the EU market.

In our country we are trying to move away from the above and carry out a trial without any success stories in the world. The latest situation created by the BOI is very pathetic. The BOI, which was created mainly to attract valuable foreign direct investment, has entertained a giant footwear manufacturer to commence production and enter the local market on equal terms as a local manufacturer under Section 16. Though Section 16 is in the law books, we feel the BOI should have contacted the line ministry before arriving at this arbitrary decision. We feel any country gives preference to locals and Malaysia is a good example under the ‘BumiPuthra’ program how they treated locals when it comes to industry. 

The Indian company has entered the Sri Lanka market investing only $ 250,000. This point alone reminds us that the time has been reached that we have to restructure the BOI to suit the current investment scenario. 

In 1978 when the BOI was established $ 250,000.00 was a huge amount and it is not valid in the present context of the world economy. I will be really pleased if any person can cite an example even within our neighboring countries where an outside manufacturer can commence a business through such an easy mode and enter the local market. 

We can clearly say this particular Indian investor does not bring any of the following.

1) New technology? No already there are more than a dozen industrialists adopting this technology

2) Will it use local raw materials? No

3) Will it generate foreign exchange? No, only a deposit of $ 1 million to enter the local market which can be taken back when they are vacating the local operation. 

4) They will utilise our hard-earned foreign exchange to repatriate the profits. Through this industry we are losing our hard-earned foreign exchange. 

5) Will it generate huge employment? Not at all , only 200 jobs

The most important point is that they have the advantage to procure raw materials, machinery, mould, etc. at a very competitive price unlike any of the local manufacturers due to their scale of operation In India.

Great danger

If this industry is not converted into an export industry with a limited local market facility under the BOI’s Section 17, it will absolutely kill the SMEs before afterwards taking out the big national players.

Our main question is what benefit will the country derive by bringing such competition where the Government has repeatedly kept on mentioning that it is a must for the growth of the industry?

Furthermore, this will create a very bad precedent that can affect our other successful industries. At the moment there can be loads of investors planning to enter Sri Lanka through this easy mode. To our surprise Sri Lankan industrialists are not too bothered about this very poor opening of our market without any gain to the economy. We feel all industrial chambers and politicians who love to bring prosperity to the masses have to act very fast to address this great danger.

At the moment our need has to follow a similar program like India’s ‘Make in India - and export’. Whereas we are following the opposite of ‘Make in Sri Lanka and sell it in Sri Lanka’. This can be identified as offering our market on a silver tray, which was built up by local entrepreneurs with so many sacrifices. I feel this is the beginning of industrial colonisation once again without any benefit to the country where our hard-earned foreign exchange will be drain to other countries.

It does not qualify for any of the points always highlighted (refer above) by senior ministers at various forums. Out of the five points mentioned at the beginning of this article all of us agree on the importance of the last two points i.e. the growth in infrastructure and a single-widow fast-track facility to set up industries in Sri Lanka, with even local industrialists frustrated with the prevailing position.

As our growth was greatly hindered for three decades due to the civil war which prevailed in this country where all industries managed to survive and displayed their resilience, we feel it is too early to open our economy further. 

Instead of this the Government must give all necessary support to go global and nurture the industries that have displayed signs of growth. Encourage them to move towards joint ventures where technological transfer is possible. Encourage more and more schemes under Global Production Sharing (GPS) to import on knockdown form and assemble it and export. This will be an ideal approach with the planned infrastructure development of roadways, ports and airports. This alone will help to get the advantage of reaching Europe and the Far East in an equal time of 14 days’ lead time by steamers.

With a population of 21 million, making our country a production base by using all trade agreements will be the answer. 

For this the Government must help and nurture local industries to become competent to attract the eyes of customers outside of Sri Lanka and local industrialists must create the required merchandise. The answer is not just opening the industry to large-scale manufactures and products which will even kill our foreign exchange-saving industries which are about to reach global markets in the near future. 

Even the private sector has a big role to play by cutting down on costs, improving efficiency and creating a product line that will attract foreign buyers.  With a wide exportable product range we will only be in a position to reap the advantages under the proposed FTAs.

As a private sector we do not want to challenge the Government. We wish to play our role and move towards growth by using the path prepared by the Government. Although the title of this article says Industries vs. the Government, we believe strongly that only with proper understanding between the Government and the private sector, identifying both parties’ current strengths, weaknesses, opportunities and threats, can we move forward rather than fighting a useless battle that will take us nowhere.

(The writer is the Past Chairman of the Ceylon National Chamber of Industries. He can be contacted at [email protected]).