Forty Is Not a Road Safety Policy

By Dhananath Fernando

Originally appeared on The Morning

There is now a conversation about introducing a minimum age of 40 for those who drive three-wheelers as an occupation. The Government has subsequently clarified that no decision has been made. But the proposal itself is worth discussing because it reflects a much broader problem in the way we approach public policy. 

Whenever we see a problem, our first instinct is often to regulate it. Over the years, there have been many proposals to regulate three-wheelers, including a separate regulatory authority, registration systems, and different licensing arrangements. In fact, Parliament amended the National Transport Commission (NTC) Act in 2025, expanding the NTC’s mandate to cover three-wheelers and other forms of passenger transport. 

Therefore, the question today is not whether the Government has the power to regulate. The real question is how that power should be used. 

A Sri Lankan success story 

In a market economy, regulation should have a clear purpose. We regulate where there is a genuine safety issue, fraud, information failure, or harm to others. We should not regulate simply because we do not like the employment choice someone has made. 

In many ways, the three-wheeler is actually a Sri Lankan success story. 

According to the Department of Motor Traffic, Sri Lanka had 1.2 million registered three-wheelers by the end of 2025. They have created an entire ecosystem around leasing, insurance, repairs, spare parts, tourism, and, more recently, digital mobility platforms. 

The reason three-wheelers became so popular is quite simple. Entry is relatively easy. Compared with starting many other businesses, someone can obtain a three-wheeler, find customers, and start earning an income relatively quickly. That flexibility matters, particularly in an economy where formal employment opportunities are limited. 

Three-wheelers also fill a gap left by our public transport system. A bus or train can take you along a main route. But getting from your house to the railway station, from the bus stop to your office, or travelling between two places that are poorly connected is a different problem. The three-wheeler has solved part of that problem without waiting for a government master plan. 

The missing economic point 

This is why the proposal to keep people below 40 away from the occupation misses the economic point. 

If young people are choosing to drive three-wheelers because better-paying jobs are unavailable, banning them from driving a tuk-tuk does not magically create a better-paying job. The solution is to create an economy where a 25-year-old has better alternatives. 

If manufacturing expands, tourism grows, construction improves, businesses invest, and new companies are created, wages will rise and people will move naturally towards better opportunities. We should make better jobs more attractive, rather than making existing livelihoods illegal. 

The same principle applies to proposals for additional licences and permits. Every extra licence has a cost. There is the fee, the time spent obtaining it, and the discretion given to an official to approve or reject it. For someone earning a daily income, even losing one working day matters. 

Technology has already solved many of the problems policymakers are trying to solve through regulation. 

Ride-hailing platforms identify the driver and vehicle, display the fare or an estimate, track the journey through GPS, and allow passengers to rate drivers. Payments can be digital. A passenger has a record of the trip before, during, and after the journey. 

Ratings also create incentives. A driver who repeatedly provides poor service risks losing customers and earning opportunities. A good driver can build a reputation. This is market regulation through information and consumer choice. 

One major Sri Lankan platform, PickMe, reported more than 167,000 independent drivers and delivery riders by March this year. It also reported that driver net earnings increased by more than 14% during the financial year. That does not mean every driver is earning well, but it demonstrates the scale at which technology is now organising what was previously a highly informal market. 

The question of safety 

Then there is road safety. There is a popular belief that three-wheelers are among the main causes of fatal accidents. Three-wheeler drivers certainly are not famous for perfect lane discipline. But policy should be based on evidence rather than reputation. 

Table 1 containing Ministry of Transport data shows the number of vehicles involved in fatal accidents. There are two important qualifications. First, these statistics show vehicles involved in fatal accidents. They do not tell us which vehicle caused the accident. 

Second, raw numbers alone are not sufficient to calculate risk. We should ideally compare accidents against the number of active vehicles and, more importantly, kilometres travelled. A commercial three-wheeler may travel many more kilometres every day than a privately owned vehicle. 

So these numbers cannot prove that three-wheelers are perfectly safe. But they certainly cannot justify an arbitrary minimum age of 40 either. 

Regulation must target the problem 

Three-wheelers remain an important part of Sri Lanka’s mobility system. National transport statistics for 2025 puts their passenger modal share at around 20% in 2024. That is still a substantial share of how Sri Lankans move. 

Of course, basic safety standards, vehicle fitness, insurance, enforcement of road rules, and protection against fraud are necessary. Dangerous driving should be punished regardless of whether the driver is 22, 42, or 62. 

But regulation should target the problem. If the problem is reckless driving, enforce traffic laws. If the problem is poor vehicle condition, enforce fitness standards. If the problem is youth unemployment, create an economy that generates better jobs. 

Keeping a 25-year-old away from a three-wheeler until his 40th birthday solves none of those problems. 

Sometimes the best thing a government can do is not to create another barrier, but to allow people to work, compete, earn, and move when a better opportunity comes along. 

A System That Failed to Connect the Dots

By Dhananath Fernando

Originally appeared on The Morning

Anyone who has tried to send foreign exchange through a Sri Lankan bank knows the drill. The bank asks for the invoice, purpose, source of funds, and supporting documents. Sometimes the questions feel longer than the transaction.

That is why the allegation that as much as $ 1 billion was sent abroad as import payments, while the goods did not arrive, is difficult to digest. The Police has arrested four managers from four private banks. The investigation is still unfolding, and neither the final amount nor individual responsibility has been established by a court.

First, we must get the economics right. This was not $ 1 billion physically removed from the Central Bank’s reserves. Customers would have paid rupees and purchased foreign exchange through commercial banks. 

If the allegations are correct, Sri Lankan wealth moved abroad illegally and extra demand was created for dollars. That is serious, but it does not mean our reserves would automatically be $ 1 billion higher today or that this incident caused the 2022 balance of payments crisis.

A TT is not the crime

The reported payments appear to have been advance Telegraphic Transfers, commonly called TTs. A TT is neither illegal nor unusual. A supplier may demand a deposit before building a customised machine that takes months to arrive. Small Sri Lankan importers often lack the bargaining power to refuse.

A letter of credit is not an iron shield either. Banks examine documents, not containers. If an invoice is fabricated, a company is a shell, or insiders collude, both TTs and letters of credit can be abused.

Misinvoicing includes underinvoicing to reduce tariffs, overinvoicing to move extra money abroad, and phantom imports where no goods arrive. High and complicated border taxes encourage underinvoicing. But the answer is not to label every importer or exporter a criminal. Our exporters need imported machinery, raw materials, and packaging.

The failure between institutions

The alleged fraud appears to have travelled through the gaps between institutions. A bank sees the customer and payment. Customs sees the goods. The company registry records directors and shareholders, the Inland Revenue Department sees turnover, and the Financial Intelligence Unit (FIU) sees suspicious patterns. Auditors and bank supervisors are expected to test the controls.

A connected system should see the whole pattern. Repeated large advances without matching Customs declarations should raise a red flag. So should a shell company sending amounts that do not match its business. If several institutions see warnings but no one connects them together, compliance exists only on paper.

Sri Lanka still operates under Customs Ordinance No.17 of 1869. Customs reform and digitisation have been attempted many times, but have faced resistance and delay. This is the price of postponing reform. The 2026 requirement for a unique transaction number for import-related foreign exchange payments is a sensible start, but it must connect the payment to the Customs declaration, arrival, delay, or refund.

The system must also understand genuine business. A delayed shipment is not automatically fraud. One delayed order may need an explanation. Repeated unmatched payments, hidden beneficial owners, and transfers inconsistent with turnover need immediate investigation.

Independent, but accountable

It would be easy to place the entire blame on the Central Bank. That would be neither fair nor useful. The Central Bank cannot inspect containers, while Customs cannot see the complete behaviour of a bank customer. Commercial banks and their boards are responsible for Know Your Customer (KYC), internal controls, and suspicious transaction reporting. Auditors, company regulators, and law enforcement also have duties.

But collective responsibility cannot become nobody’s responsibility. Bank supervision sits with the Central Bank, while the FIU collects, analyses, and disseminates information on suspicious transactions. The public deserves to know whether warnings were filed, patterns identified, and action taken. Banks, auditors, and Customs must answer the same questions.

The Central Bank is, comparatively, one of Sri Lanka’s better-managed public institutions. Its independence must be protected because monetary decisions should not serve short-term politics. However, independence is not immunity from scrutiny. Independence and accountability must travel together. Demanding answers should not become an excuse to weaken the institution.

The response should not be a blanket ban on TTs or a requirement that every importer use an expensive letter of credit. Such rules raise costs, hurt smaller businesses, and may push genuine transactions into informal channels. Modernise the Customs law, connect the databases, reveal the real beneficial owners, publish relevant audit findings, and hold individuals and institutions accountable where failures are proven.

Rather than criminalising deliberate unauthorised transfers, we have to look at the overall policy framework that has failed us. Creating an offence after the money has gone is weaker than a system that raises the warning before the next payment leaves.

This is not a story that trade is dangerous or that Central Bank independence has failed. It is a story of old laws, disconnected databases, and reforms delayed until they become headlines. When institutions work in silos, fraudsters work as a network. 

The billion-dollar question is not only who sent the money. It is why the red flags did not rise together. Sri Lanka cannot postpone that reform again.

The Rules That Keep SMEs Small

By Dhananath Fernando

Originally appeared on The Morning

Small and Medium-sized Enterprise (SME) development is a favourite topic of every government. This week, the Ceylon Chamber of Commerce held Scale Up 2.0, its National SME Forum for 2026. The attention is understandable. SMEs form the bulk of Sri Lanka’s businesses and provide a large share of employment across agriculture, manufacturing, and services.

The response from governments is also familiar. We offer concessional loan schemes, often with multilateral agencies. We organise technical training programmes and build institutions such as the Ministry of Industry, Industrial Development Board, and National Enterprise Development Authority. Private banks have SME desks and special credit schemes. We then encourage entrepreneurs to export, enter global markets, and become more competitive.

All this may be useful. But we rarely ask the harder question: do Sri Lanka’s SMEs remain small because they lack support, or because our regulations make growth too expensive?

Diagnosing the ailment

We usually describe the SME problem as a financing problem. But it may be more accurate to call it a scaling problem.

For a small business, scaling means hiring the next worker, importing a new machine, opening another branch, registering for another tax, or supplying a larger company. At each stage, the business encounters another licence, approval, report, or compliance requirement.

Large firms can hire lawyers, consultants, accountants, and retired officials to navigate the system. A small entrepreneur often has to do it alone. Every day spent following up on an approval is a day taken away from customers and production. Every delay ties up working capital.

The regulation may appear neutral on paper, but its cost is not neutral. A fixed compliance cost is much heavier for a small company than for a large one. In practice, it becomes a ‘size tax’ on SMEs.

Sometimes this tax appears suddenly. When a business crosses a particular turnover or employment threshold, it may face a new set of taxes, audits, reports, or labour regulations. Growth then becomes a cliff. The rational response may be to remain informal, split the business, avoid the next employee, or decline a large order.

We then offer the same entrepreneur a concessionary loan to grow. But a loan cannot solve regulatory uncertainty. It can finance a machine, but it cannot guarantee that an approval will arrive on time. A development bank cannot compensate for a business environment that punishes firms when they expand.

This does not mean businesses should be exempt from tax, labour, environmental, or consumer protection laws. Good regulations are essential for a functioning market. But every regulation must address a clear and measurable harm, and it should do so at the lowest possible cost.

Treating the underlying problems

Many Sri Lankan laws still carry an old assumption: commercial activity is suspicious unless the State permits it. A modern economy should begin from the opposite position. Economic activity should generally be allowed unless it causes measurable harm to another person or the public.

A law is not necessarily bad simply because it is old. But an old legal framework can become a serious problem when it governs a modern economy.

The Customs Ordinance No.17 of 1869 is a good example. It has been amended many times, but its basic legal architecture was designed for a paper-based trading world. Documentary requirements, broad officer discretion, uncertain timelines, and complex penalties all increase the cost of importing and exporting.

Large companies can spread these costs across many shipments. A small exporter cannot. One delayed shipment can mean losing a buyer, missing a season, or facing a cash-flow crisis.

Sri Lanka needs a modern Customs act built around electronic documentation, risk-based inspections, clear statutory timelines, transparent rulings, and proportionate penalties. For an SME, faster Customs clearance is not merely a matter of convenience. It can determine whether the company is competitive enough to export.

Free trade agreements can provide valuable market access. But market access is useful only if Sri Lankan firms can reach those markets competitively. Rules of origin, certification, and buyer requirements also carry costs. If an SME must first struggle through expensive and unpredictable regulations at home, a trade agreement alone will not make it an exporter.

Land is another part of the same problem. For many small entrepreneurs, land is the most valuable asset they own. But unclear ownership, weak titles, and long delays in settling disputes make it difficult to use that land as collateral. Improving land titles, digitising records, and resolving commercial disputes faster would address part of the financing problem at its root.

Instead, we often leave the underlying problem untouched and create another loan scheme to treat the symptom.

Regulatory clean-up crucial

Sri Lanka needs a serious regulatory clean-up. Every licence, permit, and approval affecting a business should be reviewed. The institution responsible should explain what harm the regulation prevents and whether the same purpose can be achieved more simply.

New regulations should disclose their likely cost to a small firm. Low-risk approvals should have firm deadlines. If an agency fails to respond within that period, approval should be granted automatically. Rules that no longer serve a clear purpose should expire.

In a healthy economy, SMEs will always be large in number. Some entrepreneurs will choose to remain small. Others will become suppliers to larger companies, join export value chains, and slowly climb the ladder. A few may eventually become large Sri Lankan companies.

The objective is not to eliminate small businesses. It is to make remaining small a choice, rather than a regulatory destiny.

Sri Lanka’s SME problem is not simply that our entrepreneurs think small. Too many of our laws make scale expensive, uncertain, and permission-based. If we genuinely want SMEs to grow, we should not offer only another loan, institution, or seminar.

We must remove the rules that make hiring the next worker, buying the next machine, and entering the next market unnecessarily difficult.

Your EPF is your money

By Dhananath Fernando

Originally appeared on The Morning

Cabinet has approved the drafting of amendments to the Employees’ Provident Fund (EPF) Act. The Government has indicated that the objective is to improve services and respond to present social, economic, and technological changes. The complete bill is not yet publicly available. However, this is a valuable opportunity to reconsider whether the EPF is designed around the institution or around the people whose money it holds. 

For most private sector workers, the EPF will probably be the largest pool of savings they will ever own. It may finance a home, medical treatment, or their retirement. It is not a Government grant or a gift from an employer. It is part of a worker’s earnings, set aside every month for the future. 

Therefore, every amendment should begin with one simple principle: your EPF is your money. 

EPF returns 

By the end of 2025, the EPF had a net worth of nearly Rs. 5 trillion. Just over 3.1 million member accounts received contributions during the year. Yet Sri Lanka’s labour market is much larger. Many informal and self-employed workers remain outside regular retirement savings arrangements, while gig and platform-based work have made the traditional definition of employment increasingly difficult to apply. 

Compared with the main public sector pension scheme, which is financed from current tax revenue, the EPF is based on a more sustainable contributory principle. Employees contribute 8% of their monthly earnings, while employers contribute another 12%. That principle should be protected. 

However, being contributory does not automatically protect the value of a worker’s savings. What matters is not only the interest rate shown on the statement, but what that money can actually purchase. 

The EPF paid an interest rate of 9% in 2022. But annual average inflation was 46.4%. This produced a real return of approximately minus 25.5%. In 2023, the EPF paid 13%, but with inflation averaging 17.4%, the real return was about minus 3.7%. 

Conditions improved significantly in 2024, when an 11% interest rate and inflation of 1.2% produced a real return of approximately 9.7%. The EPF declared 10.75% for 2025, when annual average inflation was slightly negative. 

The lesson is not that the EPF always produces poor returns. Recent returns have been reasonable. The lesson is that a nominal interest rate can provide a misleading sense of security when inflation is high. Workers ultimately retire with purchasing power, not percentages printed on a statement. 

There is also the question of how the money is invested. At the end of 2025, approximately 94.5% of the EPF investment portfolio was held in Government securities. This may be understandable given the size of the fund and the limited depth of Sri Lanka’s capital markets. Nevertheless, it means that workers’ retirement savings are heavily connected to the financial position of the Government. 

Amendment priorities 

Following domestic debt restructuring, the governance of the EPF can no longer be treated as a purely technical matter. The roles of administrator, custodian, investment manager, and regulator must be clearly defined. 

Investment policies, costs, returns, and risks should be disclosed regularly in a form that an ordinary member can understand. Every member should have easy digital access to a complete statement showing contributions, returns, and performance against inflation. 

The first priority of the amendment should be better service and enforcement. When an employer delays contributions, it is the employee who loses both money and interest. Digital matching of salary deductions and employer remittances, automatic notifications to employees, time-bound recovery procedures, and compensation for lost interest should be considered. A worker should not discover after retirement that contributions deducted from the salary were never remitted. 

Accounts must also become genuinely portable. A person changing jobs should not be left with several disconnected accounts and paperwork accumulated over decades. A single member identity should follow the worker throughout his or her career. 

The amendment should also begin a serious discussion about member choice. This need not mean dismantling the EPF or transferring the entire fund to private operators. The existing EPF can remain the secure default option. But, over time, members could be allowed to direct a limited portion of future contributions to licensed and regulated retirement funds. 

Different workers have different needs. A younger worker may accept some investment risk for a potentially higher long-term return. Someone closer to retirement may prefer greater stability. Members could choose between conservative, balanced, and growth-oriented funds, including funds that automatically reduce risk as retirement approaches. 

Choice without protection, however, is not genuine freedom. Private managers would require strict rules on capital, independent custody, fees, conflicts of interest, audits, and disclosure. Returns should be published after deducting all fees and compared against inflation and common benchmarks. The objective must be competition based on performance, not aggressive marketing. 

Security of retirement savings 

The changing labour market must also be considered. Self-employed people, freelancers, and workers with irregular incomes should have access to simple and flexible retirement accounts. Contributions could be made in smaller amounts through digital payment systems rather than requiring a conventional monthly employer-employee relationship. 

The cost of creating formal employment also matters. For every Rs. 100 in gross earnings, Rs. 20 goes to the EPF – Rs. 8 from the employee and Rs. 12 from the employer. The employer contributes another 3% to the Employees’ Trust Fund, in addition to meeting gratuity obligations. Although these payments provide important benefits, the entire package affects the cost of hiring a worker. 

Therefore, reform should not simply increase contribution rates. It should improve compliance, reduce paperwork, broaden coverage, and make formal employment easier to create. 

Better-managed retirement savings can also provide long-term capital for productive businesses, corporate debt, infrastructure, and innovation. But retirement security must come first. EPF money should never be directed towards projects merely because they carry a development label. Every investment must be judged on risk, return, and the interests of members. 

Retirement savings are not secure merely because the Government manages them. Nor are they automatically secure simply because a private company manages them. Real security comes from clear ownership, professional management, transparent accounts, sensible diversification, low fees, effective regulation, and member choice. 

Above all, it requires low and stable inflation. No amendment to the EPF Act can fully protect workers if the value of money itself is repeatedly weakened. The best protection for the retirement savings of Sri Lankans is a stable rupee, supported by sound monetary policy. 

Do we need another State company to manage bus terminals?

By Dhananath Fernando

Originally appeared on The Morning

Among the recent Cabinet decisions was a proposal to establish a new State-owned company to operate multimodal transport hubs such as Makumbura and Kadawatha. 

At first glance, this may sound like a sensible idea. Anyone who uses public transport knows that Sri Lanka badly needs better terminals. Buses, trains, taxis, parking facilities, and passenger information systems must be properly connected. Toilets must be clean. Timetables must be reliable. Passengers must be able to move from one mode of transport to another without confusion. 

But the real question is not whether these facilities should be managed better. The question is whether we need another Government company to do it. 

Sri Lanka has tried this model before. The common facilities at the Southern Expressway interchange are operated through Canowin Hotels and Spas Ltd., a Government-linked company associated with Canwill Holdings and State-owned institutions. Although the facility remains at a reasonable standard, anyone who has visited it would know that its commercial and service potential is much greater. 

The Government also attempted a similar approach with metro bus operations by setting up a new company and injecting public money into it. Every such company requires a board of directors, senior management, office space, staff, vehicles, and an initial capital contribution from the Treasury. Before a single passenger receives a better service, taxpayers must first finance another institution. 

We have seen a smaller version of the same problem at the renovated Central Bus Stand in Pettah. A large amount of attention and public money went into reopening the facility. Yet within a very short period, even some of the washroom facilities had been damaged. 

A better management model

This is not simply a problem of investment. It is a problem of maintenance, incentives, and accountability. 

Multimodal transport hubs, airports, ports, and large terminals require specialised management skills. They must deal with thousands of passengers, multiple transport operators, retail spaces, security, cleaning, traffic flows, ticketing, and commercial activities. The quality of the service depends on countless small decisions being made every day. 

Governments are generally not good at making those decisions quickly. They do not have the same flexibility in hiring, procurement, pricing, and operations. More importantly, those responsible for failure rarely face any direct consequences. 

If a washroom is dirty, a signboard is broken, or a timetable is not displayed, which official is held responsible? If passenger numbers decline or commercial spaces remain empty, who bears the loss? In most Government institutions, the answer is the taxpayer. 

A better model is already available within Sri Lanka’s transport sector. 

The Colombo International Container Terminals and the South Asia Gateway Terminals operate within the Port of Colombo with significant private sector participation. The Government remains the landlord and retains an important regulatory role, but private operators bring capital, technology, management systems, and international expertise. 

This model is not perfect. The Government continues to play multiple roles as owner, shareholder, and regulator. That can create conflicts of interest. But it is still more effective than the Government attempting to operate every terminal directly. 

The lack of progress at the East Container Terminal provides a useful contrast. When politics, State ownership, and operational decisions become mixed together, projects are delayed and opportunities are lost. 

The Government’s responsibility 

The same principle can apply to multimodal transport hubs. 

The Government can retain ownership of Makumbura, Kadawatha, and other transport centres while allowing professional operators to manage them under clearly defined contracts. This can be done through a public-private partnership, a build-operate-transfer arrangement, a concession, or a management contract. 

The contract should specify the standards expected from the operator: cleanliness, safety, passenger waiting times, availability of information, maintenance of toilets, parking management, retail services, and accessibility for people with disabilities. 

Performance indicators must be measurable. Penalties should apply when standards are not met, while the operator should be able to earn a return by improving the facility and attracting more passengers and commercial activity. 

Even when the Government wants to provide public transport at a subsidised rate, it does not have to operate the terminal itself. Subsidies can be transparent and targeted. The operator can be paid based on passenger numbers, service standards, or the availability of essential facilities. 

The Government’s responsibility is to ensure that passengers receive a good service, not necessarily to employ everyone who provides that service. 

Airports around the world, including major hubs such as Delhi and Heathrow, operate with substantial private sector management and investment. Their success does not come merely from building modern terminals. It comes from the discipline, systems, and incentives required to maintain them every day. 

Sri Lanka has many Government buildings and infrastructure projects that were opened with modern technology and great publicity. Within a few years, equipment stops working, repairs are delayed, and facilities begin to deteriorate. 

The difficult part is rarely cutting the ribbon. The difficult part is maintaining the facility after the politicians and television cameras have left. 

The best way to provide a public service

There is also a much larger opportunity. 

Railway stations in areas such as Pettah, Kollupitiya, and Bambalapitiya sit on some of the most valuable land in the country. With the right concession structure, private investors could modernise the stations, improve passenger facilities, and develop commercial spaces without requiring the Government to finance the entire project. 

The railway could retain ownership of the land and receive concession fees or a share of the revenue. Passengers would receive a better service, while valuable public assets would generate income instead of becoming another expense to the Treasury. 

A similar approach could have been considered for metro bus operations. Instead of creating another State company, the Government could have allowed multiple private operators to enter the market under common standards, routes, and digital timetables. 

Even companies with experience in mobility and technology could contribute. A transport management company could use traffic data, passenger demand, and digital payments to utilise buses more efficiently. Platforms such as PickMe and Uber have already shown how technology can make mobility more convenient when barriers to entry are reduced. 

Sri Lanka does not lack buildings, companies, or Government institutions. What we lack are structures that connect responsibility with performance. 

Rather than establishing another State-owned company, the Government should develop a clear policy framework to outsource the management of transport hubs. It should set standards, regulate safety, monitor quality, and protect passengers. 

The Government can own the asset. But it does not have to clean every toilet, manage every shop, park every bus, or operate every terminal. 

Sometimes the best way for the Government to provide a public service is not to provide it directly, but to ensure that someone competent is held accountable for delivering it. 

The paddy problem is more than a price problem

By Dhananath Fernando

Originally appeared on The Morning

I recently joined a television programme to discuss the economics of paddy and rice. Three farmers representing farmer associations joined the discussion, together with former Governor of the Sabaragamuwa Province Prof. Dhamma Dissanayake.

It was difficult to listen to the reality faced by the farmers. Their main request was for a paddy price of around Rs. 120–140 per kilo.

The Government has announced a guaranteed price of Rs. 120, but the Paddy Marketing Board (PMB) does not have the capacity to purchase even a meaningful share of the total harvest. The private sector, meanwhile, purchases paddy at around Rs. 95 per kilo.

One farmer presented his numbers. After nearly three months of work, his profit from one acre was about Rs. 20,000. When you hear numbers like this, it is easy to understand why farmers are protesting.

There is also another complaint. Farmers argue that keeri samba has been imported when there are already adequate stocks in the country, putting further pressure on local prices.

We know there is a problem. It is also very easy to politicise it. But the solutions are more complicated than announcing another controlled price.

Suppose the Government forces private millers to purchase paddy at Rs. 120 per kilo. Either the price of rice will have to increase further, which will be politically difficult, or millers will simply reduce their purchases. Similarly, the Government itself cannot purchase the entire harvest at the guaranteed price.

There are around 346 storage facilities under the PMB, but their total capacity covers only a small fraction of the annual harvest. Therefore, the Government cannot become the buyer of last resort for the entire paddy market.

The problem of storage

When we look at the problem through an economic lens, one of the most important issues is storage.

My colleague Sudaraka Ariyaratne and researchers at Advocata have conducted an in-depth study on the paddy market, which is yet to be published. One important insight from their research is that market power in the paddy sector is closely connected to the ability to store the harvest.

Farmers and farmer organisations generally do not have sufficient storage capacity. Most of the storage capacity is with millers.

Paddy is also different from many other products because a large quantity of the harvest enters the market within a short period. Farmers cannot keep the harvest for long without proper storage. They therefore have little choice but to sell soon after harvesting.

When thousands of farmers bring paddy to the market at the same time, prices naturally fall.

Storage changes that equation. It gives the owner the ability to decide when to sell and allows the harvest to be released gradually into the market.

Therefore, if we genuinely want to empower farmers, part of the solution lies in storage.

One option is to create more storage opportunities for farmers and farmer organisations. Another is to improve access to storage for smaller millers, creating more competition in the market.

But how can farmers build storage facilities? That is where access to credit becomes important. Farmers, farmer associations, or farming communities should be able to borrow and invest in storage and other productivity improvements.

But banks require collateral. Many farmers have very little collateral. Some cultivate land under permits. Others farm rented land and pay part of the harvest as rent. This is where land rights become directly connected to the paddy problem.

We often discuss land rights as a separate economic reform. But without clear and bankable property rights, farmers cannot unlock the value of the assets they already use. The land remains dead capital. Without collateral there is no credit, and without credit there is no investment in storage, technology, or productivity.

The structure of the market

The second major issue is the basic demand and supply structure of the market.

Suppose our farmers suddenly achieve an extremely good harvest because productivity improves. Under the present system, even that success can become a problem. A larger harvest can create an oversupply and push prices down further.

Normally, when a country produces a surplus, exports can become a safety valve. But Sri Lanka has limited opportunities in this area because many of the rice varieties we cultivate do not have strong international demand.

Much of global demand is for long-grain varieties such as basmati. Sri Lanka largely cultivates different varieties suited to our own consumption patterns and agricultural conditions. We cannot simply switch to basmati overnight. Soil conditions, weather, seed varieties, and farming practices all matter.

Therefore, even if we produce a significant surplus, exporting it is not necessarily easy. At the same time, our cost of production remains very high.

During the television programme, one farmer explained how many parts of the process are still highly labour intensive. Paddy is dried on roads and open grounds using manual labour. Workers have to be paid at every stage. Paddy is stored in bags, which then have to be physically carried, stacked, and moved again.

From applying fertiliser to drying, storing, transporting, and finally processing the harvest, there are inefficiencies throughout the value chain.

Every inefficiency adds another cost. Eventually that cost has to be absorbed either by the farmer, the miller, the consumer, or the taxpayer. Most of the time, all four end up paying in different ways.

There is another structural weakness in the market. Farmers mainly depend on one broad category of buyer: the rice miller.

Ideally, paddy and rice should have many different types of buyers. Rice can be used for a range of industrial products and value-added applications. These can include processed foods, beverages, rice-based ingredients, and other industrial uses.

The more diverse the buyers are, the less dependent farmers become on a single market.

But such a market cannot develop through Government instructions alone. Farmers and smaller businesses need access to capital, storage, technology, and markets. New investors need space to enter. Competition needs to increase.

The real solution

The paddy problem cannot be solved simply by imposing a controlled price on rice or announcing a guaranteed price for paddy.

A guaranteed price without the capacity to purchase is only an announcement. A controlled rice price without addressing production costs creates shortages and distortions. Forcing millers to buy at a particular price without considering the final selling price will not create a sustainable market either.

The farmer who earns only Rs. 20,000 after three months of work certainly deserves a better outcome. But the answer is not another temporary intervention every harvesting season.

The real solution is to give farmers more options: the option to store, the option to borrow, the option to invest, the option to improve productivity, and, most importantly, the option to sell to more than one type of buyer.

For that, economics has to come into the paddy market.

When governments pick industries, industries start picking governments

By Dhananath Fernando

Originally appeared on The Morning

I had a friend who got three A passes for his A/Levels in Biology. Then he sat for the A/Levels again, this time in Mathematics, got three A passes again and entered the Engineering Faculty.

I once asked him why he did his A/Ls twice. He said the first time his parents wanted him to become a doctor. So he studied Biology. But what he really wanted was to become an engineer. So he did his A/Ls again and followed what he actually wanted.

I was reminded of this story with the renewed discussion on industrial policy. Governments, economists, and multilateral agencies are once again talking about industrial policy as a way of developing economies.

At the surface level, there is nothing wrong with it. Everyone wants more industries, more exports, more investment, and better jobs. The real question is how we get there. One school of thought believes the government should identify certain industries that have future potential and actively support them. The government can provide subsidies, tax concessions, cheap loans, tariff protection, and infrastructure.

The other school of thought is that the government should create the right environment for industries to grow, without deciding which industries should become winners.

These two approaches may sound similar, but they are very different. For example, imagine the government spending $ 1 billion to build research laboratories, testing facilities, and common infrastructure that can be used by all exporters. Now imagine the government selecting three industries and giving those industries a subsidy package of $ 1 billion.

Both may be called industrial policy. But the outcomes are very different. The first creates a public good. The second creates a group of beneficiaries.

The problem for Sri Lanka 

This debate has become more relevant with the World Bank itself taking a more open position towards industrial policy in its recent work. The World Bank was traditionally associated with the view that governments should avoid picking winners and focus more on markets, competition, and openness.

That view has now changed to some extent. But the change should not be misunderstood. The new thinking is not that every government should suddenly start choosing industries and writing subsidy cheques. The argument is that governments already intervene in economies, and in some cases there can be legitimate reasons to do so.

The problem for Sri Lanka is what happens after the Government decides to pick an industry. Let us say the government identifies a few ‘strategic industries’. The first request will be protection from imports. Then they will say they cannot compete because electricity is expensive. Then they will ask for cheaper loans. Then tax holidays. Then special land concessions. Then further protection because they still need more time to become competitive. What started as industrial policy can quickly become permanent protection.

This is where the problem really starts. Initially the government picks the industries. Then the industries become dependent on the government. Finally, the industries become powerful enough to influence the government.

At that stage, industries start picking governments. They will support politicians who promise to maintain tariffs. They will lobby against competition. They will oppose trade agreements. They will argue that removing protection will destroy jobs.

A temporary subsidy becomes permanent. A temporary tariff becomes a permanent wall. The so-called infant industry never really grows up. This is not because businesses are bad. Businesses respond to incentives. If the easiest way to make profits is by becoming more productive, they will invest in productivity.

If the easiest way to make profits is by influencing government policy, they will invest in lobbying. That is the danger. Sri Lanka has seen this many times. We introduce protection to support local industries. But while one industry benefits, thousands of consumers and other businesses pay higher prices.

For example, if a tariff is placed on an imported raw material to protect one local producer, every downstream industry using that raw material becomes less competitive.

The protected company wins. The rest of the economy pays. 

The other problem is information. How does the government know which industry will succeed in 10 years? Can any ministry predict future technology, global demand, energy prices, or consumer preferences?

Entrepreneurs cannot predict these things perfectly either. But there is one major difference. Entrepreneurs normally take risks with their own money or investors’ money. Governments take risks with taxpayers’ money. This takes me back to my friend who did his A/Levels twice. His parents knew him better than most people. They had his best interests at heart. Yet even they could not make the perfect decision on which career suited him.

The need for a careful approach 

That does not mean parents should have no role. They can provide education, guidance, and opportunities.

But there is a difference between creating opportunities and deciding the outcome. The same applies to government. Government can create the conditions for industries to succeed. But it should be very careful about assuming it knows in advance which industry should become the next national winner.

When a private business makes a bad decision, it eventually runs out of money. When a government programme fails, very often the answer is another budget allocation.

This does not mean the government has no role. Sri Lanka definitely needs a policy towards industry. But policy towards industry is different from picking industries.

Government should focus on the problems faced by almost every business. Expensive and unreliable energy, complicated taxes, unpredictable tariffs, difficulty accessing land, Customs delays, poor transport, policy uncertainty, and skills shortages.

Instead of giving cheap electricity to a selected industry, fix the electricity market. Instead of giving tax holidays to selected companies, create a predictable tax system. Instead of protecting selected producers from imports, reduce the cost of raw materials and intermediate goods for all industries. Instead of trying to predict the next winning sector, allow thousands of entrepreneurs to discover it.

There is also a valid role for government in areas such as climate change, research, and common infrastructure. But even there, government should be careful.

Suppose the government decides that solar panel manufacturing is a strategic green industry and places high tariffs on imported solar panels. We may create a small protected solar panel industry. But we will also make solar panels more expensive for every hotel, factory, and household. We may protect a green industry while slowing down the green transition. That is why the question is not whether government should do anything. The question is what government should do.

The lesson for industrial policy

Sri Lanka cannot compete with the United States, China, or Europe by offering bigger subsidies. We do not have that fiscal capacity. Our advantage should be different.

Simple regulations. Competitive energy. Fast approvals. Open trade. Efficient ports. Better skills. Strong property rights. Predictable policies. Those are the areas where government should be active.

In the end, my friend became an engineer not because his parents stopped caring about his future, but because they eventually allowed him to choose the path that suited him.

That is perhaps the better lesson for industrial policy as well. Government should create the opportunities, remove the obstacles, and provide the common infrastructure. But it should be careful about choosing the career of the economy. Because once governments start picking industries, industries may eventually become powerful enough to start picking governments.