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.

Economic Recovery in the North: Moving From Aid to Entrepreneurship

By Anushka Wijesinha

This article originally appeared in the Daily Mirror on 27 May 2015.

Last week, Sri Lanka marked the six-year anniversary since the end of the armed conflict in May 2009. In the aftermath of the war, there was an impressive reconstruction and public infrastructure effort, with around 10% of all budget expenditures during 2009-2013 being spent directly on reconstruction in the Northern and Eastern Provinces. Two large ‘Marshall Plan’-type programmes – Uthuru Vasanthaya in the North and Neganahira Navodaya in the East – aimed to kick-start growth through an infrastructure and public works drive. The major connective infrastructure in these provinces – roads, bridges, fishery harbours, etc. – are now of a standard rivaling many other parts of the country. However, the shift from reconstruction, to true economic recovery through industrialization, job creation, and entrepreneurship, has been much slower – particularly in the North. While this article does not take a comprehensive look at all the reasons for this, it points to some key issues that need attention by donors, public officials and the private sector.

Post-war Economic Dynamics

It is clear that the post-war growth spurt is having a tangible effect on the Northern economy, particularly in key cities like Jaffna and Vavuniya. Consumption has picked up sharply, and a lot of the big brands from the South – in consumer electronics and agricultural equipment – are now operating here. There is even a branch of the Colombo-based men’s hair salon, La Passion!. Meanwhile, years of donor interventions have also distorted economic incentives. A local civil society leader I met with on a recent visit remarked that, “A hand-out mentality has been rooted in, and there is a need to promote entrepreneurial effort”. The steady inflow of foreign remittances is also having an economic effect in Jaffna, skewing the incentives to work. Young people who would otherwise be joining the labour force seeking employment are opting to stay out and live off remittance income instead. Locals complain of sharp rises in alcoholism and drug abuse among youth. But the picture is not the same across the peninsula. In Point Pedro, for instance, young people are keen to look for jobs and eager to see new industrial activities start up.

Supporting Industrialization

Atchuvely Industrial Zone is one such activity. This estate, which had been derelict and shut down during war, has now been revamped by UNOPS with funding from the Indian government. Twenty-five acres are now ready for occupation, but the inflow of investment has been rather slow. When I visited here earlier this year, I met with the owners of the few factories that have commenced operations, including a manufacturer of hardware items and a recycled paper producer. Several factories have received American donor support for their equipment and machinery, but are having difficulty finding the local skilled labour required to install and operate these machines. I also noticed that while several other projects had been given approval, the slots allocated to them were empty. Many local entrepreneurs are having difficulties with obtaining project finance to set up. This must be tackled, and local bank branches must play a better role in financing enterprise growth here. There is plenty of opportunity for, and interest among, indigenous entrepreneurs to expand into Atchuvely, professionalize their operations, expand and employ more people.

Beyond Donor Aid to Accessing Better Markets

In the immediate post-war period, there has been a high dependence on day labour for income – manual labour on farms and civil works projects. But the availability of work is often uncertain, leaving people vulnerable to fluctuations in income. Donor projects have identified this and attempted to support income diversification. These projects have funded training centers for job training and livelihood development and gifted people and households machinery and equipment. But during recent visits to the North, I witnessed in several instances where these facilities lay abandoned. I observed how successive rounds of donor projects have “gifted” assets to people, but paid little attention to help them make productive use of these assets. While these have been built and gifted with all the right intentions, there has been less focus on ensuring that these can sustainably support entrepreneurship. Little attention has been paid to helping them access markets. One local government official in the North remarked to me, “Many NGOs are providing training for people to produce various things in Kilinochchi and Mullaitivu, but the peoples marketing knowledge is weak and so they cannot sell what they make.”

From ‘Cow-Dropping’ to ‘Dairy Entrepreneurship’

Diary projects have similar problems. A colleague I was travelling with jokingly called this the “cow-dropping syndrome”. So many donors have “dropped” free cows on families and hoped that this would improve livelihoods and incomes. Yet, little attention had been paid to help them become ‘dairy entrepreneurs’ instead; helping them maintain healthy animals, improve milk quality, and link up to stable markets and lucrative value chains. In some cases, women of female-headed households who received free cows had simply sold them off, either because they did not have a way of plugging in to a profitable milk supply chain, or even because it became too expensive to maintain owning them (feed, veterinary costs, etc), in the absence of sustainable revenue generation. Amidst this, however, a project by Cargills and Tetra Laval, was different. Supported by GIZ, they built up a group of dairy entrepreneurs who now regularly supplying large volumes of milk at better prices, to the national supply chain. With advice from Tetra Laval’s global ‘Food for Development’ programme, Cargills has been able to learn best practices in dairy farming and milk production. This in turn has boosted Northern dairy farmer’s knowledge in maintaining better milk production. Similar efforts by ILO’s LEED project have also adopted an integrated approach, where local producer groups are closely linked to national value chains.

Next Phase

More of these approaches are needed to boost entrepreneurship to support the growth of indigenous enterprises here, not just support an influx of brands from Colombo. Helping micro-producers link up with supply chains can certainly boost incomes in the North. It is already six years on, and once the dust settles on donor support it is entrepreneurship of the people that will boost the Northern economy more sustainably. The next phase of economic recovery must shift from ‘aid’ to ‘entrepreneurship’.

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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

Abuse of Sri Lanka's migrant workers: Is a ban on migrant labour the best solution?

By Ravi Ratnasabapathy

Reports of abuse of migrant workers have prompted calls to ban the outflow of labour, is this a solution?  There are some real concerns that need to be addressed but the economic consequence of a complete ban would be dire as foreign employment, is, by far, the dominant sub-economy of Sri Lanka. Remittances reached US$ 7,018 m in 2014, accounting for 39% of all foreign exchange earnings. The estimated 1.9 million foreign workers form 25% of our labour force.

To put things in context it is worth examining the history of migrant labour.

The oil boom in the 1970’s resulted in labour shortages in the Middle East. Fortuitously, the Non-Aligned Conference held in Colombo in 1976 opened up employment opportunities for Sri Lankans in the Gulf. By 1976 unemployment had reached almost 25 percent of the labour force, leaving 1.5 million unemployed in a population of 15 million. Migration was a solution to a problem of severe unemployment.   

It is ironic that even today, migrant labour absorbs 25% of the labour force. Hypothetically if there was no overseas employment Sri Lanka should have an unemployment rate of around 29%, far worse than that of 1976.

Overseas employment is therefore a solution to economic problems faced at home. A report by the UN states that out-migration in Sri Lanka is driven by low per capita income, unemployment and/or underemployment, high inflation, indebtedness and lack of access to resources. A long term solution needs to address these fundamental problems, most crucially the creation of employment. If there are sufficient well-paying jobs at home there is no need to seek work overseas. The steady increase in total departures testifies that Sri Lankan workers are making a choice, that it is better to risk abuse abroad than suffer poverty at home.

The abuse stems from weaknesses in the legal system in host countries. Fear of being overwhelmed by migrant workers may be one reason why host-country legal systems offer scant protection to temporary workers.

According to the Middle East Institute, a think tank, foreigners make up an estimated 37-43% of the population of the Gulf Cooperation Council (GCC) countries and constitute 70% of the workforce, with workforce numbers rising significantly higher in the UAE (90%), Kuwait (82%), and Qatar (90%).

The high percentage of guest workers worries government officials in host countries. Accordingly, governments have legislated to minimise the perceived threat. Restrictions on length of stay, strict regulations about changing jobs, hurdles imposed by the sponsorship system, difficult-to-meet criteria for bringing in family members, the inability to own land and businesses, the near-impossibility of obtaining citizenship, and the absence of legal rights all work to keep guest workers’ stays short, temporary, or informal.

Unfortunately, this is what enables the abuse. According to Human Rights Watch, workers typically have their passports confiscated and are forced to work under the highly exploitative kafala system of sponsorship-based employment, which prevents them from leaving employers. Migrants often have limited information about their rights and channels to seek help, and face discrimination and obstacles to redress. Domestic workers are worst off because labour laws in the Gulf exclude domestic workers from even the basic protections guaranteed other workers such as a weekly rest day, limits to hours of work, and compensation in case of work-related injury. Restrictive immigration rules make it difficult for domestic workers to escape from abusive employers.

Worker remittances have become a mainstay both for the national economy and for the households which receive them. Domestic workers, the category most vulnerable to abuse, are generally unskilled and drawn from the poorest sections of society. Many are below the poverty line or just above it, working overseas represents an opportunity to escape from poverty.

Therefore what the Government needs to do is to work with GCC countries to improving the system so that abuses are minimised.

Some work is being done, eleven Asian countries set up the Colombo Process in 2003, a regional consultative process to address the needs of contractual migrant workers employed overseas. In 2012, participating governments, including South Asian countries and all six GCC countries, adopted a Framework of Regional Collaboration committing to prevent abuse and foster greater benefits from migration. These include reducing recruitment costs, developing standard employment contracts, and making recruiting agencies responsible for the activities of local-level labour brokers. It also recommends pre-departure and post-arrival information seminars for migrant workers and government action to enforce labour laws.

Charities such as Helvitas are implementing projects to educate workers, provide guidance, support and access to legal advice. The Helvitas Labour Migration project works along 4 main threads:

• Access to Information: Migrants and their families are empowered to take an informed decision, based on safe migration knowledge. This includes the ability to follow the legal process or to detect fraudulent practices of sub-agents.

  At the same time, local government officials are supported to increasingly provide safe migration messages to the community and guide a decision-making process.

• Access to psycho-social support: By raising awareness on migrants'psycho-social issues with counsellors, midwives, and other relevant officers, the migrants are increasingly able to access services to mitigate their psycho-social hardships. Individual counselling and psycho-education sessions are provided for caregivers, migrants'children and returnees.

• Access to justice: Together with The Centre for Human Rights and Development (CHRD) Sri Lanka, migrants are provided free legal assistance and access to legal redress mechanisms provided by the Sri Lankan Bureau of Foreign Employment.

• Remittances management: Migration can only be successful when remittances are managed sustainably. Financial literacy and knowledge about productive investments is key for migrants and their families. Therefore, they are sensitised on access to loans, budgeting, savings, formal banking and remittances transfer systems in order to maximise the financial benefits of migration.

The Government should partner with such organisations to ensure wide dissemination of these programmes.

Not all abuse takes place overseas, some local recruitment agencies have been known to be guilty of poor practices including failure to observe blacklists of employers/overseas recruitment firms compiled by the Sri Lanka Bureau of Foreign Employment (SLBFE), excessive fees, double-charging migrants for fees already paid by the employer and misrepresentation of pay or working conditions. More seriously some employment agencies have been accused of theft of wages and refusal to assist in mediation and repatriation. The SLBFE monitoring and enforcement functions also need to be strengthened to limit any local malpractices.  

Banning overseas employment is not a solution, although Nepal did experiment with one, temporarily banning women under the age of 30 from working in Gulf countries. The danger with a ban is that it may push workers into irregular migration channels with heightened risk of exploitation and trafficking. Instead, the Government needs to work in partnership with international agencies and other countries to strengthen the system so abuse is minimised.

Attracting FDI: Sorting out contradictions in policy

By Ravi Ratnasabapathy

The article originally appeared on the Daily News on 15 May 2015

The BOI is reportedly developing a new investment policy for Sri Lanka with the help of a panel of experts.

This is a welcome move, but the investment policy needs take a broad view in order to remove some of the impediments to investment that stem from different sources. Two in particular, the policy on land ownership by foreigners and the visas for foreigners have become a source of confusion and a barrier to investment.

Foreign Direct Investment (FDI) is widely used by developing countries as a tool to solve their economic problems. FDI can create employment and result in the transfer of technology which contributes to long term growth.

In countries where unemployment or underemployment is a prevalent the creation of new jobs is a priority and a good enough reason to attract FDI.

Even more important is technology transfer, a broad term that encompasses not only equipment but technical know-how, organisational, managerial, marketing practices and other skills that the employees of a firm learn while working with a foreign partner. When employees move to other firms they take these skills with them, which results in the skills being diffused into the local labour market, improving its productivity.

The transfer of knowledge is not limited to direct employees; foreign affiliates can also diffuse technology and skills to domestic suppliers, customers and entities with which they have direct and indirect dealings.

To ensure that local inputs meet their stringent technical requirements, foreign affiliates often provide the local suppliers not just with specifications but sometimes also with assistance in raising their technological capabilities.

Naturally, as countries have become more aware of the benefits of FDI an intense 'global race' for foreign investment has developed and Sri Lanka should ensure that it is not left behind.

In order for a country to be more attractive to investors (both local and foreign), there is a need to put in place measures to ensure an enabling environment by reducing so-called hassle costs, which is why the BOI was set up as a central point for all paperwork.

Access to land is necessary for investment but recent shifts in policy on land have caused concern.

The purchase of land by foreigners was prohibited in 1963, under the Finance Act. In 1992, the Exchange Control Act repealed the Finance Act allowing the purchase of land by non-residents on payment of a 100% tax.

The growth of tourism in Galle and the southern coast since the mid 1990's, particularly the development of a new concept of 'boutique hotels' may be traced to this event. Prior to this Sri Lanka focused mainly on mass tourism, the change in land ownership policy attracted a different type of investor, who brought with them a new concept of selling to niche markets. The 100% transfer tax on land was repealed in 2002. This, together with the tax amnesty of 2003 created a boom in property.

Up to that point the policy on land followed a clear trajectory towards greater liberalisation. Then followed a series of policy flip flops. First the 100% land tax was re-imposed in 2004. The tax was initially applied only to foreign nationals but was later extended to local companies owned by foreigners.

Then an announcement was made in November 2012, during the budget speech, that the sale of land would be banned. No legislation was enacted but the land registry simply refused to register any transfers due to the uncertainty causing much annoyance and confusion amongst investors.

Parliament finally enacted the Land (Restrictions on Alienation) Act No. 38 of 2014 in October 2014. This banned the sale of land to foreigners and companies where 50% or more of the shares were held by foreigners. Foreigners were allowed to lease land but a 15% tax was to be imposed on the lease rental for the entire term of the lease.

If a firm entered into a 99 year lease, it would be required to pay 15% of the total lease rental payable over the 99 years immediately as tax. In effect the firm would be asked to pay 15 years rent, up front as tax. Moreover, the tax was applied retrospectively, from January 2013.

On a short term lease of a year or two, a 15% tax may be tolerable but for any investor who is here for the long term, the type of investor that the country needs, the tax is prohibitive. Should investment slow there may be knock-on effects on areas such as tourism. Boutique hotels, being small, sell through word of mouth, to friends and associates of the owners. If foreigners are made to feel unwelcome they, along with their friends and family, are likely to start looking elsewhere for their annual holidays and winter escapes.

The spirit of the new Act appears aimed at restricting the access to land for foreigners, first by outright prohibition on sale and second by imposing an extortionate tax on leases, creating an effective barrier to investment.

Inconsistent with such a restrictive law is provision for the Minister with the approval of cabinet to grant exemptions to the Act. Therefore in practice foreigners can buy whatever they want, provided they have the blessings of the appropriate politicians and government officials. Analysts say that such wide discretion is designed to encourage what economists call 'rent-seeking' behaviour or in common parlance, corruption. Similarly confusing are the visa rules. On one hand the country wants to attract talent from overseas, initiatives such as Work In Sri Lanka have been launched to encourage skilled people from overseas to relocate but the country still denies work visas to foreign spouses of citizens. These are foreigners already resident in the country, many have skills that can be utilised productively, yet they are denied the right to work.

Although the sale of land is restricted, the Government still seems interested in promoting the sale of flats in high rises to foreigners-flats situated on or above the fourth floor of a building are specifically exempt from the restriction on the sale of land to foreigners. It does not seem to have struck anyone in authority that foreigners may not be interested in buying flats if residency visas and dual citizenship are hard to get. If the foreign spouse of a Sri Lankan has to give up a career in order to relocate the attractiveness of the country will diminish.

Some countries do restrict ownership of land and work permits are required almost everywhere but the rules need to be sensible investment is not to be deterred. Coherence, consistency and simplicity in policy will promote investment. 

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Ravi Ratnasabapathy trained as a management accountant and has broad industry experience in finance. He is interested in economic policy and governance issues. 

Plans to impose a Rs 10,000 Minimum wage: Will it improve welfare?

By Ravi Ratnasabapathy 

The article originally appeared on Dailynews on 7 May 2015

It is reported that the Government intends to legislate a minimum monthly wage of Rs.10,000 with an increment of 25% to be imposed over the next year. An increment of Rs.1,500 is to be effective from May 1 2015, while the rest will be effected from May 1 2016.

The legislation is probably founded in good intent: improvement of the welfare of citizens. Improving the welfare of people should be one of the fundamental objectives of a Government and one that few, if any, would question.

In simple terms we may measure welfare as the standard of living or in economics, the amount of goods and services that a person can enjoy. To the average person it may appear obvious that there is a minimum that one needs to earn to pay for basic foodstuffs, rent, electricity and utility bills and other expenses to live as a human being.

The standard of living is dependent on two factors: the income of people and the cost of goods and services. If the cost of goods and services is low then people do not need a high income.

A price list from Ceylon Cold Stores dating from the 1950's or 1960's lists the price of an imported Australian chicken at Rs.3.10 per pound, haddock fillet from Scotland at Rs.3.00 per pound and ice cream at Rs.10.00 per gallon. The author recalls paying a rupee for bread and 15 cents for the bus fare to school. If costs had remained at those levels people could have lived comfortably on a few hundred rupees a month.

Therefore in striving to improve the welfare of people there are two approaches that may be taken: the increase of wages or the reduction in the cost of living. Moreover if the cost of living increases faster than wages, people will be worse off, even if wages keep rising.

Sri Lanka has a highly distorted tax structure with essential commodities and foodstuffs being taxed at high rates. The previous regime excelled at the art of taxation by stealth with “special commodity levies” being imposed on milk powder, dhal, canned fish, potatoes, onions, chillies and a host of other foodstuffs. Milk powder is taxed at Rs.135 per kg, dried fish at Rs. 102 per kg, butter at Rs.880 per kg, cooking oil at Rs.110 per litre.

This is quite apart from VAT and other levies that add a further 15%-16% to costs. The taxes form a significant part of the final price of the goods. The current regime has cut some of the taxes but there is much more that could be done.

The problem that the Government faces in cutting taxes is that they have no means of paying for the bloated public service. The Government spends 54% of the tax revenue just paying the salaries and pensions of public servants.

Due to high levels of debt, interest cost takes up a further 38% of tax revenue.There are also huge inefficiencies and waste in the public sector. Sri Lankan Airlines lost Rs.30 bn in 2013, the cost of which is passed on to people as higher taxes.

The cost of living can be reduced significantly, with consequent improvement in welfare of the people, if taxes were cut but in order to do so waste and inefficiency in the public sector must be reduced.

Returning to the minimum wage, in order to impose a minimum wage, there needs to be employment.

The Government can impose minimum wages but this will have little effect in improving welfare if people are unemployed. There is no point in absorbing the unemployed into public service, as the previous regime did on grand scale because paying for this means taxing-and impoverishing the population at large.

Therefore the first step in poverty reduction is to ensure that jobs are created in the private sector, the second step being to control the cost of living.

The problem is that if the minimum wage is set too high and economic activity that takes place at low wage levels may become unviable.

Low wage jobs generally employ unskilled labour; if jobs are lost it is the poor who will suffer. It is better to have a low-paying job and some income rather than no job and no income.

As liberal economist Paul A. Samuelson wrote in 1973, “What good does it do a black youth to know that an employer must pay him $2.00 per hour if the fact that he must be paid that amount is what keeps him from getting a job?

In 2003, South Africa imposed minimum wages in agriculture to provide protection for workers to a sector with lowest average wages in the country.

A study on the impact of this by Bhorat, Kanbur and Stanwix concluded that while farmworker wages rose by approximately 17% as a result of the minimum wage, employment fell significantly, by over 20% within the first year.

A study of the impact of minimum wages in Indonesia by Asep Suryahadi, Wenefrida Widyanti, Daniel Perwira and Sudarno Sumarto reached similar conclusions. Since the late 1980's minimum wages had become an important plank of Indonesian government policy. While minimum wages succeeded in increasing average wages employment declined.

According to the study, a 10% increase in minimum wages resulted in a more than one per cent reduction in employment for all categories of workers except white collar workers.

Given the evidence available, the Government's decision to impose a minimum wage must be viewed with caution. If the minimum wage is significantly above market rates it will cause a decline in employment. The current wage level of Rs.10,000 is fairly low and anecdotal evidence suggests that its impact on employment will be small but once such legislation is in place the question of increments comes up.

A politician looking for quick votes in an election year may promise a high increase to the minimum wage which may reduce employment in the long term, to the detriment of the poor.

This policy, taken together with the ill-conceived taxes imposed in the budget sends a negative signal to investors. Investment in new business is needed to create employment, so sending the right signals is important. Not only could this policy destroy existing employment it could also be a dis-incentive to the creation of employment in the future.

It is advisable that the Government reconsider this policy. 

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Ravi Ratnasabapathy trained as a management accountant and has broad industry experience in finance. He is interested in economic policy and governance issues.

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.

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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

Reforming Sri Lanka’s power sector

By Ravi Ratnasabapathy

 The article originally appeared in the Daily News.

Electricity was introduced to Ceylon by a private company in 1895, but since 1927, with the formation of the Department of Government Electrical Undertakings the industry has been a vertically integrated state monopoly.

The electricity infrastructure comprises generation, transmission and distribution. Transmission refers to the bulk transfer of electricity from power plants to substations located near demand centres. Distribution is the delivery of power to consumers from substations.

Some reform of the industry took place during the 1980's and 1990's. LECO, a state owned private company established in 1983 to undertake the distribution of power in Kotte. Independent Power Producers (IPPs) and small hydro developers entered the industry in the mid1990s when generation was opened to private investors following a severe power crisis in 1996.

Since 2004 policy reverted to state-lead investment with the exception of small renewable power projects. The CEB reports regular losses, is heavily indebted and has invested billions but does Sri Lanka have an efficient and economic system of electricity supply, the stated mission of the CEB?

The disaster that is the coal power plant is well known and provides good reason to reassess the long term plans for the provision of power.

Before examining long term solutions there are immediate problems that need to be addressed so some short-term measures are necessary. A peculiarity of Sri Lanka's electricity demand is the high evening peak load. A steep increase in demand occurs between 6pm-7pm which then peaks from 7pm-8pm. Thereafter demand gradually eases over the following three hours.

Peak demand is about 50% higher than average demand and coping with this presents the most urgent problem for the CEB. A study by the Public Utilities Commission of Sri Lanka (PUCSL) in 2012 recommended that “aggressive action is still required to curb further growth in peak demand, since an adverse trend is observed during recent past”.

The simplest solution to this is to move to daylight saving time, which means setting the clock forward by an hour. This proved to be an effective curb on demand when it was implemented after the power crisis of 1996. It was previously used in Ceylon during WWII to conserve power and also by Pakistan after a power crisis in 2008. It is a simple cost free solution that demands immediate implementation.

The management of the demand for power by bulk consumers is also needed. An overlooked aspect of this is the waste of power in the telecommunications industry. Transmission towers consume a lot of power but operators in Sri Lanka do not have a comprehensive infrastructure sharing regime. Operators regard their networks as a source of competitive advantage and share only limited sites. This has resulted in widespread duplication of infrastructure, unnecessary strain on the grid and unsightly visual pollution. The Telecommunications Regulatory Authority (TRC) needs to impose a proper infrastructure sharing regime. Sharing must cover all infrastructure including SLT’s fibre backbone and the TRC should incentivise the decommissioning of redundant sites. Moving on to longer term solutions should private power have a role to play?

In Sri Lanka IPPs have been controversial but the solution is not be to ignore the private sector but instead to move to electricity auctions to procure power. Auctions increase the competition and transparency of electricity procurement and are now quite widely used. Examples include the UK, New Zealand, Australia and Singapore. Open, transparent competition promotes efficiency and reduces costs to consumers. Singapore moved from state monopoly in 1995 to competitive market in stages over a period of years, yielding tangible benefits to consumers. Although the price of oil, the major cost in electricity generation, increased by 152% between 2001 and 2008, Singapore’s electricity tariff rose only 14% during that period. This was possible largely due to efficiency gains in generation, such as utilising more cost-efficient technology.

Competitive pricing encouraged firms to invest, for example in more efficient gas fired combined cycle turbines and retro-fitting existing plants. The share of electricity generated in Singapore by natural gas increased from 19% in 2000 to 79% in 2010 and overall power generation efficiency increased from 38% to 44%. Consequently, carbon dioxide emissions per unit of electricity generated declined by 30% between 2000 and 2007.

The tangible benefits from liberalising the electricity market make a compelling case to move in that direction although the process is by no means a simple or easy. Even in Singapore the major reforms were introduced gradually over a period of a decade, but this should be the vision for Sri Lanka’s power sector.

The Pathfinder Foundation published a paper in 2007 examining in some detail how Sri Lanka could move to a competitive electricity market. The conceptual model for an electricity market, in very simple terms is to have the generation, transmission and distribution split into independent units with competition between them.

It is essential to have several entities carrying out generation (IPPs and entities carved out from existing CEB generation assets). These will compete in a daily computerised auction to sell power to the transmission entity, which should have no links to the generating entities. The auction is usually held a few says before the actual despatch of power is needed. The generating units compete to supply power for fixed time slots in the day, usually for each hour or half hour and the system automatically awards the time slots to each generating unit based on the lowest cost. The transmission entity in turn sells the power to distribution units, which will be monopolies in their respective areas of operation. When distribution utilities operate in similar operational areas, the regulator can easily set up realistic performance targets by comparing their performances. Similarly since the transmission will be carried out by a separate entity the losses in transmission are easily monitored and the incentive is created to minimise leakage.

If practical advice were needed the Government of Singapore has always been willing to share its expertise.

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Ravi Ratnasabapathy trained as a management accountant and has broad industry experience in finance. He is interested in economic policy and governance issues.

Tea & Hoppers - Fixed Prices, perverse incentives [Podcast]

By Anushka Wijesinha

In my latest podcast, I talk about tea and hoppers; two of my favourite food items, and indeed of most Sri Lankans. But the government now dictates how much shops can charge me for these – and its a pretty fantastic, lower price than ever before – milk tea at Rs 25, plain tea at Rs. 10, and plain hoppers at Rs. 10. As a consumer, I should be pretty happy right? “Not if it’s causing unintended consequences!”, the economist inside me is saying.

In this article titled ‘The Problems of Price Controls‘, The Cato Institute – a prominent libertarian think tank in the US, asserts that,

“price controls reduce quality, create black markets, and stimulate costly rationing”.

We are seeing this play out right here in Sri Lanka. Last month, we saw one of the most intrusive and bizarre examples of administered prices (or price controls) being introduced by a government in recent times. This was on tea, and hoppers, served anywhere in the country, to be enforced by the Consumer Affairs Authority. What this has done is cause perverse incentives among those making and selling these items. Using poorer quality ingredients, shaving off quantity, skimping on the add-ons. Government-imposed fixed prices not only completely violates basic economic freedoms enjoyed by firms – like the freedom (and ability) to use price to signal quality or differentiation – but it is also notoriously difficult for a government to enforce fully and fairly. We must do more to make policymakers and bureaucrats understand that badly thought out public policies cause perverse incentives by economic agents, and this helps nobody. Listen to the podcast by clicking play below, or visit it on Soundcloud 

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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 

The Colombo Port City: dealing with unsolicited proposals

By Ravi Ratnasabapathy

The Colombo Port City has generated a storm of criticism, the latest from the Friday Forum, which has called for systematic reviews of large state infrastructure projects. The Chinese Government is now reportedly weighing in on the side of the developer, The China Harbour Engineering Corporation.

Unsolicited proposals such as the Port City are controversial. How should a government deal with them? What should be done with the Port City project itself?

Public procurement, especially for infrastructure is a complex process. The general procedure is that a project, once identified and screened by the relevant line Ministry (in regard to the economic and financial viability), should be submitted to the Ministry of Finance for preliminary clearance. If Finance Ministry Clearance is obtained it must be submitted to the Cabinet for approval in principle. If this is obtained, the Finance Ministry will appoint a Project Committee to develop a detailed Request for Proposal (RFP).

The RFP is very important, since it is the foundation of the project. It spells out the project needs clearly and sets the framework within which competing bids can be evaluated. The RFP would include the following:

1. Criteria of assessment of technical and financial viability of the project.

2.  Details of specifications

3. Models of relevant Agreements as decided on a case by case basis.

4. Environmental data and information.

5. Any other relevant information.

An unsolicited proposal bypasses this process of vetting, which means a bad project can get through. Therefore, traditionally unsolicited proposals were viewed with disfavour. The United Kingdom for example does not permit unsolicited projects.

Many of the world’s most controversial private infrastructure projects originated as unsolicited proposals, such as the Dabhol Power Plant in India and many independent power generation plants in Indonesia. In some countries private companies submitting unsolicited proposals often did so in an attempt to avoid a competitive process to determine the project developer. If successful, they were then able to finalise project details with the government through exclusive negotiations behind closed doors, which is also the case in Sri Lanka.

Should Sri Lanka bar unsolicited proposals?

There are positive aspects of unsolicited proposals. Sometimes such proposals are based on innovative ideas and it is useful to obtain external input in conceptualising, designing, and developing projects.

The difficulty is in getting the right balance between obtaining innovative project ideas without losing the transparency and efficiency of a competitive tender process.

Therefore a proper written policy is essential. At a minimum, the principle should be that all unsolicited proposals are channeled into a transparent, competitive process where challengers have a fair chance of winning the tender.  

There are two main approaches that have been developed to deal with unsolicited proposals. These are:

1. In a formal bidding process, a predetermined bonus point is awarded to the original proponent of the project. Chile and the Republic of Korea have such a system. Problems may arise with definition of appropriate bonuses which is subjective and potentially open to manipulation.

2. The Swiss challenge system in which other parties are invited to make better offers than the original proponent within a specified time period. If a better offer is received, the original proponent has the right to counter match any such better offer. This system is practiced in the Philippines, South Africa and Gujarat in India. This is the preferred option since it does not require further analysis or subjective decision making.

Either of the above approaches can work with proposals that are still on the drawing board. How do we deal with a project where work has already commenced such as the Colombo Port City where the developer has already spent a substantial amount of funds? It cannot simply be cancelled, despite various contradictory claims emanating from the sections of the Government, nor can be easily be opened to tender.

A Developers fee approach – where the project is opened to tender but development costs to date are reimbursed, either by the government or the winning bidder, could be a solution. There will be difficulties in assessing the costs and it is not certain whether either the Government or another developer would be willing to take it on, but at least opening up for tender will give us an idea of the alternatives available.

The project will initially need to be subjected to an independent technical review to ensure that concerns in areas such as water supply, sewage disposal and power have been addressed. The city of Colombo is already overloaded in all these respects, adding the strain of the port city to the crumbling infrastructure of the capital could take it to bursting point.

The environmental issues are another can of worms, from the supply to sand, to the damage to corals, impact on marine life to altering of tidal patterns that may cause coastal erosion elsewhere. A full independent review is needed.

If both areas of concern can be addressed then it may proceed, after being opened to tender as discussed above.  If the project cannot proceed there is another headache as to what to do with the partially built site-a separate study on the best alternate use is needed.

What is tragic is that all these problems could have been avoided. There were processes and institutions in place to ensure proper procurement, but they were abolished in 2007.

The National Procurement Agency (NPA) of Sri Lanka provided the general framework for handling unsolicited proposals. Written guidelines on unsolicited proposals were in place. All unsolicited proposals were to be dealt with through the Swiss Challenge system.

 Set up in 2004 by then president Chandrika Kumaratunga the NPA was shut down in December 2007. All the more reason that the proposals in hand should be channeled into a transparent, competitive process.