Economic Summit tackles key issues to boost biz, investments

By Cassandra Mascarenhas

The third and final day of the Sri Lanka Economic Summit 2012 organised by the Ceylon Chamber of Commerce commenced with a plenary session titled ‘Skills and Productivity to Compete in the Global Market,’ which discussed the initiatives that are underway and aimed to identify additional steps required to improve the quality of human capital available in the country for Sri Lanka to accelerate economic development.

Skills and productivity to compete in the global market

Featuring two keynote speakers, the first was the Senior Minister for Scientific Affairs Prof. Tissa Vitarana whocommenced by noting that countries with developed economies are dominating the world market and that it is their products are the ones being sold around the world because of their quality and price competitiveness.

“We are with our limited resources as a small country faced with the challenge of trying to get our products and services sold in this market. We need to out-compete those from other economies and whatever industries set up here will not succeed unless this happens and this is necessary for us to meet that challenge to be a part of the global knowledge economy,” Vitarana stated.

He emphasised on the need to be able to generate not only the skills – not just labour and technical skills of competent engineers and scientists – but the need to be innovative as well. Sri Lanka has to be able to develop science-based technologies which will add value to the country’s raw materials so that those value added products will be able to compete effectively in the world market.

“I am sorry to say that I have been trying to get this message across but with limited success. We have to grasp this vital point and it is then that we can forge ahead. In Japan, more than 85 per cent of their exports are high tech; South Korea exceeds 75 per cent; Singapore 60 per cent and even Thailand 27 per cent. Sri Lanka is less than two per cent.”

The Minister stressed on the need for electronics, ICT and even bio-technology which is something other countries are now developing. He spoke on nanotechnology and praised SLINTEC which in a short space of a year, registered seven international patents, pointing out that it is through that kind of cutting edge research and development that Sri Lanka can become really competitive and catch the foreign markets needed.

“The amount Sri Lanka spends on research and development is only 0.18 per cent of GDP. We don’t need to spend a big amount to generate high tech products. We only have 4,300 researchers – we need at least 18,000. We are in the process of trying to set up, through my ministry, a mechanism to coordinate and monitor all scientific activities in the country.

“We want to get the private sector to directly interact with the researchers so that the research will be pertinent and will be oriented towards increasing value addition in the country,” he explained, stating that SLINTEC has proved that this can be done. The industrialists involved in SLINTEC became aware of the need of cutting edge products to take their products forward in the global market.

focused on human capital and research and business sophistication in her keynote address – two pillars identified by the global innovation index as vital for building an environment to encourage innovation.

Sri Lanka in fact did not fare very well in the global innovation index, ranking 94 out of 141 countries. The index which looks at innovation inputs and outputs noted that the country’s inputs performed worse.

“We have a lot to do to improve our innovative capabilities through the accumulation of human capital through education and higher education and investing in research and development is something you cannot do without if you want to be competitive in the world market,” she pointed out.

However Arunatilake observed that merely having skilled workers is not sufficient. There s a need for businesses that will use these workers and give priority to conducive research and contribute towards research.

In terms of tertiary education, Sri Lanka ranked 128 out of 141 which put the country at the bottom of the pile. “We really need to concentrate on improving tertiary education in the country. Research and development and primary education also needs to be improved else we won’t have students to go into tertiary education.”

She stated that BRICS have been investing a lot in increasing their science and technology capabilities especially amongst workers. Although Sri Lanka has people working in science and technology jobs, most of them are not qualified. “This is the problem we need to address. 84 per cent do not have a degree and even those who have a degree are arts graduates which are another problem so there is a need for us to expand our education.”

Technology is not only needed to innovate but also to use more advanced technology from other country and to use the knowledge being generated in other countries the country needs knowledgeable workers to use this information to improve productivity in their workplaces.

“How well are we adopting foreign technology? Sri Lanka again doesn’t do too well even compared to other low middle income countries like India and Vietnam. We need to employ high tech workers – we speak of brain drain but we need to create opportunities for those people to remain in the country,” she pointed out.

“Sri Lanka needs to think about training workers – midcareer workers as well not just the school leavers. Our workforce is aging. If we don’t do this we will become outdated. We also need to invest at a school level to push children towards the science fields.”

Panel discussion

Along with the two keynote speakers the panel featured The Employers’ Federation of Ceylon Director General Ravi Peiris, Sri Lanka Institute of Information Technology President/CEO Prof. Lalith Gamage, Watawala Plantations PLC CEO and Sunshine Holdings PLC Group MD Vish Govindasamy, Aitken Spence Hotel Managements General Manager – Training Amal Nanayakkara, 99X Technology CEO Mano Sekaram and Access International Chairman Sumal Perera and was moderated by Dankotuwa Porcelain PLC Former Chairman/Managing Director Sunil Wijesinha.

Q: How to you train and create innovative minds?

Arunatilake: It’s not only about what is taught but how it is taught. Rote learning is not important. Teaching and learning is about problem solving and critical thinking and we need to inculcate this into the way we teach. We need to get away from exams and improve learning capabilities.

Q: What steps have you taken to cultivate and sustain a culture of innovation?

Sekaram: In order for us to move forward as a nation, what is very important is not only innovation in terms of manufacturing but also in terms of our business models. People who win today are people who change the game. We need game-changers but we only have a few game-changing entrepreneurs. In my own organisation, we are moving away from the command and control management style and are empowering our employees more to come up with game changing business models.

Nanayakkara: You have to allow freedom, people should be allowed to really think and innovate. That is freely allowed in our company and we also provide funding. One reason we are lagging behind is due to the lack of funding. We also need to continuously train workforce in order for them to innovate further.

Perera: As a first generation company, our rewards are closely linked to innovation and performance. People join companies to develop themselves and that fact is very closely related to skills development, innovation and developing the business along with their specific work teams. I think that the fundamental requirements of the organisation and the employees should be synchronised into a common goal and that is how we have been able to develop innovation and out of the box thinking to get ahead within the organisation.

Peiris: This whole question of innovative thinking is one that needs to be cultivated over a period of time. Today we are in a culture of qualifications – students are told that the more qualifications they have, the better and they are pushed towards this. By the time they enter a workforce, they are totally exhausted. Innovative creative thinking of students needs to be cultivated in the education system which will also benefit companies in the long run.

Gamage: To see the results of these projects and convert them into commercial ventures, we have set up an incubator through which people can build up their own companies based on their innovative ideas. This is something that we do to further innovation.

Vitarana: I endorse everything that is being said. We need to create an enabling environment where this kind of thinking can be encouraged. More education shouldn’t mean knowledge for knowledge’s sake but should enable people to get a better grasp of reality so that their innovations will be useful and relevant. The kind of education we have now curbs and stifles that innovative spirit. We need to encourage people to ask questions, come out with new ideas and create an environment to the extent to which that kind of activity is encouraged.

Q: Can’t you allow the concessions offered to the public sector in the Budget to the private sector as well?

Vitarana: I fully agree with that, I think that’s what should be done. The last Budget was very progressive but the same concession should also be given to private sector research and I will support this strongly.

Q: What do you think about labour laws and what changes would you like to see?

Peiris: Most labour laws here are a classic example of a syndrome – the false sense of security syndrome. Successive governments have been trying to appease the working class by regulating employment and giving a set of laws where the employees feel very comfortable and it has now come to a point where there is resistance to any change, even to make changes to create an enabling environment for businesses.

We have made recommendations simply to have an enabling environment and flexibility in work environments. We talk about women empowerment but there are so many restrictions. There is much to be done but nothing has been done so far. Reforms should move towards working efficiently and working in a smart manner.

Furthermore, our holiday patterns are totally inconsistent. The fundamental issue that the Government needs to address is to make these changes to have an enabling environment for businesses to grow.

Govindasamy: There is a lot of talk about imports and import substitution but to get to that kind of level, we have to be competitive but with this kind of holiday regime we have at present, we will never be competitive. We need to keep in mind that when we have holidays here, the rest of the world is working and they will not wait for us.

Q: What are your thoughts on private universities coming in?

Arunatilake: It is not possible for the Government to fund the required education needs so we need to look at private institutions and private partnerships. We need to expand tertiary education and increase quality and we need to find ways to do that

Gamage: There are mechanisms for private institutions to set up here and it is set out in the Universities Act. There is also a process at the UGC to award a particular degree. Right now there is a mechanism and the Government is now trying to change the legislation to encourage more private sector institutes to participate in this but even without that, right now anyone can set up an institute

Vitharana: From a 100 innovations, there may be only one that is commercially viable and we need a mechanism to identify such innovations and get people trained in properly evaluating innovation. It’s not an easy task but it needs to be addressed. Other countries have done it and we should learn from them

Gamage: To obtain such innovations people first need to be nurtured but I don’t think that most institutions have such mechanisms in place. We are trying to get the private sector to sponsor research programmes – if we have such collaborative efforts, it will benefit the end user and we are there certainly to collaborate and develop those research programmes.

Ease of doing business

Sri Lanka’s rank in the World Bank Doing Business Report improved over the last two years. Out of 183 countries, Sri Lanka’s rank moved from 110 to 98 in 2011 and to 89 in 2012. Of the 10 indicators used to measure ease of doing business two indicators; that of protecting investors and trading across borders, have shown notable improvements.

Others have shown little change with some showing a slight improvement or deterioration. While no ranking system is perfect and the same counts for the assessment of Ease of Doing Business, what is more important is actual progress in reforms to have a material improvement in the regulator y framework and systems to ease business processes.

The session kicked off with a presentation delivered by the Central Bank of Sri Lanka’s Director of Statistics Kumudhini Saravanamuttu who gave an overview of the Ease of Doing Business Index.

The ranking reflects the ease or difficulty of doing business in a country based on info provided by their respondents who are the users of the services provided mostly by public sector institutions and makes a comparison of 183 countries. The numbers of procedures, time taken to complete said procedures and the cost involved are the three main criteria.

“Our ranking compared to other Asia countries shows that Sri Lanka is in the middle of most countries. Singapore is first with Hong Kong coming in second in Asia. Looking at SAARC countries, we are second there,” she said

Looking at how Sri Lanka can improve its ranking, Saravanamuttu noted that starting a business in 30 days is far too long. Dealing with construction permits is a massive area but the Colombo municipality has made some improvements and reduced this time to 110 working days.

“The World Bank does not take into account the reforms that we implement immediately. Instead they have to be in operation for at least a year before it is taken into consideration,” she explained. The credit information bureau has also implemented a secure transaction system which allows SMEs to use machinery as collateral in order to improve access to credit.

The number of taxes was also reduced in 2010 although this has yet to be taken into account by the World Bank. In terms of exports and imports, procedures for exports have been reduced to 21 days and costs $ 750 with imports coming up to a similar amount of days. Customs has introduced an electronic system to streamline procedures and it is expected to help.

“In the area of protecting investors, we have done some work on this but we need to improve. In fact, we need to improve in all areas, even in those areas in which we score fairly high because if we stand still, we will be overtaken by another country,” said Saravanamuttu.

“We are doing quite badly when it comes to enforcing contracts – the procedure takes 1,318 days. With the commercial court coming in, there could be some reduction in that area and that is going to be one of our focuses in the future as it is important.”

In terms of resolving insolvency, she assured that amendments are being made in the Companies Act to improve on that.

“We are expecting to improve after this year’s evaluation. We may make reforms but if other countries do them faster and better than us, they will overtake us so we need to be dynamic and stay ahead of the curve. We are concentrating on simplifying procedures, become user friendly, develop online systems and trying to have a one stop shop.”

Panel discussion

The Central Bank official joined Sri Lanka Ports Authority (SLPA) Chairman Dr. Priyath Wickrama, Customs Director General Dr. Neville Gunawardene, Information and Communication Technology Agency (ICTA) CEO Reshan Devapura, John Keells Holdings PLC Deputy Chairman Ajith Gunawardena, Unilever Sri Lanka Shipping Manager Dinesh De Silva and Haycarb Ltd. Managing Director Rajitha Kariyawasam for the panel discussion and was moderated by Media Consultant Savithri Rodrigo.

Q: What does ease of doing business actually mean?

Ajith Gunawardena: Essentially we are talking about being attractive and globally competitive. We can distil this down to two key areas – being efficient and being highly productive. Focusing on what that means, I think we should focus on three core areas – development of human capital, quality infrastructure and a free and transparent business climate.

We should set ourselves certain goals. Our literacy is high but that does not give us good human capital. We need to progress to the next level, from secondary to tertiary and vocational education. In terms of our demographics we need to go into skilling our labour. Capital investment needs to be done in a focused manner.

People talk about labour reforms but I don’t think that is a priority – judicial, land and education reforms are needed. It is important to monitor the indices but it is merely a mechanism to help us focus on priorities. If we set ourselves goals, a lot of action will follow in terms of competiveness and efficiency.

Q: Would we be doing ourselves a favour by highlighting our position in the index?

Devapura: Yes and no. Indices are all relative but if all the other countries around you have done more work, you are still lagging behind. At the end of the day indexes are good but that is not the end goal. We have to create a more conducive environment so that it is easier for people to do businesses and for the Government to be more efficient.

Wickrama: Indexes play a certain role but for me I think if anyone thinks of investing in Sri Lanka, there are a few more factors to consider – sector specific factors especially. For instance, if you take the garment industry they know the product quality of Sri Lanka.

Likewise, these indices will play a general role but to improve the investment climate in Sri Lanka, we need to identify particular sectors and improve on them but we have to concentrate on ratings as well as they may give investors an additional push to come to Sri Lanka. We have made good progress in

Q: Does Sri Lanka have an environment of predictability and law and order when looking at it from a multinational perspective?

De Silva: Putting both together, doing what we are now doing, when any business wants to take off the ground and go forward, laws have to be fair and transparent and there shouldn’t be any sudden surprises that a business should face in order to have a fair playing field. We can see quite a lot of initiatives are being implemented but the Government needs to create a conducive atmosphere for businesses to go ahead.

We have to convey our needs to the Government and the process for this is quite open and that gives us a good feeling although there are issues, they can be sorted out. In that sense, the current situation gives businesses an opening and we are comfortable but we are looking forward to improvements in the future.

Q: Reforms are well and good if put into reality and a lot of them are monetary; how does one balance the two?

Saravamamuttu: One of the strategies is to reduce the number of procedures and that is the approach that we have taken. It’s like having low and stable inflation – you shouldn’t have to think about these things – they should happen without causing inconvenience. When these don’t work right, there is corruption. Our actual costs are quite low but do not include bribes which people pay to get a lot of things done.

Indonesia maybe more corrupt than Sri Lanka but they have other advantages so it evens out. These are mundane procedural things that we must get right. They are not difficult to get right. What is important is that if we make reforms and improve the regulatory environment, all businesses will benefit even if it is not taken into account by the World Bank and that is what we want.

Q: Is bribery and corruption a necessary evil?

Neville Gunewardena: We have a system place and when someone does something wrong, it gets highlighted. Smuggling and various other activities are taking place and these need to be combated by have a proper risk management system and combat illegal trade. I think this is where we need to focus on. We have no control of enterprises under the BOI and monetary mechanisms are weak but yet I think what is necessary is to have a proper monetary mechanism for enterprises under the BOI and those that are not.

Q: When setting up offshore, what are the challenges that you have come across?

Kariyawasam: I think from a Sri Lankan point of view, exchange control regulations been happening over a period of time but not at a pace that the private sector and investors have wanted. The Central Bank’s approval process compared to some of the more advanced economies is fairly lengthy. There are a lot of areas where the exchange control reforms need to come. We need stabilise the Sri Lankan rupee. We have seen the chaos it has caused and the volatility has been alarming.

There is a lot of work to be done and in the rules when looking at offshore investments perhaps by looking into bilateral and multilateral agreements. The policy frameworks need to identify locations that are beneficial to Sri Lanka.

Investing in Sri Lanka

The Government introduced substantive reforms to the taxation structure in Sri Lanka with the National Budget for 2011 which was intended to simplify the tax system and ease businesses. With the 2012 Budget, several tax incentives have been introduced to encourage investments. The Board of Investment has also been restructured recently. There has been significant investor interest with re-establishment of peace and the seventh plenary session discussed opportunities for investment.

It commenced with a presentation delivered by KPMG Sri Lanka Partner/Head of Tax Premila Perera, who noted that the world is changing and the global economic landscape is changing and questioned if these changes transcend to opportunities for Sri Lanka. Looking at Sri Lanka, the country is poised for growth and is well positioned to make use of this growth.

“We are close to India and we need to better integrate ourselves with the rest of the region and other emerging markets in order to make the most of this. The war ended and we now have the peace dividend which is the foundation of our growth. In KPMG’s index, Sri Lanka is the first in Asia and22 out of the 60 emerging economies so we are poised for growth but when a potential investor looks to investing in Sri Lanka, the question comes up as to why invest in Sri Lanka,” Perera said.

Although we have a viable value proposition, investment into Sri Lanka has been slow for a number of reasons. The Government’s low tax regime would be undermined if there is uncertainty. There is a lack of clarity about the intent of legislation. The Government should ensure that when bills are presented to Parliament that they are available to be public, especially to chambers and similar institutions and a policy guideline should be issued so that there is no uncertainty or ambiguity.

Perera noted that Sri Lanka needs to see if the import levies can be pulled into one tax. “There needs to be a paradigm shift in the mindset of the tax authorities. The tax trust gap needs to be reduced – the trust between the tax payers and the tax authorities. There needs to be constant dialogue.”

“The convergence of the dual tax regimes was fine but the practicalities of that have to be dealt with. Investors would like to see what tax incentives would affect their industry and this is something should be facilitated by the BOI with the concurrence of the tax authorities.”

Furthermore, she stressed for the need to have a definition of what a new product line is from the revenue authorities so that a new investor would be certain whether he would be entitled to a concession or not. Even when it comes to expansion, there should be a certain amount of clarity about the criteria.

Incentives have been granted to hotels and certain other projects. Even contractors of the projects have been granted incentives and with some projects, the initial cost of implementation is waived. There should be some rationalisation of the basis on which incentives are granted. She called for the covenants of the OECD model to be upheld.

“Coming back to predictability, this country has already seen convergence to IFRS but has the tax authority issued a guideline on the convergence? Other countries would issue guidelines before the convergence is made to ensure predictability. Our Customs law is archaic. Authorities are also not well versed in how the rules should be applied, which is very annoying for taxpayers,” Perera added.

She called for the enhancement of trade with other emerging economies and India through FTAs. “We need to extend these agreements to other countries. Singapore has 18 FTAs and has progressed to a CEPA with India.”

“Another thing we can look at is benchmarking ourselves against another country. Procedural complexities and administrative bureaucracies is something else we need to look at. It is obvious that the mere granting of incentives alone is not enough. Sri Lanka has to exploit its potential to the full and I believe we need to move fast to create a proposition.”

Panel discussion

The panel discussion, along with Perera, consisted of Board of Investment of Sri Lanka Research Department Executive Director Nihal Samarappuli, National Physical Planning Department Director General Lakshman Jayasekara, Jetwing Hotels Ltd. PATA Chairman Hiran Cooray, Colombo Stock Exchange Chairman Krishan Balendra, Hemas Holdings PLC CEO Hussein Esufally,  Holcim (Lanka) Ltd. CEO Stefan Huber and Hayleys PLC Senior Economist Deshal de Mel and was moderated by PricewaterhouseCoopers Deputy Leader and Head of Markets Sujeewa Mudalige.

Q: It is impossible to get the necessary approvals outside the Western province – how do we address this issue?

Jayasekara: Fiscal planning development is very important for the next step of development in Sri Lanka. In that context after a long while, a Government came forward to do a master plan for the country so that people are able to look at where the country is going in the future, where development is taking place so that they can work out their plans.

The master plan tried to encourage development in places other than the Western Province. The fact that Hambantota came up is a signal that Colombo is not the centre of action but that the rest of the country is. I agree with you that the political leadership to improve the rest of the country has to come from the politicians. The money needs to flow away from Colombo into the rural areas.

Q: How would you look at investment in Sri Lanka?

Huber: As an MNC, we have to face a lot of challenges not just here but we are here to talk about how to make opportunities out of challenges. Clarity, consistency, simplicity and transparency are needed. Politicians should focus on policy making and putting it in place. Sri Lanka has to look at itself and then look at the scale financing which is an issue when it comes to large scale investments.

Q: How do you see us going forward in attracting investment? What needs to be done?

Balendra: In terms of FDIs, we have seen some of the largest portfolio funds investing in the market in Colombo even during the war. Investing in Colombo was popular despite the war and when the war ended that interest took off and the market also took off. Unfortunately with the global developments and some of the developments here the market has come undone.

A correction is natural but it is a sharp correction. Overall looking at 2012, we have seen Rs. 24 billion rupees inflows. Overall, foreign portfolio funds that were interested in Sri Lanka are still interested. There is low liquidity, companies are still tightly held and there are a number of large state entities that are not listed. While the Government is not keen on privatisation, they can list companies and maintain control.

Q: What is holding us back?

Cooray: In terms of tourism, the confidence is coming back. New players are coming into the sector and are making investments. One or two big names are beginning to build here and other management companies are coming in but they come in here with no money and expect Sri Lankans to put in money but it is good to have big brands to come in.

Existing companies are improving their existing properties and after that, we will branch out into new properties. However getting approvals for building a hotel, even though we have a one-stop shop, is a nightmare and most of the bureaucrats look at how not to let a project through. We will go through all those processes and take on the challenges, finally get the approval and build but will others do that? If we are to reach the targets set, we need to fast track those processes.

Q: Are you worried about the fact that no large scale projects have come through and that some of the Sri Lankan entities are looking at other countries for investment rather than making their investment here?

Samarappuli: The world is changing rapidly so we need to be prepared to deal with such changes. When we started our apparel industry, our unemployment rate was very high but it has now come down. Everything is changing a lot now that we have developed to a middle income country and there are certain industries in which certain types of changes should happen.

If you take the tea industry or apparel industry, if we reach a $4,000 per capita mark, will they be able to sustain their industries here? We need to see if we can outsource some areas and focus more on the value added services.

Q: There is so much emphasis on the need of new investments - do you think existing companies have the right incentives and policy frameworks and are you at a disadvantage in comparison to new investors?

Hussein: I wouldn’t say we are at a disadvantage. There isn’t a lot of new investment coming into the spaces that we are in so I can’t say that there is any such disadvantage.

Q: What do you have to say about the price controls on pharmaceuticals, cement and dairy industries?

De Mel: The price controls are certainly a constraint. It is a policy that we need to look at overall and I hope that once there are some strong outputs from these industries that those price controls will be relaxed.

We should focus on what our competitive advantages are. If we cannot produce at a competitive level, we shouldn’t go there at all. We need to think about this policy of import substitution carefully. It is something we should look at from both a private sector and public sector perspective.

Q: Why aren’t the Inland Revenue and other authorities addressing this issue of simplifying taxes etc.?

Perera: There should be a complete paradigm shift in the mindset of the authorities if we are to move forward. There is training required and I think it’s mostly based on that because steps have been taken to simplify the regime and I hope we don’t go back on that. Revenue authorities need to be educated on how to deal with taxpayers. Why continue to harass the compliant taxpayers? There are also onerous requirements of filing of documents and taxpayers have to file so much documentation to. It’s a complete mindset change that needs to be brought about.

 – Pix by Upul Abayasekara