Budget 2016 goes under private sector scanner

By Shehana Dain

The cream of Sri Lanka’s leading diversified conglomerates on Tuesday shared their take on the unity Government’s maiden Budget at a packed Daily FT-Colombo University MBA Alumni Association organised Forum. 

Held for the sixth consecutive year, the Forum drew over 600 participants, bringing top blue chips as well as several other experts under one platform with Finance Minister Ravi Karunanayake as the Chief Guest. 

Following Former Central Bank Deputy Governor W.A. Wijewardena’s speech (published on P11 of today’s Daily FT) and PricewaterhouseCoopers Director Tax Services Charmaine Tillekeratne’s comments on tax proposals in the 2016 Budget, the private sector panellists took the centre stage.

The private sector observations were shared by John Keells Holdings Plc Deputy Chairman Ajit Gunewardene, Carson Cumberbatch Plc Director Mano Selvanathan, Softlogic Holdings Plc Chairman Ashok Pathirage, CT Holdings Deputy Chairman and Managing Director Ranjit Page, Hayleys Plc Director Sarath Ganegoda, Aitken Spence Plc Director Parakrama Dissanayake, Hemas Holdings Plc CEO Steven Enderby, Sunshine Holdings Group Managing Director Vish Govindasamy and Expolanka Holdings Plc Director Sanjay Kulatunga. The panel discussion was moderated by Daily FT Editor Nisthar Cassim.

Below are excerpts from the panel discussion:

Ajith Gunewardene: The Budget lays down a medium term fiscal consolidation framework targeting a deficit of 5% by 2018 and 3.5% by 2020. We believe that adhering to these targets is going to be very crucial going forward because it will create an environment of predictability, which has been lacking. Predictability of the macro economy is important to drive the economy.

Secondly, the outlay of education has been increased significantly and it’s very positive in the long run. The issue here is it needs upgrading to the education hardware and software, to be relevant in terms of education output for today’s need.

The third important aspect is the replacement of the draconian and outdated Exchange Control Act. It’s indeed a very progressive step. The Land Alienation Act was a significant impediment for investment, badly drafted and confusing. The proposal to remove respective clauses, specifically to allow listed companies to own freehold land and the removal of the lease tax, will encourage and spur capital formation and FDI.

The Budget has also proposed that management expenses of life insurance companies be redefined for tax purposes. It’s crucial that the authorities actively engage with the industry during the process of redefinition, so that the policyholders and the life insurance industry do not suffer any unintended consequences or retrospective application, especially at a time when life insurance coverage and pension products are of such importance.

In relation to the overall execution of the Budget, it’s the implementation that is going to be crucial and the gazetting and the legal framework. We hope that the Minister will closely watch the private sector, so that no unintended consequences will be created which we have seen in the past.

Mano Selvanathan: This Budget clearly depicts a country in a hurry to succeed economically and politically to become a successful technology-driven advanced economy. To achieve this we need a vibrant economy. In terms of a vibrant economy, now you find more than 10 property developments happening around the country. In the first round you see a lot of foreign investors buying into this property, which is very good, but in the second round who’s going to rent out these properties? You need expats, international employees and people of that calibre in this country to support the property development business.

To achieve this, I’m very happy to see the International Finance Centre coming up in Colombo. Apart from that, the Port City and Megapolis expansion of Colombo will support the internationalisation of Colombo and the financial districts. That is a very positive step for Sri Lanka towards becoming an international centre.

One matter which I would like to note is the elimination of the Securities Investment Account (SIA) from the system. The thought was such that investors could bring in their money and when they want to they could sell it and take their profits, interests and capital out. Now according to the Budget proposals, anyone can bring any money and credit it to any banking system.

The world is changing in terms of monitoring drug money and ill-gotten money and Sri Lanka has to be very cautious at a time like this. We should have a system where monies are monitored in and monitored out. I’m not talking of exchange control, but speaking about a system to monitor the inflows and outflows. This has been a success in countries like Singapore where strict monitoring takes place.

Parakrama Dissanayake: The positive side of the Budget is the revival of State-Owned Enterprises through Public-Private Partnerships (PPPs). We have been involved in PPPs out of Sri Lanka and PPPs are private-sector driven. In Sri Lanka they should think beyond the PPP model of Sri Lanka Telecom which is in fact managed by the public sector.

We are also pleased that the Budget has set targets to be within the top 20 transhipment ports by 2025, but I’m sure the policymakers are aware that the business model on which shipping ports thrive in Asia and South Asia has changed drastically. From the outsourcing model it has moved into near shoring and re-shoring, placing a huge challenge on shipping. 

The Minister also spoke about developing Hambantota as an offshore bunkering hub, but here I would like to note that offshore bunkering is not possible during the monsoon season. Instead try and work on the tank farm that is available in Hambantota. In fact the Government has lost millions of dollars in trying to get involved in bunkering. The Minister also spoke about the Trincomalee Harbour; it’s a positive thing, but unfortunately some say that it is on the wrong side of the Sri Lankan map and as a result it has not achieved its full potential. The Budget also mentioned that it would encourage PPPs within the current policy framework that is the East terminal.

Additionally there were some concerns over the further liberalisation of the freight forwarding industry from 40% going upwards to 75% and when I sought clarification from the Minister he said it’s not $5 million but $10 million. We have seen proposals in the past as well but proper implementation is what we don’t see. I must request the Minister to appoint special task forces for each sector and ensure the implementation of the 2016 Budget is done right.

Sarath Ganegoda: The Prime Minister in his economic policy speech mentioned the generation of one million jobs, enhancing income levels and development of the rural sector and so on. Now, who would do all these? When you look at the proposition of the GDP structure of Sri Lanka, about 6% comes from the Government sector, SOEs and expenditure and investment together is about 15% and the balance staggering 77% comes from the private sector. So if the country has to achieve these jobs, the private sector has to perform. 

In my opinion the 2016 Budget provides an environment conducive for the private sector to perform. The revised tax structure will increase the disposable income of individuals by Rs. 12 billion, of which a good part will go for consumption; what fuels any economy is consumption. All business including SMEs will have a positive impact.

It’s a very good move to allocate Rs. 100 million for skills development in the leisure sector. During the civil war what we did first was cut off training costs and now we are feeling the repercussions. The leisure sector is experiencing a dearth of good skills and this will turn it around.

Under concerns which is my personal view as well as the company I represent is the decision to liberalise the tea blending operation. In principle I’m okay with it, but the timing is the problem. Currently the tea industry is in a dire state and we see unsold tea at auctions – 16% is unsold and cost overpowers revenue. At a time like this the decision remains doubtful.

Ranjit Page: The VAT and deemed VAT being taken off in agriculture and dairy gives us an opportunity to link the producers to the market place. Therefore as an industry we will be ensuring the overall Government mission in encouraging local production of agriculture rather than imports.

The challenges we would face is with regard to skilled people. One would look at retail and agriculture and dairy as a sort of unskilled workforce but it’s not so. We invest heavily for quality human resource. The next part is labour retention, so our request to the Government is development of the other areas beyond the Western Province, especially in the lagging regions.

Sanjay Kulatunga: Our game-changers of this Budget are firstly the creation of a logistic hub by allowing global logistic companies with the scale and knowledge to expand Sri Lanka as a hub, which will certainly be a game changer in the future. This will definitely attract foreign investment and help develop logistic infrastructure, thereby allowing the industry to compete with regional players. This will also encourage these companies to set up their regional outlets out of Sri Lanka and also bring in some of the back office operations to Sri Lanka.

The area that will have the biggest impact from the Budget is the sizeable amount of money, Rs. 10 billion, for the digitisation of the country. This will improve the quality of data. One of the big issues is the accuracy and timely availability of data for policymakers. Also computerising the Pradeshiya Sabhas to divisional secretaries and Police stations where the poor have to go for payments hopefully will be dealt with much more effectively. Adding to that, tax evasion and avoidance will be difficult as we go for a digital economy.

The most fascinating aspect in the Budget is the Colombo International Financial Centre. I think we have all the ingredients if we are to work towards it and build a competitive finance sector in line with Dubai and Qatar. Obviously as mentioned in the Budget we should have our own courts and on that system as well as regulatory framework which goes with this kind of systems. 

We see foreign multinationals setting up back office operations in Sri Lanka has been quite easy but the real transformation would be setting up front office operations in Sri Lanka where the fund management companies can be based out of Sri Lanka and operate towards the sub continent and the fund managers and analysts can work here. At the same time I don’t think we have the qualified staff to work in such instances. So in the interim period I think we should give the opportunity to come and work here as well as getting our own act up and running.

Steven Enderby: When I get my hands on the Budget, the first thing I would ask is how many rupees the Minister is putting into my pocket and how many he is taking out. The good news is I think he has put a few in my pocket. A question that we all have is, can the Government raise the revenue of Rs. 2,047 billion? Is it going to get ahead of itself and spend the some of the anticipated money before it actually receives it? In Hemas we are involved in three sectors; healthcare, leisure and travel and personal care. The leisure sector has been given the much-needed attention and incentives. When it comes to the leisure sector, we have been having major issues with the ever-escalating construction costs. It came to a point where we had to question the feasibility of some of the projects that are to be undertaken. I’m very happy to see that some of the revision projections given to the construction companies have been removed.

If we look at healthcare, actually not quite a lot has been mentioned about it. There is a fairly general encouragement to increase the level of pharmaceutical manufacturing. Looking at the private hospital industry, there is incentive to the public healthcare sector, which I think is a huge positive. I think prevention is much cheaper than curing, so I must urge the Government to look into these methods. So I think it’s important for the private and public sectors to work closely together to prevent rather than manage.

Finally, moving on to cosmetics and personal care products, there is very little mentioned in the Budget about it. People may or may not be aware since the establishment of the pharmaceutical regulatory authority this year, cosmetics are not regulated. I look forward as an industry to work closely with the Government to form regulations in that aspect.

Vish Govindasamy: We have always seen budgets which are very much infrastructure led and leave no money in people’s hands. I think for the first time we are going to see a growth-oriented Budget.

There is a provision for high tax payers who pay Rs. 24 million and above, but I think there is already a gold card privilege and you may be aware that there is nothing that comes out of it; hopefully these things will be rectified. When India increased the tax net it came up with a very simple method; owning mobile phone, owning a car, owning a house and so on. That just got them to getting the people to start paying taxes.

Having done all these reforms in the exchange control sector, there are other ancillary departments that need to be improved. For example, you have to be able to incorporate a company within two days. If you follow the Ease of Doing Business country index and take the top 15 countries, we must be able to at least copy them. We don’t need to re-invent what they’re doing. Sometimes we spend a lot of time in Sri Lanka re-inventing the wheel; there is a lot of good technology out there, just copy it and it will work.

As far as the industry that we’re working in, the 50-year lease extension if you have done well in the plantation industry has also been said in the past three budgets. Hopefully this time it will materialise. For the first time we have heard about diversification, but in today’s environment we have to at least take 50 approvals. After the 50 approvals are taken, the investor has gone away.

The fertiliser subsidy that has been removed will not help the plantation company at this time. Also the whole concept of the tea hub, the timing is the issue. Maybe it will be a good move with proper regulations but it should not be done in haste. Sri Lanka manufactures 350kg of tea and we need to make sure that we find a home for that tea before we import any more tea.

Since the depreciation of the rupee, we have not been able to incorporate the increased rupee value to the calculation of our imports. No one is willing to take on that decision and we are in limbo.

Ashok Pathirage: The Budget this time around is a very bold one. The Minister gave the industry the opportunity to present our Budget proposals and has listened to us and has also incorporated them in the Budget. The Minister has articulated the Premier’s economic policy within the Budget statement. Completely taking off the duty from apparel will definitely take us towards developing Colombo City as a shopping paradise.

In our perspective we are investing in a large shopping mall while JKH and foreign entities like Shangri-La are also into it. I think all these will build confidence in developing retail centres and we can take our retail apparel to Singapore and Dubai. I hope the Government has a master plan and will take ownership for the key drivers to come together to achieve these objectives.

Pix by Bhanuka Kirinde

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The Daily FT-Colombo University MBA Alumni Association organised Post Budget Forum was supported by PricewaterhouseCoopers as Technical Partner, Citibank as Platinum Partner, First Capital Plc as Silver Partner, IronOne Technologies as Bronze Partner, Phoenix Ogilvy as Creative Partner, OfficeMax as Official Printer and Gold FM, Sun FM and Hiru TV as Official Electronic Media Partner.

Q&A session

Following the customary panel discussion, the floor was open for questions directed towards Finance Minister Ravi Karunanayake. Below are the questions that were raised depicting the real pulse of the audience present:

Q: One of the policies of the Government was to move towards a greener Sri Lanka, but the 2016 Budget has increased duty on electric and hybrid cars?

A: When we gave an incentive in January, we were criticised about why we did so when there’s a Sri Lankan company developing an electric car. As a matter of fact yesterday Kapla Ltd. Company came back and said that they would be commercially introducing the vehicle in January. We gave them also a challenge. In the meanwhile we saw $ 100,000 cars coming in at 2.5% and also saw a huge leakage when $ 15,000 cars were coming in at 2.5% rates. That was revenue erosion. We are also been blamed for having too many cars on the roads and we don’t have infrastructure development happening at the moment to control that.

So ultimately we have revenue erosion and have foreign remits going out of the country, creating an exchange control problem and we were having a double impact. So that’s why we thought a little bit of discouragement has to be given before getting our infrastructure in place.

After the incentive we gave in January, the market moved faster than we thought. We can’t shift policies every six months; we need to be consistent.

 

Q: There have been inconsistent policies with regard to the motor industry. Will the Government change gears again?

A: We did give an incentive in January, but the implications were not what we thought. We will give a 99% coherent and consistent policy but there are variances that we have to take at times. This is something unprecedented; if we didn’t take this decision it would have led to the death of the economy.

 

Q: The increased number of vehicles on the road is basically due to the poor quality of public transport and nothing has been done regarding this. Do you think increasing taxes is the only solution?

A: You’re partly correct but also wrong to say nothing has been done. We have looked into railways, which we believe is the quickest step to bringing the cars off the roads. We looked at Avissawella, Panadura, Ja Ela, and Negombo in order to bring in people to park their cars and go in the train. We can look into all of these points coming in less than 45 minutes to the expressway. We need to refurbish this and motivate directors and young professionals to get into the concept. We need to refurbish it and we have given four months for the Railway Department to do this. We will certainly make this private sector oriented.

We also looked into buses but that is a fairly high investment oriented sector; we failed last time in the ‘park and ride’ concept.

 

Q: In the technical notes with regard to the resident visa fee currently you proposed for three years for foreigners is $ 1 million and $ 5 million. Is it USD or Rupees? In the Budget it says $ 250,000 as opposed to the technical note?

A: The correction needs to be done. It’s not a fee; it’s a onetime investment and its $ 250,000. Earlier the intention was $ 1 million but we then realised that it would be too expensive at the start. The permanent residency is $ 5 million and that remains unchanged.

 

Q: What’s the Government’s motive in providing full security to finance institutions’ deposits?

A: Finance companies are in a bit of a difficult situation but don’t be alarmed at all, it’s very much in safe hands. There are 58 companies that are there, there was a necessity to protect those companies as well and as a result we took the banking industry to do core banking. The CBSL till now has not been playing a supervisory role, they have been playing a political role and as a result the financial companies have been put into jeopardy.

We have given time till 1 January to give a rating and once this is done the people will be able to deposit without any fear. We want to give senior citizens the comfort factor to tell them that it’s as safe as depositing in a bank. The prudence of this move is to ultimately give comfort so that people will go and invest and save more and the industry revives itself.

 

Q: By moving out the leasing section in the banking industry, how will that affect machinery leasing, especially in the construction sector?

A: Only 6% of the banking sector is into leasing so before it gets out of hand we are trying to control it. If it was 80%, yes then the decision would have been re-thought. This has been a move taken by many developed countries and we are taking that. The banking system is so rigid; I want them to take greater risks and concentrate on core banking. They should have a license for banking, not for leasing. I will have a discussion with the bankers and see if there will be any issues we need to address.