“Giving wings to budget proposals and R&D”

When the policy dialogue we engage in, through print and electronic media, in various public fora, or in one-on-one meetings, is adopted at national policy level and in annual budget proposals, it is encouraging indeed.

The gratis time invested to think and write, is given greater meaning, generates “literary” rather than monetary dividends and sustains an interest in continuing to write. I am also thankful to a few representatives of the Taxation Commission, some of whom I have known for more than 3 decades, for the time they took to read and discuss suggestions made from time to time in the articles of the Thought Leadership Forum, and to economists and researchers from policy support bodies who took time to interact with me. Given that I did not have time for individual written submissions due to my travels, these sessions helped me share thoughts and ideas and to explain my rationale.

The Thought Leadership Forum (TLF) launched 5 years ago, and previous connected writings of a decade and a half or more ago, have only one purpose – realisation of a better “big picture” for the country. Thus, it is not intended to be a weekly feature, or to fill space and time. It is purpose driven and specific. It is to help propel the country to new heights rather than to propel a column or its author to new heights or to greater visibility.

I was pleased to learn, from current and potential local and foreign investors, corporate planners and the broking community that the TLF series on tourism had catalysed many new thoughts and actions and that the series on Jaffna and the North East — on restoration and the empowerment of indigenous entrepreneurs, may have had an impact on strategies by Ministries, Government Departments and certain MNCs. I am certainly humbled by these. Nevertheless, for completeness, I must apologise to readers and to the many who called and emailed me, for being unable to write recently, which was only since I was overseas for extended periods of time during the last several months.

Flat Bed or Lap Top

I have a choice at this moment. I can indulge in rest and sleep or engage with my laptop. I chose the latter. The thoughts of today are being penned on board a long haul flight out again and while looking out into the blue sky. I thought the caption “Giving Wings to Budget Proposals” would be most appropriate. I do so in the hope that reinforcing the suggestions on modernisation, upgrading and R&D, made in the TLF column 5 months ago in June, can give meaningful flight to last week’s budget proposals on this subject. I am also hopeful that these writings will even in a small way foster an objective debate in parliament.

Budget Breakfasts and Teas

I was unable to attend budget breakfasts, teas or evening discussions last week, but have been able to read the coverage and analysis in the FT (including of course the photos of celebrity CEOs who attended the sessions, giving readers the impression it was a fashion show or ladies tea party). I hope readers will take this comment in the right spirit!

On a serious note, many aspects of the budget proposals encouraged me and though there may be areas for criticism I will focus in this article, on the need to give “wings” to the proposals on Modernisation, Upgrading and Research and Development.  For this purpose I will refer to my column of Monday June 21, 2010 titled “Modernisation and Expansion; Research & Development, Science & Technology.

The thrust of the message I endeavoured to convey in the June article can be summarised as follows:

Economic growth is a function of investment as a percentage of GDP. There is public sector investment and private sector investment. Private investments require to be catalysed by fiscal and investment incentives.

Tax holidays by themselves do not necessarily catalyse investment. Tax incentives for qualifying investment can be a potent strategy.

Investments require to be catalysed not only in new ventures but also in expansion and modernisation of existing ventures.

A revenue shortfall, which arises from otherwise taxable income being diverted to investment, which qualifies for deductions in the form of qualifying investment relief, is a challenge to Governments.

However, progressive nations who have modernised their economies have placed considerable emphasis on incentives for modernisation, upgrading and research and development.

To give life to incentives in statute books, it is often necessary to develop special or dedicated institutional mechanisms.

While the institutional mechanism has to be resourced with carefully selected public and private personalities, it requires a parallel tangible focus on administrative effectiveness and technical knowledge and qualifications in the field.

The President’s Council of Advisors for Science and Technology (PCAST) of the USA is a possible model to follow.

Sri Lankan intellectual capital currently offshore can be leveraged to make a contribution to policies and strategies of a Sri Lankan PCAST.

Due to space constraints, only selected paragraphs are re-produced below, for the benefit of readers who may have missed the original article:

Modernisation and Expansion; Research & Development; Science & Technology — Thought Leadership Forum: 21 June, 2010.

Selected Extracts —

“Tax holidays are not the only catalyst. Incentives to modernise, upgrade and expand-like those, which we introduced in 1989/1990, are yet potent and worthy of re-consideration. Incentives for pioneering ventures, and expansion of industry were modelled on the Singapore Economic Expansion (Relief from Income tax) Act. These add more value than granting capital gains tax exemptions for share trading, which we also introduced at the same time. The latter has served its purpose although the capital gains of venture capital/private equity must remain exempt to catalyse new ventures.

While discussing strategies for investment in tourism over 3-4 weeks in this column, I proposed the re-introduction of “Qualifying Investment Relief” as an inducement for investment.  Tax Holidays are actually of limited attraction in the immediate to medium term since we need to release as rapidly as possible, corporate and personal savings to finance what I like to term “pent up demand for new investment.”

Malaysia and R & D

It was in 1989/1990, while serving on advisory committees to develop the “Strategy for Industrialisation” that we researched the economic development strategies, and fiscal policies of several ASEAN countries. Research revealed that considerable emphasis was being placed at national level by respective governments on R&D. What we then referred to as ENICs — Emerging Newly Industrialised Countries such as Thailand, Malaysia, Indonesia and Philippines and NICs — Newly Industrialised Countries such as - Korea, Taiwan, Hong Kong and Singapore, all focused on R&D. Having performed a comparative analysis of several of these countries, I made special note of the strategies of Malaysia.

Malaysia had specific incentives for research and development; advertising, marketing, publicity and promotion of products overseas. The rationale for Malaysia’s incentives was extremely clear and thus the proposal for double deductions for research and development and overseas publicity and promotion were modelled on them and I submitted these with considerable enthusiasm. Thus, these incentives were made available in Sri-Lanka and over the last two decades in some shape or form, may have been watered down, diluted or withdrawn.

Ministry of Technology and Research

A revisit of these incentives, can be undertaken by the Ministry of Technology and Research which has oversight over many research and science and technology bodies such as the Institute of Policy Studies, National Research Council, Institute of Fundamental Studies, National Engineering Research and Development Centre, National Science Foundation, National Science and Technology Commission, and the Sri Lanka Accreditation Board for Conformity Assessment. Together with representatives of the NCED, perhaps a study of and the design and implementation of a mechanism to grant research and development related tax incentives, which will not be abused, should be considered.

Advisory Hierarchy and Institutional Mechanisms

Endeavouring to reflect on why the emphasis on research and development has not been pursued by successive governments in Sri Lanka, chambers of commerce, professional associations and even scientists, I thought perhaps I should also recommend an advisory hierarchy and an institutional mechanism to help sustain the interest in research and development and the commercialisation of such research. What I call the advisory hierarchy can be based on a US model.

President’s Council of Advisors — PCAST

The US has a PCAST even to this day – a President’s Council of Advisors on Science and Technology.  I wondered why the GOSL recently changed the title of the Ministry of Science and Technology to Technology and Research since I believe that, science and technology is a broad area and research is an inherent expectation of a proactive ministry, no matter what you call it. PCAST in the US frequently makes submissions on the US technology situation. Even as fairly recently as 2004, PCAST made submissions to the highest levels of government. It conveyed that while the US may have among the best and most flexible research and development initiatives, and an entrepreneurial business climate, (apple, I phones and i-pads or Microsoft or Intels are examples!), university related infra structure and people and the world’s largest market – all of which put together is referred to as a “innovation eco system” — that this “innovation eco system” is eroding rapidly.

PCAST’s words of caution

The PCAST report of 2004 cautioned the US Government in the following manner “we are not competing against foreign companies but against foreign countries.” Referring to several overseas governments, it cited examples of how countries provided attractive packages of capital grants, tax holidays, free land, worker training and other incentives to induce investment by foreign technology companies. Many technology CEOs had conveyed to PCAST that they moved manufacturing overseas to stay competitive and that incentives made off shore manufacturing irresistible.

Obama has not lost sight of R&D

US President Obama gave even greater recognition to the establishment of PCAST recently. PCAST is composed of not more than 21 members, one of whom is the Assistant to the President for Science and Technology (the “Science Advisor”), and 20 of whom include distinguished individuals and representatives from sectors outside of the Federal Government appointed by the President. These nonfederal members have diverse perspectives. The Science Advisor serves as a Co-Chair of the PCAST. The President has power to designate at least one, but not more than two, of the nonfederal members to serve as a Co-Chair of the PCAST with the Science Advisor.

Innovation and Technology Advisory

A President’s Innovation and Technology Advisory Committee (PITAC), part of the PCAST, advises the President on matters involving science, technology, and innovation policy. As part of its advisory activities, PITAC solicits information and ideas from stakeholders — including the research community, the private sector, universities, national laboratories, state and local governments, foundations, and nonprofit organizations — regarding a technological congruence that has been called the “Golden Triangle.”

A thought for Prof. Tissa Vitharana

What I described are potent pointers for us. We are a country with year round good weather, locations of scenic beauty where research and development centres and science parks can be established. We have an intelligent and literate work force and a reasonably up to date fixed and mobile and other information and communication technology infrastructure (thanks to the privatisation of SLT and liberalisation of this sector). We could well be a versatile research and development hub, even before we are a financial hub or an air and sea hub. This may also lead to the return of our scientists who engage in R&D at present, for the benefit of their adopted homes and countries.”  End of Extract of 21June, 2010 article

Of course the Ministers have now changed and we have a new Minister and a Deputy Minister. The Secretary to the Ministry has been re-appointed. I am hopeful that this team will give wings to the budget proposals with regard to modernisation, upgrading and R&D, the implementation of which is not entirely “a ball in the court of the private sector.” The following is a closing thought.

An autopilot mode for the private sector?

Relevant, well thought out and tangible investments in modernisation, upgrading and research and development will make the manufacturing, agricultural and agro-industrial and certain service sectors more competitive. This will lead to sustainable economic growth. This in turn would lead to sustainable and perhaps more monetarily rewarding employment opportunities. That is the justification of an incentive on the part of GOSL and an investment on the part of the private sector. However, the private sector alone cannot make this happen.

While yet on board this Sri-Lankan airlines flight of over 10 hours let me draw an analogy. It cannot be put on autopilot, though the flight path is clear. The investing community, requires Governmental policy and implementation support if the private sector is to be cleared for take off; and can leverage the tail wind; be vigilant and risk manage turbulence while yet enjoying a taste of paradise, “in flight.” The estimated time of arrival will also then have greater clarity.

It requires a Government private sector partnership. This partnership requires an institutional structure and mechanism. The GOSL can adopt the PCAST approach of the United States. Leadership for this initiative will rest with the Ministry of Technology and Research who will require to attract, perhaps Sri Lankan scientists onshore and offshore as well as representatives of the manufacturing, agricultural, industrial and service sector who are up to date, aware and practical. The institutional mechanism should also lend support and guidance which, when combined with multi lateral and bi lateral technical and financial assistance, can provide the boost to the outcomes envisioned in the budget.

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