Sri Lankan Government

Sri Lanka’s political system: A Failure of Governance

Originally appeared on Groundviews

By Ravi Ratnasabapathy

This essay examines failures of governance in Sri Lanka. Although discussed within the context of State Owned Enterprises (SOE), they affect many other aspects of public life.

The weaknesses in the governance of SOEs stem from those embedded within the larger political system. These problems can be assessed by an examination of the political system, understanding the incentives of actors and the effectiveness of institutions in directing these towards the public good.

Some examples of general weaknesses in the political system

  1. The power of interest groups

  2. Campaign finance

  3. Weak parliament and committees

  4. Citizens as shareholders

The power of interest groups

People may commonly assume that political actors are mainly concerned with public interest and that the state exists to carry out the wishes of the public.

Unfortunately, the State is made up of people and the dominant motive in people’s actions in the marketplace – whether they are employers, employees, or consumers – is self-interest.

When individuals become politicians they do not suddenly abandon their personal interests and turn into public-spirited individuals who make morally correct decisions in the ‘public interest’.

While most people will base some of their actions on charitable instincts only in rare cases are these likely to be primary motives. Politicians are no different, acting to please interest groups that support them, pushing policies that lead to re-election and pursuing other personal agendas.

 Politicians take collective decisions. They are made by politicians on behalf of the public, and not by the public themselves. All decisions involve a trade-off in costs and benefits but when an individual makes an economic choice, they experience both the costs and the benefits. Thus, they will only act if it is in their interest.

In collective decisions, whether they involve giving jobs to graduates or building a road, the beneficiaries (e.g. graduates, road users) are not always the people who bear the costs (taxpayers or homeowners whose property is lost). Further, in a market transaction both sides have to agree, if either disagrees, they can walk away. In political decisions those who disagree cannot walk away, they are bound to accept the decision and bear whatever costs the collective choice demands.

Therefore collective decisions, unlike individual ones, carry wide implications. Good politicians should weigh overall costs and benefits on our behalf to determine if ‘social welfare’ might be increased by the right choices. The question is do Sri Lankan politicians have the motive; or even the capacity, to do so?

When political decisions are made how do we determine what is ‘best’ for ‘the people’? Society is complex, made up of different groups with different interests. The young may be interested in education and jobs, but pensioners may be more concerned with old age security and health care. An ageing population may vote for increased pensions, but if this is achieved at the cost of lower spending on education the young may lose. Different decisions involve different stakeholders with varied interests, making it difficult to identify a single ‘public interest’.

When collective decisions are taken a choice will be made between many competing sets of interests: but only one set of interests can win. Politicians face conflicting pressures from lobbyists, businesses, family and friends. Those with the greatest leverage will win. This is not the same as saying that policies that bring the greatest social benefit will win.

Small, homogeneous groups (trade unions like the GMOA or businesses) find it relatively easy to organise and have a great deal to gain or lose when collective decisions go for or against them. The opposite is true with large groups, such as consumers or taxpayers.

With large groups the impact of collective decisions on a single member is small so they have little incentive to lobby. Being so diverse, they are also difficult to organise.

The result is that concentrated interest groups have a powerful incentive to organise and campaign for policies that will specifically benefit them. By contrast, the general public, with very diverse interests, have little motivation to put effort into public debate.

The protective tax (roughly Rs.10) on a loaf of bread may not amount to much to a consumer but to the flour millers this represents a gain of around Rs.20 billion a year.

When particular groups manipulate policy to win preferential tax or legal privileges this results in a substantial transfer of wealth from the public to privileged groups. In Sri Lanka the practice is widespread; witness the plethora of special tax concessions (about 200 according to the Finance Minister) exclusive import licenses, permits and protective tariffs.

Campaign finance creates incentives for corruption and poor governance

Limits on campaign spending and the need to disclose sources were removed in the 1978 constitution, opening the floodgates. This excludes the majority of citizens, including the educated, from politics.

There are no accurate estimates of the cost of an election campaign but a former Secretary General of Parliament recently stated that this was in the region of Rs. 60-70 million. Conversations with other commentators produced estimates between Rs. 50-100 million, rising to Rs 150 million for those fighting for preferential votes.

The proportional representation system has increased constituency size (campaign costs are proportional to constituency size) while the preferential voting system intensifies political competition (not only must candidates battle other parties, they must also fight within the party). The combination has sparked an arms race in campaign spending.

While costs are lower outstation they are still substantial and far beyond the lawful earnings of an MP who earns a monthly salary of Rs. 54,285/- plus other allowances of around Rs160,000/-.

Politicians turn to wealthy backers, some connected to the underworld, to fund campaigns and provide labour-in return for political protection or rewards. The result is that a group selected on the basis of access to cash and a workforce – not intellect or ability – enters Parliament. Moreover, the need to recover campaign spending means they come into office under obligation to their sponsors, carrying an inbuilt incentive to corruption.

This has undermined the technical capacity of the state; how can proper policy be formulated if the politicians and bureaucrats are ill-qualified to perform the necessary analysis? The bureaucracy has an important role in policymaking, providing objective assessment of policy options, drawing on experience and practical considerations. Unfortunately, decades of nepotism have sapped its capacity. The concept of independent policy analysis does not exist in Sri Lanka, leaving a vacuum vulnerable to capture by special interest groups.

Weak Parliament and committees

Political actors will pursue their own interests, but functional governance systems can check the worst of these impulses. The most important is parliament, which works through questioning government ministers, debating and the investigative work of committees, principally the Committee on Public Expenditure (COPE) and Committee on Public Accounts (COPA) which scrutinise expenditure.

Unfortunately, serious deficiencies exist. Engineering crossovers in return for political office reduces Parliament to a rubber stamp. Thus there is little incentive for MPs to take Parliament seriously. Many don’t even attend.

An analysis showed that less than half the MPs attended at least 75% of the sessions. Even those who attend remain in the house only for the first hour. Attending funerals or weddings is the priority; they recently voted themselves a new monthly allowance of Rs.100,000 for gifts at functions. Once elected, the goal is Cabinet appointment, as this presents opportunities for gain or furthering political careers. Once ensconced, the incentive is to enjoy office, not to risk the privileges by questioning authority. The multiplication of the Cabinet is driven more by the need to lure opposition MPs to maintain a rubber-stamp majority than strictly functional requirements.

The committee system is also weak. Until recently they were ‘Consultative Committees’ chaired by a Minister and structured to aid the executive than hold it to account. With the major overhaul of the system [1] by the Yahapalanaya government – a significant if little known reform in the last three years – these are now known as ‘Oversight Committees’ and their function is now much better geared to scrutiny and accountability-but much more needs to be done.

COPA/COPE are under-resourced; their reports complain of a lack staff (particularly audit) and proper IT systems. Further, the government is not required to act on the recommendations of these committees (although ministers must now respond to findings) within any stipulated period of time, leaving the accountability loop open.

Despite many limitations, these committees have uncovered multiple grave malpractices that point to fundamental control weaknesses. The fact that only a minority of institutions seem able to furnish an unqualified audit report suggests much more lurks undetected.

Citizens as shareholders

If politicians do not hold SOEs to account can citizens, the ultimate “owners” exert any meaningful oversight? Unfortunately not because:

  • They have no legal standing as owners;

  • The fragmented nature of the “ownership” creates a collective action problem: no one citizen, even ones who are seriously interested, has an incentive to bear the costs required to monitor the managers.

Oversight is costly, and time and effort must be spent on monitoring performance if malpractice is to be detected. This task is made more difficult as citizens lack ready access to information. As no direct rewards accrue to a diligent citizen from such action there is little incentive to expend the effort to do so; citizens depend on politicians to do this. As discussed previously, the politician has no clear incentive, especially since they are not held accountable for poor performance.

The main mechanisms to address these two layers of agency costs are corporate laws and political and legal institutions. The weaknesses of the political institutions have been discussed above and corporate law are rarely enforced on SOEs.

To take a few simple examples; of the 55 large SOEs only ten had published an annual report for 2016, as per the 2017 report of the department of Public Enterprises. (The law requires publication within six months of the year’s end. Timely disclosure is essential in a robust corporate governance framework as it provide the basis for scrutiny for stakeholders.) Thirty were two or more years in arrears.

Sri Lankan Airlines has suffered a Serious Loss of Capital [2], but the legal procedures that must follow have been ignored. Even the labour laws are not enforced-the JEDB has unpaid EPF liabilities of Rs.323m but earns no sanction.

Therefore, the performance of SOEs suffers from both political costs (i.e. the costs associated with control of firms by politicians who have political goals that differ from economic efficiency) and agency costs (i.e. the costs resulting from managerial pursuit of private benefits at the expense of the firm), leading to chronic inefficiency and underperformance.

Conclusion: a dysfunctional state that serves political interests

The political process incentivises corruption. A weak governance regime means little accountability and few checks on government spending. In addition, limited technical capacity means policy is open to “capture” by special interests. The combination is deeply dysfunctional: a parasitic system that transfers wealth to the politically connected through corruption and rent-seeking.

The weaknesses in the political system are discussed here in order to place the context within which the agency and political costs of SOEs are experienced. Poor oversight magnifies these costs. In combination with the perverse incentives of politicians it gives rise to the blatant breaches of fiduciary responsibility that occur, repeatedly in the COPE reports.

All political systems need to mediate the relationship between private wealth and public power. Those that fail have dysfunctional governments, captured by wealthy interests.

The ramifications of this are far-reaching. Although a full discussion is out of place here, structural weaknesses could explain why a massive expansion in state activity has yielded minimal visible benefits to citizens. Between 2005-15 total government spending quadrupled (from Rs.584 billion to Rs.2,290 billion) with little noticeable improvement in essential services; transport, health, education or waste disposal.

The money is swallowed up in a massive administrative machine. There is endless duplication in the 32 cabinet ministries, 3 non-cabinet ministries, 107 departments, and 24 spending units, 452 SOEs just at the centre. Most developed countries make do with about 20 ministries.

The problem with endemic corruption is that public officials, both bureaucrats and politicians, may redesign programmes and propose projects with few public benefits and many opportunities for private profit.

In Sri Lanka, patronage wins elections which may be why we have 166,588 peons and 25,645 drivers in public service (but only 19,612 medical officers and 32,399 nurses). The public sector workforce ballooned from 850,267 to 1.35m between 2005 and 2016.Salaries and pensions consume almost half of all tax revenue. Much other government expenditure has been funded by debt: but it is only now; when debt is repaid-and taxes rise, that the true cost becomes apparent to the public.

Structural problems require structural solutions; changing the identities of the people who hold public office will not suffice.

A concerted effort to improving oversight is needed, to overcome the resistance from within (as it is not in their interest). The National Audit Bill to strengthen the Auditor General’s role to increase accountability was only passed in July 2018, after being held up since 2003. Requests to open the COPE/COPA hearings to the public by the Committees’ themselves have gone unheeded.

Improving accountability and governance within State Owned Enterprises is important because of the large leakages that take place, but this will address only the subset of a larger problem.

Sri Lankan intellectuals have long placed great faith in government but given the quality of governance the role that the state should play in public life should be reassessed. The governance mechanisms are what ensure that state activity delivers benefits to citizens. A state that exhibits high levels of governance may be trusted to play a larger role, whereas one with weaker governance should only play a smaller role.

Keynes stated the function of government: it should do only what the people could not do at all, not what it could do better than the people. Our objective should be a state that performs a limited and well-defined number of tasks to which it is suited and has the requisite capacity.


[1]. Ministers are now required to submit responses to committee findings (previously they could be ignored), COPE follows the convention of being chaired by an opposition MP and non-COPE members of Parliament may now observe its proceedings

[2]. As per Section 220, if it appears to a Director of a Company, that the ‘net assets’ of the Company are less than 50% its ‘Stated Capital’, then the Board, within 20 working days of such fact becoming known to the Director, shall call an Extra-ordinary General Meeting of the Shareholders to be held, not later than 40 working days from the date of calling of such Meeting. Sri Lankan Airlines has lost the entirety of its capital and now has a negative capital.


Sri Lanka has a total of 527 State Owned Enterprises out of which regular information is available for only 55. The inefficiencies and mismanagement which riddle our SOEs are explored in the Advocata Institute's new report  “State of State Enterprises in Sri Lanka- 2019"

To read more on SOEs and download full report visit www.advocata.org

Game of charades: The lackadaisical implementation of price controls on basic foods

Originally appeared on Daily News

By Ravi Ratnasabapathy

The Government has imposed price controls on a number of basic foods in order to control the cost of living. For the purpose of study, we wanted to ascertain the products subject to controls, as well as the prices at which they were supposed to be sold.

A list of price controlled items is a straightforward piece of information that should be readily available to any consumer.

Unfortunately, this does not appear to be available anywhere. The website of the Consumer Affairs Authority (CAA) lists a few items; gas, cement, milk powder, chicken, rice, and pharmaceuticals. The other items were not listed.

The information on the CAA website is outdated (eg. A controlled price from 2014 is listed for chicken although chicken was removed from the list of controlled items in April 2017). On inquiring from the CAA over telephone, we were asked to refer to the website. A list was eventually compiled after a field visit to the CAA by extracting the relevant information from copies of the gazettes.

How are price controls to be enforced if a list of items subject to control is not readily available?

The proper approach would be to ensure that list of controlled prices is displayed at every outlet, so customers know if they are being overcharged and can then make their purchasing decisions accordingly.

Having compiled a list, we compared the controlled prices with the weekly market prices published by the Department of Census and Statistics in its survey of the main markets in the Colombo district in the period September 1, 2017 to June 30, 2018.

It is evident from the table we have collated that the controlled prices are not being followed in most instances.

The surveys of traders by Breakthrough indicate that 67% of retailers and 46% of wholesalers react to raids by the CAA by temporarily adjusting prices. They later revert to business as usual. Trying to enforce retail level price control across the informal trade and public markets is a practical impossibility. The CAA annual report (2014) states that 22,402 raids were carried out that year and 25,287 in 2013. This is small fraction of 205,573 retail outlets (general as well as those specialised in food, beverages and tobacco) in the country.

In any case if the controlled prices were strictly enforced, then the usual distortions such as shortages and queues would become obvious with unpalatable political consequences.

The CAA is successful in enforcing prices on items supplied by large businesses or corporates such as in cement or milk powder. Whether this actually keeps prices low is questionable.

Large businesses are relatively easy to monitor and they are open to pressure to supply even at a loss; on the implicit understanding that they will be allowed to recoup this at some point, as noted in the articles included in the appendices to this report. It is very clear that the only item consistently being sold at the controlled price is milk powder produced by a multinational. Wheat flour, which is also produced by large corporates tends to track the controlled price closely. The majority of the other items were being traded at prices above the controlled price.

During the period under survey, price controls were imposed on Nadu rice (December 26, 2017) coconuts (December 6) and revised on dhal and kata (December 6) with minimal impact on prices.

The impact of taxes on prices is particularly interesting. When some taxes were reduced in November 2017 (dhal, potatoes, Big onions), prices declined on these items over period of weeks, sometimes falling below the controlled price. When taxes were later raised (potatoes to Rs.30/kg on February 24, B onions to Rs.40 on May 2) prices rose again eventually breaching the controlled price. In the case of dhal prices eventually fell below the original controlled price (159/kg) following the reduction in tax – but prices did not respond significantly when the controlled prices was reduced to Rs.130 (December 6, 2017).

This underlines the case for reducing specific food taxes if there is any serious intention to control prices.

It is also worth noting the difference in prices between imported and local items, potatoes, and big onions. Locally produced items are not subject to tax or price control, but when available, these retail at prices higher than the controlled price and are sometimes higher than the (taxed) imported items.

Instead of attempting to protect agriculture through taxes (which raises prices for consumers) the government should facilitate the modernisation of the sector, supporting investments that improve productivity (eg. mechanisation, drip irrigation, greenhouses, quality seeds etc).

Using controls to reduce prices does not appear to work.

Addressing the inefficiencies within local agricultural is the sustainable way to lower prices: increased productivity raises farmer incomes and lower consumer prices in the long term.

The scheme itself is ill-conceived and there seems little intent or capacity to enforce. Reducing taxes, increasing competition and productivity in local agriculture is a surer path to lower consumer prices.

Updated Price List

“Price Controls in Sri Lanka: Political Theatre”, a new report by the Advocata Institute finds that consumer price controls lead to unintended outcomes including lower quality.

To read more on Price Controls and download full report: www.research.advocata.org/pricecontrol

A video documentary: https://youtu.be/zG5hV94G7Qc


Bringing sanity to public finances

Originally appeared on Echelon

By Ravi Ratnasabapathy

Ad-Hoc policies have created unsustainable long-term spending commitments. A medium-term expenditure framework can discipline policymaking.

Sri Lanka has experienced a large and persistent budget deficit, averaging over 7.7% of GDP since 1990. The deficit has been met partly by borrowing, which is why the debt-to-GDP ratio has averaged 89.1% during the same period, almost double that of our peer group. The government has attempted to close the deficit through painful and unpopular tax increases; but amid the rising cost of living, public patience for this has already worn thin.

With elections looming and the popularity of the government sinking, there is a danger they will revert to giveaways without considering the impact this will have in the longer term. Giving jobs or salary increases to state workers is a popular short-term gimmick, but involves long-term commitments: salary payments over the life of the employee, often followed by a pension. With 1,358,589 people already on the State payroll and a further 600,000 drawing pensions, this is no longer sustainable. Salaries and pensions alone consume half of government revenue.

The accumulated ills of various shortsighted measures have taken the country to the brink of default. There is an unprecedented ballooning of foreign debt repayments over 2018-22 amounting to a massive $14.9 billion. To put this in context, the current IMF facility is only $1.5 billion.

The maturing debt is too large to be repaid, so must be rolled over, which means we need to borrow to repay. In order to do so, we must maintain investor confidence. Failure to do so will lead to higher borrowing costs – something we cannot afford. Moody’s ranks Sri Lanka among the countries most exposed to an interest rate shock. Interest payments already consume around 36% of government revenue, an increase in rates will put severe pressure on the budget.

The accumulated ills of various shortsighted measures have taken the country to the brink of default. There is an unprecedented ballooning of foreign debt repayments over 2018-22 amounting to a massive $14.9 billion

Moody’s warns, “Persistently high government liquidity and external vulnerability risks continue to pressure Sri Lanka’s credit profile, and specifically measures to build reserves and smooth the profile of external payments may be insufficient to stem imminent government liquidity and balance of payments pressures starting in 2019, when large international debt repayments come due and Sri Lanka’s three-year International Monetary Fund Extended Fund Facility programme concludes."

This is why the Finance Ministry has pushed through unpopular tax hikes and increased fuel prices. Foreign lenders will look at the country’s finances to assess its ability to repay; so in the short term, there is no sensible alternative but to collect more taxes. The real problem, however, is not tax but runaway spending; over 2000-16, total spending grew at a compounded annual rate of 12% (from Rs335,822 million to Rs2,333,883 million), with the deficit following suit (Rs119,396 million to Rs640,326 million). Foreign financing of the deficit grew from Rs495 million to Rs429,130 million in the same period. It is government spending not taxation that ultimately determines the total burden of government activity on the private sector. Although spending may be financed by borrowing or printing money (instead of taxes), all government spending is ultimately a call on resources that have alternative uses, or involves transfers from one group of society to another.

Debt is simply taxation postponed, with interest added. Money printing can tide over in the short term, but ultimately results in inflation and currency depreciation. The need, therefore, is to reign in expenditure, which must start with a proper plan.

Large businesses routinely plan for 3-5 years, but the government relies on an annual budget, which is produced by a bottom-up approach – i.e. the various departments submit their estimates of expected expenditure, which are then amended and collated centrally. Planning and policy is geared to the annual budget cycle, and little attempt is made to prioritize spending.

Debt Balloon and Yawning Deficit.png

Planning must move away from annual budgets to a Medium-Term Expenditure Framework (MTEF), three-to-five year rolling plans, the important features of which are as follows:

  • Extends the timeframe of budgeting from 1 year to 3-5 years.
  • Projects the future cost of existing programmes and approved policy changes (baseline).
  • Establishes hard spending limits – fiscal targets (i.e. deficit or total spending).
  • Establishes a procedure for proposing any new policy initiatives.
  • Rolls the MTEF forward each year, adding a year at the end.

The Treasury can work backwards from revenue, assuming no changes in the tax structure and the deficit target to arrive at the overall spending limit. Matching this with projected costs of current programmes will indicate if there is space available in the budget for new policy initiatives. Fiscal space is the difference between baseline projections and the government’s spending target; if there is no space, no new programmes can be accommodated, unless some existing programmes are cut.

The overall spending limit is a ‘hard’ limit, but within the overall limit, reallocation can take place. This forces the Cabinet to consider spending priorities – where should limited resources be allocated? The Cabinet can determine soft ceilings for ministries that need to ‘win’ competitively on the basis of plans submitted.

Although spending may be financed by borrowing or printing money (instead of taxes), all government spending is ultimately a call on resources that have alternative uses, or involves transfers from one group of society to another

The Treasury needs to reward credible plans, so those that provide performance measures, specify outcomes, outputs and costs should receive more funding. Performance measures help make the case for budget allocation and enable monitoring of programmes. Performance measures are based on the following parameters:

  • Inputs: Measures the resources used to provide government services, such as personnel, operating expenses and capital.
  • Activities or output: Measures what an agency does, the number of applications processed, the number of passengers carried and kilometers of roads paved.
  • Efficiency: Measures the cost per unit of activity such as cost per patient, cost per student or cost per child vaccination.
  • Outcome: Measures how well objectives are met. These are usually the ends of government such as safety, health or educational improvement.

Expenditures must be driven by policy priorities, but disciplined by budget realities, which means sudden and unplanned announcements cannot be made. The result is greater policy predictability, a focus on outcomes, priorities and expenditure management.

Conceptually, this is simple, but implementing it in practice is a daunting task involving a lot of political negotiation (to get ministers to agree to spending limits) and administrative work in estimating future costs, revenues and measuring performance.

The trickiest political negotiation involved is in allocating the spending limit according to priorities. This exercise is the most important – with an annual incremental budget, no one is forced to question the ‘base cost.’ With a hard spending limit to be allocated among departments, questions on priorities come to the fore. The other obstacle is weak capacity within the government, both the bureaucracy and among ministers, which means that external technical support is needed to implement this, which is fortunately available through donor programmes.

Bridging the deficit.png

More than 16 African countries have adopted an MTEF, with Ghana and Malawi pioneering it in 1996. Since then, other countries in the region have followed. Implementing may be done in stages, starting with key spending units. In Malawi, the deficit contracted from 15% of GDP in 1994/5 to 5% by 1998/9, partly due to the MTEF. According to the World Bank (2013), by the end of 2008, more than two-thirds of all countries had adopted an MTEF. To work, the MTEF must become the government’s budget process and control the details of spending. Expenditure limits are agreed to by incoming governments giving intra-party policy consistency.

Properly planned expenditure means little need for periodic, ad hoc adjustments to taxes, which are witnessed at every budget, and even in between budgets through gazette notifications. Unexpected tax changes wreck havoc with the plans of businesses and households alike. Greater visibility will increase overall levels of confidence among lenders and investors.

When an MTEF is implemented well, public expenditure is limited by the availability of resources, budget allocations reflect spending priorities, and public goods and services are delivered cost-effectively. MTEFs, therefore, offer the prospect of achieving the three high-level objectives of public expenditure management: aggregate fiscal discipline, allocative efficiency and technical efficiency. Reaching this is an incremental process, but with good technical support, it is possible. The earlier this is adopted, the better.

Assessing Colombo’s urban redevelopment projects

By Ravi Ratnasabapathy

There has been some controversy about the urban redevelopment that took place at break-neck speed in Colombo under previous regime. Visitors and casual observers were struck by the changes to the city; Colombo was looking a lot cleaner and smarter.

The criticism has focused on the human aspects: the plight of evicted residents, the loss of a certain way of life or the change in the character of the city. Little attempt seems to have been made to assess the financial costs and benefits, chiefly because the full costs remain unknown.

The World Bank funded a part of the project and has borne the brunt of the criticism, but many of the projects were carried out independently by the UDA, the military and other state agencies.

The World Bank provided a loan of US$213m of which US$148m was allocated to finance flood and drainage management, US$ 51m for infrastructure rehabilitation (mainly streets and drainage) and US$10m for implementation support.

According to the project brief, the World Bank funding is in two components; the first addresses the problem of urban flooding, which regularly affects economic activities of Colombo. The second aims to support local authorities to rehabilitate and manage their drainage infrastructure and improve the systematic collection of solid waste. 

What the World Bank has been funding is basic infrastructure, something that was sorely lacking. Some observers have conflated this with the high profile redevelopments such as The Dutch Hospital, Colombo Racecourse, Floating Market, and Independence Arcade which seem to have been done independently by various state agencies. The confusion is understandable, given the lack of information.

The most controversial projects involving the rehousing of the urban poor seem to have been carried out mainly by state agencies, with the World Bank involvement being limited to one project at St Sebastian's Canal.

For a proper assessment citizens should know all the facts but the costs of the projects were deliberately shrouded in secrecy. In the interests of transparency the Government should collate and publish the total cost of the regeneration projects and the means by which they were financed. Since some of the projects are largely commercial in nature it is also necessary to know the income earned and the costs of operation.

Pending the availability of hard financial data, we can look at some of the broad philosophical arguments for urban regeneration.

There are many positive things that can come from urban renewal, depending on what drives the programme. The earliest projects were carried out in Victorian London to provide social housing to the poor, replacing the terrible slums that they lived in. A similar justification was used in the case of some of Colombo's new projects but one must note two critical points: the terrible conditions in London at the time, and the underlying purpose of the exercise : to improve the lives of the poor by providing cheap housing for the poor.

In Colombo the impetus seems to be more modern, one of stimulating economic growth through urban regeneration. This is something that has also worked (with varying degrees of success) in many different places but success is dependent on the right policy and governance framework.

If the economy booms, consistently over a few years people will have money to spend and there will be demand for land: for shops, for business premises, for entertainment.

When the demand materialises it makes sense to redevelop older or decaying parts of the city, to improve land usage or ease congestion. If the economy were booming then the Town and Urban Councils would be flush with cash (from trade based taxes) and there would be less need to borrow money to redevelop. It would also be possible to get the private sector involved in the redevelopment process, minimising the need for debt funding.

Urban regeneration needs to go hand in hand with the right policy and good governance because this is what ultimately drives growth. Ideally these should precede the regeneration effort and will help overall growth and the building of confidence. Getting this right policy costs little money but requires enlightened leadership. Once in place, growth will take place overall and attention may be turned towards the more neglected or decaying parts of the city.

Unfortunately what appears to have happened is debt funded beautification for which there is scant demand. According to news reports the floating market in Pettah is deserted. The Racecourse and Independence Arcade fare somewhat better, but store owners have complained that traffic is limited. It is a nice place to wander around in but few people actually seem to buy anything, as indicated by a recent news report that the Ceylon Tea Board shop at the Racecourse is running at a monthly loss of Rs.1m.

The problem seems partly to be in the mix of the shops in the malls. The shops were not allocated on general commercial principles or through a transparent process. Most crucially the malls seem to lack a proper ‘anchor’ tenant. Typical shopping malls incorporate one or more anchor stores and a variety of smaller stores, an anchor tenant being the largest retail outlet in the mall, chosen on the basis of its potential to attract customers to the shopping centre in general.

Naturally, these are commercial decisions and are best taken by businesses, not the Government.

What the Government should have done with these prime locations is to have tendered for proposals for redevelopment and handed over the entire project to a commercial developer. The property would have been developed, the treasury would have earned some revenue, the Government would be less burdened with debt and citizens need not be concerned with the commercial risks and rewards of the restaurant and retail trade.

What was the final cost to the taxpayer and could the money could have been better spent elsewhere? These are fundamentals question which must be answered and it is imperative that all the relevant information be made public as soon as possible.

The townsmen and visitors may be delighted by the external appearance of the city, but let us just hope that we are not walking on streets paved with gold, as in the folk tale of Dick Whittington.

Expanding Trade with India : Winning with Competition or Cowering under Protection?

By Anushka Wijesinha

The article originally appeared on the Daily Mirror on April 29, 2015

In preferential trade agreements, we often see the potential losers being the most vociferous and more organized, while the gainers are quieter and more fragmented. This has been a typical characteristic of the debates on the India-Sri Lanka Free Trade Agreement (ISFTA) and the proposed Comprehensive Economic Partnership Agreement (CEPA) as well. But Sri Lanka must be careful of letting one side be heard more – by the public as well as by policymakers – than the other. More eclectic and informed debate representing all sides is essential, which is why I look forward to moderating this afternoon’s National Chamber forum on ‘CEPA and Its Implications for the Sri Lankan Economy’ – the first by the private sector following Indian PM Modi’s visit and announcements by both him and the new Sri Lankan government that they would forge ahead with the deal.

Deeper Engagement

The proposed CEPA would expand the current ISFTA to cover services, investment, and economic cooperation. The agreement was to take in to account the massive asymmetry between the two countries (economic size, population, etc.), afford Sri Lanka a more than disproportionate advantage, and allow for partially or fully restricting sectors it didn’t wish to open up right away. Following aggressive lobbying by narrow nationalist business leaders with close political affiliations, there was an eruption of uninformed and exaggerated sentiments against promoting greater commerce with India over the past few years. These groups successfully scuttled efforts at completing the CEPA deal several times in the past. “CEPA” became such a taboo word that the India-Sri Lanka Joint Statement in January 2013 avoided using that terminology, and referred to a “special economic partnership framework” instead!

Problem with Protectionism

It is not surprising that protectionist trade lobbies have emerged so influential. Sri Lanka has been sliding backwards in its openness to the world. For around 10-15 years now, protectionism has been on the rise and there has been a creeping up of applied tariffs and para-tariffs. A tangle of para-tariffs has now effectively doubled nominal protection rates to over 20%. Simultaneously, successive Budgets have introduced a range of ad hoc, special protection and promotion schemes for various domestic industries and indigenous enterprise. While this is not an unprecedented industrial policy approach, it does serve to weaken competitiveness of Sri Lankan firms. I recall a conversation with a business school friend of mine who started a high value added spice export operation out of Sri Lanka some years back. He lamented about the severe protectionist behaviour from local spice industrialists even though the project had been given the green light by the necessary authorities. Economic theory and evidence amply proves that in the presence of protection and in the absence of competition, firms become more complacent, less innovative and dynamic, and less able to face international markets. Is this what has happened to Sri Lankan firms vehemently against expanding trade ties with India? Ill-prepared for competition, cushioned by industrial policy that afforded special comforts?

 Government Must Play Smarter Role

It is incumbent on the government to ensure that stakeholder concerns are heard and addressed; that as much transparency as possible is maintained (without of course compromising the country’s negotiation position), and information is shared more comprehensively and consistently so as to prevent groups with narrow vested interests being able to misinform an mislead. Most importantly, the government cannot let the agenda be highjacked and held hostage by narrow interests groups, like in the past. A bilateral trade or economic partnership agreement that Sri Lanka enters in to affects not just a handful of firms and their employees but hundreds of other firms, hundreds of thousands of employees, and millions of consumers in Sri Lanka. The government must provide a clear policy direction on its economic engagement with India, making a strong departure from the ambiguous statements of the past – i.e., calling for a ‘special economic partnership agreement’. Meanwhile, although I did acknowledge at the start that the gainers from freer trade are often fragmented, less organized and less vociferous, it’s time that changed. Consumer and producer groups that gain from freer trade must speak up.

Opportunity to Win Big or Cower Down

Whether its called a CEPA or any other variation of it, the fact remains clear – it is in Sri Lanka’s interests to deepen economic ties with India. An agreement must be forged that cleverly expands Sri Lanka’s economic interests – those of our firms and our consumers; not a narrow few of them, but the wider many. To those who claim that it threatens our national interest, we must remind them that expanding our trade interests for the benefit of the many is also a part of our national interest. Just the opportunity to tap in to India’s growing middle class alone, set to be over 250 million this year – 20 times our entire domestic market – can be transformative. There are Sri Lankan firms with quality products that can and must break in to India. There are service providers, including dynamic Sri Lankan start-ups like Trekurious – a provider of unique lifestyle experiences – that have already entered India and demonstrated early success. A bilateral agreement will ensure that the systems are set out, for companies like these to operate in a rules-based environment. And if it is that we feel Sri Lankan firms cannot face competition, and it is for that reason alone we should not go for deeper economic engagement, then I’m afraid we have bigger things to worry about than a four-letter word starting with C.


Anushka Wijesinha is a development economist and a consultant to a host of governmental and non-governmental organizations in Sri Lanka.  He has previously worked at Institute for Policy Studies, The World Bank and the presidential commision on taxation.  His writings on economics are found on his blog -- The curionomist.  You can follow him on Twitter @anushwij