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Management Conference 2014 under the theme ‘Sri Lanka 2.0 and Beyond: Fast Tracking Economic Development’.
The conference that took place over two days held a total of eight sessions featuring 32 speakers. Including both local and foreign speakers, the conference aimed at covering all sectors of the economy and shared fine insights on the activities across diverse industries.
Following are excerpts from Day One sessions.
Making Sri Lanka a strong economic hub
Sri Lanka formulated the five hub strategy to help reach the middle income status but it is observed that in the recent years there is a loss of momentum in its efforts.
While a drop took place in two key indices, Economic Affairs Commonwealth Secretariat Former Director Indrajith Coomaraswamy pointed out that in the World Economic Forum Competitive Index the nation slipped from 52 in 2012 to 68 in 2013, and has shown a slight improvement in 2014 where it stands at 65. In the Doing Business Index it has slipped further from 81 in 2012 to 85 in 2014.
“So clearly there has been a loss of momentum. On these indices there can be dramatic improvements,” he said during his presentation on the session ‘Hub concept for fast tracking economic development’.
Taking Georgia as a case in point, the country went from 112 from 183 countries in the Doing Business Index, to a top 20 ranking in five years. In the process it is the FDI as a percentage of GDP that doubled. “If you look around and the success stories in South East Asia, the underlying theme in every instances, be it a large economy like China or a small economy like Singapore, FDI driven exports has been a crucial path of that success. And clearly that is a challenge that we have ahead of us, in terms of FDI performance and export performance. There is much that needs to be done,” he added.
On this competitiveness front, while there has been no increase in tariffs, the number of import taxes has increased which reduces the incentives that enhance competiveness. Coomaraswamy stressed that such is not compatible with the hub based growth strategy.
“If the aim is to have an outward strategy, the hub strategy by definition is outward looking. In which case the economy is getting closed, there is a fundamental contradiction,” he said at the session moderated by Ceylon Chamber of Commerce (CCC) Past Chairperson Dr. Anura Ekanayake.
Sri Lanka as a financial hub: Challenges and opportunities
On making Sri Lanka a financial hub, Central Bank Deputy Governor Dr. P. Nandalal Weerasinghe stated that over the past few years the 
financial sector indicators have moved to benign territory, thereby portraying improved financial system stability.
He shared that to further strengthen the financial sector, several initiatives have been taken by the monetary watchdog which include, continued gradual relaxation of exchange control regulation, allowing and encouraging increased access to global financial markets and encouraging capital market development.
“The CB has continued to strengthen foreign reserve buffers resulting in exchange rate and financial infrastructure stability by initiating a Central Counterparty (CCP) system, common payments switch. Moreover, it continues to aim at increasing market confidence by maintaining economic and price stability, allowing a downward shift in the interest rate structure,” highlighted Weerasinghe.
However, Weerasinghe noted that a number of necessary measures are needed to help develop Sri Lanka as a financial hub.
The first is to have a provision of physical and legal infrastructure and human resources for a futuristic business centre. This would need to be complemented with extensive network client connections with business advantages such as access to a larger market in the neighbourhood or an international shipping or aviation route which demand frequent services together with competitive incentives.
The second is to have access to human capital that are literate in finance and business, either domestically or by provisioning facilities to attract those from abroad. The third is to have high calibre telecommunications infrastructure along with state-of-the-art information technology systems to facilitate modern trading, exchange and transfer platforms.
While facilitating investment promotion and protection, he stressed the need to build a conducive business environment and follow international standards of regulations and best practices.
“Evidence suggests that a country could rise from complete obscurity to the status of a global player within a space of few years. In that context, Sri Lanka’s diversified growth strategy based on the 5+1 hub concept is likely to help overcome many challenges and assist the financial sector to emerge as an important regional and global player,” said Weerasinghe.
What will it take to make
SL’s capital market lead economic growth?
While capital markets are where long-term financial instruments whose maturity is indefinite are traded, it provides an effective source of investment in the economy. It channels savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses and government.
Pointing out the contribution made by capital markets for economic development, Securities and Exchange Commission (SEC) Chairman Dr. Nalaka Godahewa noted that it provides an important alternative source of long-term finance for long-term productive investments. It diffuse stresses on the banking system by matching long-term investments with long-term capital, provides infrastructure development capital that has strong socio-economic benefits and promotes public-private sector partnerships to encourage participation of private sector in productive investments.
Stressing the capital market sphere is an important pillar in any economy, Godahewa noted that for Sri Lanka it is imperative for the investment level to be about 33% of GDP. However, he acknowledges there are challenges in a number of areas in reaching that target.
“Liquidity is an issue with limitation on large parcels and the 2011-2012 loses are still haunting active retail investors. A limitation is also the existence of a narrow product portfolio where equity instruments are of 98% and debt instruments are only 2%.
“While there is also a lack of independent and consistent research, large state funds are not yet active in the market to their full potential and as a result, mid cap stocks still have not got due attention,” observed Godahewa.
He added that with most companies still seem to be having alternate sources of funding to support their expansions and new projects, the excess liquidity in the banking system pulls the corporate away from engaging in the capital market.
Transforming Sri Lanka into a world class ports and shipping destination
Situated in the middle of the Indian Ocean, Sri Lanka has been able to be active player in the maritime sphere in the region.
Speaking at a session titled ‘Development Challenges for Fast Tracking Economic Development,’ Sri Lanka Ports Authority Chairman Dr. Priyath Bandu Wickrama said: “With the central location the nation can develop to become a maritime centre in the Indian subcontinent. We have natural gift, the location. It is almost like a butterfly, the centre connecting east and west of the world.”
He emphasised that the maritime hub has an extremely important role in the global trade economy with changes taking place in international trade, container shipping, ports development, logistics, practical logistics and terminal performance, facility design, and other areas. And Sri Lanka with its ideal geographical position and stable government could develop to become one of the most important maritime centres in the world.
“We are in the process of attracting business communities, those in the maritime industry and as well as the supporting services by building relationships, trust and understanding, and networking with a view to establish their offices in Sri Lanka. We have enormous opportunities in this regard by incentivising maritime related businesses so that they choose Sri Lanka as their eastern base oppose to Singapore, Hong Kong, Dubai, and Kuala Lumpur,” shared Wickrama at the session chaired by CIC Holdings Managing Director/Chief Executive Officer Samantha Ranatunga.
With maritime related business relocating from Europe and countries such as Singapore deemed as expensive, the Ports Authority is confident that the nation can take the maritime industry as a key part of its development strategy since it is well positioned to attract business. He noted this will be possible with capacity building, tax incentives, developing trade zones, and developing expertise in maritime related professionals.
Making Sri Lanka an international IT and knowledge services outsourcing hub
While technology and the related industry have tremendous potential to accelerate the development of the country, the IT industry can create an economic impact along with value addition, said SLASSCOM Chairman Madu Ratnayake.
“As an industry it is a great place to be, but what we really need to understand is whether Sri Lanka can comp in the global market with this and if it has the opportunity to participate in the global industry,” he said.
The global industry shows that the demand for IT and IT related services is about $ 350 billion and only about a little over half has been fulfilled, 
which indicates tremendous potential.
Exploring why it makes sense for Sri Lanka to follow this route, Ratnayake pointed out that in 2007 Sri Lanka saw the uptake of the industry where a vision was set to reach earnings of $2 billion by 2016. Looking at the industry’s performance in the past five years, from a workforce point of view it has grown by 20%, from revenue perspective exports has grown by 200%, and the number of companies has increased by 50%.
Stating that although over the five years there has been tremendous progress, Ratnayake noted a lot more has to be done to reach the set targets. “To reach the targets we need to continuously position Sri Lanka as a destination for outsourcing. We are not doing this well at all. If we do a fraction of what is done for tourism, there will be tremendous growth. We have to continue to innovate on the talent supply so we need to have a liberal focus on how we build talent in technology and accounting. The business environment needs continuous focus, the infrastructure and environment has to be at the right level to compete,” he expressed.
Building a world class export economy
Sri Lanka’s recent export performance has been far from satisfactory since 2000 as there has been a decline in exports to GDP ratio and world export share, along with a steep fall in Sri Lanka’s share of exports from developing countries.
Noting that Sri Lanka has fallen behind its competitors, Institute of Policy Studies (IPS) Executive Director Dr. Saman Kelegama said the nation’s export problem is fundamentally “homegrown” and cannot be blamed on world markets.
“A country’s trade policy has a direct bearing on its ability to compete in an international environment. Sri Lanka’s lacklustre performance in the export sector in the post-2000 period could in part be explained by changes in the country’s trade policy over the years,” expressed Kelegama.
In 2008 Parliament passed the Strategic Development Projects (SDP) Act empowering the minister in charge of the BOI to grant exemption to ‘strategic development projects’ from all taxes for a period of up to 25 years. In the Act a strategic development project is defined as be ‘a project which is in the national interest and which is likely to bring economic and social benefits to the country and which is also likely to change the landscape of the country, primarily through provision of goods and services which will be of benefit to the public, substantial inflow of foreign exchange, substantial employment, and technology transfer’. “This definition leaves a great deal of room for discretion in the investment approval process,” asserted Kelegama.
Pointing out that the exchange rate plays a pivotal role in determining a country’s export competitiveness, direct policies to sustain an overvalued or undervalued exchange rate in the rupee may adversely impact export competitiveness.
“In nominal terms, the rupee has experienced periods of appreciation as well as depreciation. However, in real terms, the rupee has been appreciating steadily. While the policy adjustment in February 2012 from a fixed exchange rate regime to a more flexible regime saw a sharp depreciation of the rupee in nominal terms, the accompanying real exchange rate deprecation has been rather modest. A persistently over-valued exchange rate adversely impacts export competitiveness,” he added.
To formulate and implement a clear strategy for long-term export development, Kelegama said Sri Lanka should re-embrace a more consistent 
liberal trade and investment regime, work on macroeconomic fundamentals and stability, improve trade facilitation process, assistance to upgrade technology and R&D, formulate measures to attract more FDI into export-oriented industries and have a strategic focus on product diversification.
Shifting the power paradigms
Energy Sector Specialist Tilak Siyambalapitiya opined that comparing to other Asian regions Sri Lanka has been able to overcome the challenge of meeting the electricity demand, not only in business and urban areas, but almost for every citizen in the country as it has passed the 95% mark in household electrification.
With the basic requirement of the electricity industry being achieved, the question on the price being competitive still remains unanswered.
“What will it take to produce and deliver power at a competitive price? First we need to have continued faith in power generation and fuels. Most will disagree but when looking at how other countries are producing their electricity, in many it is not solar or wind that is bringing power, but it is conventional technology. So therefore I would still say we need to have faith in continued faith in conventional technologies and fuels and thereby a caution approach to renewable energy development, both small and large scale,” he said.
While front line service delivery of the industry need tremendous improvements, at the upper levels it is observed that the business is not run the way it typically should.
“We need a fully empowered regulator. While we already have one, the Public Utilities Commission, there, but there needs to be a lot of improvements and changes. The government from its side should take up its role as the policy maker and owner of this industry since presently it seems to be the operator,” said Siyambalapitiya at a session moderated by CMA Vice President M. B. Ismail.
He added that needed is also a change in the customer mindset as they should be willing to pay for their consumption. If they customers continue to ask for subsidies, then someone has to pay for those subsidies, which impacts the price.
Expediting infrastructure development
Urban Development Authority Deputy Director General Projects Nihal Fernando recalled the strategy formulated by the ‘Mahinda Chinthana’ 
for the future of the country. In that vision he pointed out that tourism and FDI has been identified as key and it is imperative both are achieved through a collective effort.
“In making Sri Lanka the emerging wonder of Asia, we should have infrastructure development spread across the country. Not only centralised to Colombo, limited to suburbs, district capital and provincial capitals, but also covering areas that still have rural characteristic. That is how we can develop the entire country,” expressed Fernando.
Commending the infrastructure projects carried out by the Government, he said the private sector also needs to extend a helping hand in this regard.
“Development of some areas has been sponsored by private sector companies as a part of their Corporate Social Responsibility (CSR). This has to continue. Custodians of the private sector will have to convince their management in adopting a town of choice under CSR. Doing so will allow making such towns feasible for FDI, attractive for tourism and better for people to live,” he said.
Fernando added that developed infrastructure should be enjoyed by the public since increase usage of the facilities will create a demand for development, which in turn can help expedite the provision of infrastructure.
Positioning Sri Lanka as Asia’s top destination for tourism
While Sri Lanka possibly has profile to qualify and work towards becoming a top destination, Rainforest Ecolodge Chairman Prema Cooray explained that a top destination is not measured by the number of people brought into the country, but against its size, profile and strength, the carrying capacity and quality of service offered to a foreign traveller.
“Sri Lanka can really dive into the future where we can qualify and be a leading destination in tourism. Tourism has a huge trickledown effect in Sri Lanka since our leakage is very low, about 10- 15 % for every dollar we earn. It has a synergistic impact on the SME sector and in terms of income distribution there can be huge equity since tourism is covered in most parts of the country. It is an industry that Sri Lanka should justly accelerate and reach its potential,” he stated.
In 2009, after the long ethnic conflict came to an end a few industry leaders came together at the request of the Government to formulate a way forward. They set out to see what could be done for tourism in terms of reaching Asia’s top destination status.
According to the tourist board by 2016 Sri Lanka would have 32,000 rooms. Noting this is revenant for the registered sector, he added that relevant in today’s movement is also the informal sector which should be taken into account.
“There is a huge upsurge in the informal sector and tourists are moving to that, and in the formal sector the growth is modest. This is attributed to the technology, and the security position is not compromised,” added Cooray.
How can SL lead to attract FDIs?
Last year the global FDI inflow was recorded as $ 1,460 billion and the majority of this, 52%, was absorbed by developing economies. There being a shift in the last few years from the developed to the developing economies for FDIs, BOI Executive Director Research and Policy Advocacy Dr. Nihal Samarappuli opined it is imperative to look at the performance within the region in this regard.
Countries such as Bangladesh, Sri Lanka, Myanmar, Indonesia, Vietnam, and Thailand had performed similarly in attracting FDIs in 2001 but in 2012 emerging clusters were observed. At the bottom are Sri Lanka, Myanmar and Bangladesh, in the middle level are Vietnam, Thailand, and Malaysia, and at the top is Indonesia, who has taken off in the last few years.
“Sri Lanka is supposed to be concerned with this since it has not performed to expectation. Although Asia is attracting FDIs, countries such as Sri Lanka are not getting the expected inflow which is resulting in a widening gap in the regional competitors,” expressed Samarappuli.
From 1978 to date, Sri Lanka has received $ 9.9 billion worth FDI of which 72% was received since 2006. From 2011 the country recorded 37% of the total FDI stock.
Last year Sri Lanka recorded about $1.3 billion FDI which is 2% of the total GDP. “The country is looking at reaching $ 100 billion economy by 2016 of which 5% should be derived from the FDI, which is about $ 5 billion. We need to look at how we are going to get from $1.5 billion to $ 5 billion in the next three years and that is a challenge. If we can manage that Sri Lanka can call itself a top destination for attracting FDI,” he said.
Pointing out the way forward and strategies to reach that goal, he said the first is to improve business ranking and seek preferential market access with strong economies. Along with that, import substitution industries should be encourages and competitive industry clusters should be created.
Propelling Sri Lanka as a knowledge hub
A knowledge hub is a location where one can source skills and capabilities for the creation of products, services, knowledge and also for the creation of wealth. Some countries have targeted industries so that the country and the economy will be known for a particularly industry.
“When a country targets an industry that is the time FDI comes in. Sri Lanka needs to decide if it is going to focus on knowledge, resource base or agriculture. The best bet is the services sector. If we get the skills right, this is an area that we can develop,” said Commercial Bank Chairman Dinesh Weerakkody.
He noted that for the country to realise its macro goal, it has to develop its skills, capabilities and infrastructure. “We have the knowledge capabilities but we don’t deliver the skills and capabilities. While many companies complain on the mismatch on availability of talent and the demand, it is their fault for not willing to invest in skills training on a candidate who has the required knowledge. They want to find people who are ready to go, that will not happen. No one is willing to invest,” asserted Weerakkody.
Touching on the challenges, he pointed out that of the 250,000 students who sit for the GCE A/L, only 9% or 25,000 students get admissions to the university, leaving out 225,000 students. Nearly 60% of the students who sit for the exam satisfy the minimum requirement. Around 150,000 students are up to the standard and of which 64% is female. Therefore only 12%-15% of the eligible students are admitted to the universities.
Between 1980 and 2012, Sri Lanka’s life expectancy at birth increased by seven years. This typically means that years of schooling increased by 2.3 and expected years of schooling increased by 2.7 years. All of which indicates that more seats are required.
“The biggest challenge we have is to get all agencies and the private sector to work towards a common goal, i.e. to create the skills and capabilities that the economy needs. To do that however we would need to have one powerful body or person with a clear mind to take control of education from primary to higher education and ensure the entire system works together,” expressed Weerakkody.
How can the hub concept provide new opportunities for Sri Lanka?
Connecting the apparel industry to the hub concept, Brandix Lanka Chief Financial Officer Hasitha Premaratne ventured on the topic as to how the industry can be taken to the next level.
With a population of 21 million, Sri Lanka achieved exports worth $ 10 billion of which $4 billion were from apparel. Singapore, with a smaller population achieved $ 410 billion exports.
“This is where the hub role comes into play Since Singapore reached the $ 410 billion exports with that strategy. We are talking about a buying and selling game with a limited value addition. Incremental exports are what Sri Lanka can focus on,” he said.
Pointing out that resource workforce is not the barrier, Premaratne said the biggest cost in the current context is the open capacity. ‘We cannot load the business since we do not have people to run those lines and this is going to become worse once the tourism and other sector booms. The value addition is not manufacturing, here we are not talking about a factory, it’s about white color jobs doing different types of manufacturing in the apparel space,” said Premaratne.
In the last 10 years, with the quotas going out, the industry has been quite resilient and has managed to take the lead.
On the global supplier base for apparel, 60% comes from Asia and in that 37% is from China. South Asia holds 10%, South East Asia holds 9% and West Asia holds 4%. However, with China’s increasing cost of production and as they plan on moving up the ladder, others in the region can tap into this space and Sri Lanka will need to be the front for that to deliver value, he said.
“In the buyer retailer map South Asia is the much sought out destination. China ranks number one and they will remain that way for a longer period, but the subcontinent will be one of the key sourcing destination. In the map the region does not just have the location but has the fundamentals as well. The resources, scalability, and the cost advantage associated when looking at the South Asia region collectively,” expressed Premaratne.
Pix by Upul Abayasekara
Coverage of Day 2 will be featured at a later date
