Combatting the Cult of ISIS

Originally appeared on Groundviews

By Ravi Ratnasabapathy

Featured image courtesy AFP

It now seems clear that the attacks on Easter Sunday were carried out by local radicals, under the aegis of foreign fundamentalists. The problem is contained in that there is little support for this group from the wider Muslim community. While those involved must be swiftly identified with and dealt with, the bigger question is how to check the spread of radicalisation?

A paper [1] by Joel Day and Scott Kleinmann offer an approach that is summarised below.

“The central problem with focusing on beliefs is the issue of variation. Simply put, if “radical” beliefs produce terrorists, then why doesn’t every Salafist or political-Islamist mosque produce terrorists? Even more complicated, why have most of those providing material support to Islamic terrorist groups shown little understanding of theology, but instead seem to be attracted to the thrill of jihadi adventurism (Venhaus 2010)”

Violent extremism is a cult, not a religion

According to the authors, treating violent extremism as a problem of religion or belief is a mistake. The process of radical, violent mobilisation shows closer links to that of a cult.

Accordingly counter strategies based on empowering moderate, liberal voices to preach inclusion and tolerance to seemingly more “extreme” mosques may not be effective, indeed even counterproductive.

“It is therefore problematic to assume that “countering narratives,” showing extremists the error of their ways, or debating theology would do anything other than produce hostility and even spur heightened aggression.”

When confronted with countering evidence, individuals may become defensive and cling on initial beliefs more strongly, driving fence-sitters towards radicalisation.

On June 12, 2016, Omar Mateen, a 29-year-old American security guard, killed 49 people and wounded 53 others in a mass shooting inside Pulse, a gay nightclub. The killer was believed to have been gay, consumed alcohol, not known in the local mosques but showed signs of identity confusion, anger, isolation, and other attributes shared with violent individuals of all sorts.

Countering a cult

To deal with a cult the focus should be on weakening the organisational ties within the movement, not on debate. In debate people tend to rely more on intuition than reason. If people are not working from ideological standpoints there is little possibility of making headway through discussion so it may make more sense to counter the networks and personal ties between individuals and terrorist groups instead.

This model maintains that since ideology fails to predict or abet terrorist violence, other social factors such as alienation, mental health, or bonds with other bad actors explains violence. It is not that ideology doesn’t matter at all, but rather that ideological pulls exist within a social context. It is the social context that counter strategies should be focusing on.

How do cults work?

Cults Create Affective Bonds Around Friendship, not Belief

Most recruits to cults and new religious movements come from those who know one or more members of the group. The personal connection between recruiter and recruited is far more persuasive than the content of the belief system as the testimony of former cult members shows:

“The way the Jesus Army worshiped was a bit odd at first … but I soon got used to it. What really attracted me was the sincerity of the people and the obvious love and bonding that they had with each other”.

Likewise, a participant in another cult reported that:

“after his first visit to the FWBO center, he thought members of the centre were crazy and decided not to go back. However, he thought about all the people he knew there, and he recalled what a great time he had with them. Subsequently he turned up for the rest of the course.”

Similarly, terror networks operate around bonds of kinship and friendship. Scott Atran found that 95% of foreign fighters who joined ISIS were recruited by friends or family. Similarly, in his study of Al Qaeda networks, Marc Sageman found that friends and family ties were involved in the recruitment of 82% of the jihadists in his study (2004, 111–112).

A vast literature finds that terrorists are not goal-seeking or strategic, but instead are motivated by a desire for friends and comradery (Abrahms 2008). It is worth recalling that 6 of the 19 September 11 hijackers were brothers (Wickman et al. 2013).

Social Connections are Deep and Meaningful

A cult is not simply a quixotic fringe group with unorthodox practices: they are a community of practice. For alienated, isolated individuals, cults create affective bonds of love and attention received from nowhere else.

The culture of jihad is more than ideology: a burgeoning literature has found that terrorist groups have cultures of practice that go far beyond doing terror. Terrorists read poetry, weep and hug, sing, eat, and have a culture that can be observed outside of the material threat they pose.

This phenomenon is the “soft power” of jihad, which pulls recruits in not with force, but with cultural appeal and interrelational ties.

Cults Thrive on Intensive Interaction Between Recruits and Elites and Forge Social Encapsulation

Cults rely on exclusive, and isolating bonding practices that forge the conditions necessary for violence. Social encapsulation inoculates the recruits from outside influence, neutralises the stigma frequently associated with participation in such groups, and masks their deviant behaviour.

Conversely, the more civil connections a group has with others, the more engaged they become in the democratic process. Cohesion and overlapping, bridging ties between communities can prevent splintering, ideological isolation, and foster mutual respect.

Cults Offer Direct Compensation and Provision of Goods in Exchange of Allegiance

People may join associations to procure goods they could not otherwise get on their own. For cults and extremist groups alike, rewards can include power, material provisions like food and shelter, as well as ego and cosmically driven outcomes. The former Saddam Hussein Baathists joined ISIS not for ideological reasons, but to procure power and goods they were otherwise denied following the US deBaathification policy.

Many foreign fighters in ISIS don’t have experience in Arabic, which indicates that the ideology cannot be very well developed. Instead, they are promised wives, adventure, and alternatives to the lives they live in the West.

Women are promised comfort, the ability to raise a family in a pure Muslim environment—the utopia is even complete with houses, clothes, and even blenders (Speckhard 2017). None of these core elements of cult-recruitment and radicalisation operate around ideology per se.

Towards a more social strategy to counter extremism

Terrorist groups, like cults, are friend and kin networks that isolate and encapsulate new members, offering various forms of compensation and affection those members could not get elsewhere. Instead of ideology, policymakers should focus on the bonds of affection between friends and kin and build campaigns that target the correct avenues of extremist radicalisation.

The first step is to be able to identify early signs of radicalisation and those best able to do so are an individual’s friends or family. However if reporting can lead to harsh government reprisals, they will be reluctant to do so.

“Community-based mosques, youth clubs, and social services should be given more resources to gain the trust of entire friendship networks. Local basketball tournaments, food-drives, open shari’a classes, and drop-in counseling sessions are civic trust-building exercises. Within these civic institutions, friends can feel safe to report warning signs because they trust the community to carefully reprimand and rehabilitate the offender and act as a social bridge to law enforcement. Mosques should be celebrated for building deep community ties, because such social fabric is far more likely to prevent radicalization than debating the finer points of shari’a law in chat rooms.”

For example, Denmark has recently employed an affective bond-based counter-extremism program that focuses on linking up would-be jihadis with mentors, learning skills, and providing avenues of hope. This actively combats the cult-like mechanisms of friendship, love, intimacy, and compensation.

Danish mothers have also established a peer network called “Sahan,” where mothers worried about a child can seek advice and counsel from others on how to intervene.

In Canada and Germany, groups have sprung up called “Hayat”—the Arabic word for love—to highlight the loving network that ISIS sympathisers actually have at home.

Second governments should not be about policing -reporting “strange ideas or behaviours.” The government needs to support vulnerable communities-job fairs, tutoring, recreation, and civic engagement to ensure people are productively engaged.

“Since religious ideology doesn’t predict violence, but rather the social conditions of groups, governments should think of CVE as simply providing good government. In essence, we guard against violence by making our societies less vulnerable to cult-like groups seeking to isolate, encapsulate, and predate on weak individuals”

Mosques should be celebrated for building deep community ties, because such social fabric is far more likely to prevent radicalisation than debating the finer points of shari’a law in chat rooms.

We should target and counter all types of “extremist violence.” The cult analogy points to the social factors that give ideology meaning, but all types of violence have social conditions that constitute actors in particular ways. Countering extremism should be conceptualised as engaging a social phenomenon, not just a set of beliefs and ideas.

As Robert Putnam has argued, the fabric of a healthy democracy is the relational bonds between citizens (Putnam 2001). Similarly, the fabric of a strategy to counter extremism is to build a social network of alternatives to the appeal of violence.

The attacks were carried out by a few individuals, with little broader support. The government, civil society and the Muslim community need to work together to defeat this.

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[1] Joel Day & Scott Kleinmann (2017) Combating the Cult of ISIS: A Social Approach to Countering Violent Extremism, The Review of Faith & International Affairs, 15:3, 14-23, DOI: 10.1080/15570274.2017.1354458

A bellyful of taxes!

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dilshani N Ranawaka

With Avurudu week just coming to an end, you have probably realised that the total for your food bill is quite exorbitant. You may have attributed this to the festive season, and the fact that food really is quite expensive in Sri Lanka. However, have you questioned why this is the case? Why do we pay so much for something as essential as food?

Did you know that for every meal your family buys, you are paying the price of a second meal (for an individual) back to the government? You might not be aware but most of the daily consumed food items that you buy for your family are exorbitantly taxed! How informed are we of the indirect taxes we are paying with every purchase we make?

Let’s take a look at the grocery list for a balanced meal of four in a family (Quantities recommended by the Food and Agriculture Organization (FAO).

When one delves into these statistics, it is interesting to see that we pay around Rs.150+ to the government in the form of taxes, just on this small basket of grocery items. That's the equivalent to one rice packet you could have bought for lunch!  

Taxes are imposed for two main reasons; they are the main source of government revenue, and they can protect local producers from import competition.

In the case of Sri Lanka, 80% of government revenue is collected through indirect taxes. Indirect taxes are imposed on goods and services as opposed to taxes levied on income.

One argument to justify such heavy taxes on consumer items is attributed to the government’s objective of protecting and strengthening local producers. When a tariff is imposed on imports, the price of imports increases, giving local producers the opportunity to compete against what would otherwise be a much cheaper alternative. For example, green beans per kg is taxed 101% on the border of the country (CIF price). This means that if you buy imported green beans, you have to pay double the price of the true value of the good.

This is appealing to local producers as they can offer comparatively lower prices for the same good. Even though these policies can be seen as helpful to local producers, it truly does not help in the long-run.

Consumer loses out

When tariffs are imposed in order to help local producers compete against cheaper imports, the government effectively removes all market incentives for local producers to stay efficient and productive. The tariffs on imported goods guarantees that their main competition is priced higher than that of the local good.

The result is that you and I, the local consumers lose out on two counts. First, if we wish to buy local products, there is no reason for local producers to provide us with a high-quality, appealing good. Secondly, if we are dissatisfied with the local product and wish to buy an imported alternative, we have to pay a much higher price as this good is subjected to high rates of tariff.

This loss to the consumer is compounded by the fact that the high price of imports creates a large gap between the final price of the imported good and at-cost price of the local good. This gap can be transformed into a profit margin for local producers as they can increase the price of their good without improving quality thanks to the high tariff imposed on the imported alternative.

Should we continue to protect?

Our producers get accustomed to inefficient production due to a lack of incentives. In this case should the government protect local producers further? If so, are we carefully considering the trade-offs; the costs incurred for the consumers?

Protectionism is a heated topic in the country. Ever since the Sri Lankan economy opened up in 1977, various campaigns were implemented in order to protect local industries. Moving on to 40 years after opening up the economy, the first ever to do so in the South Asian region, we still lag behind.

Alternatively, what the government could tap into are technological investments with other countries, which would help in exchange of technology and innovation for low-yield, less efficient, protected industries in the country. This involves in opening up the economy for foreign investment and creating an investor friendly environment - relaxing most of the heavily taxed and regulated policies by the government.

Given that this regime of protectionism has failed, are we still going to ask the government to shield our producers from foreign competition?

An ‘unhealthy’ tax regime: Is the Govt. stifling basic needs?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Anuki Premachandra

This year’s global theme for World Health Day, which falls today, is universal health coverage (UCH) for all. In comparison to most countries in the region, Sri Lanka is in a positive trajectory towards this, with a policy goal to ensure universal health coverage to all citizens through a well-integrated, comprehensive health service.

UHC is a health care system focused on medical service delivery – it predominantly revolves around accessibility, affordability, and availability of healthcare services. However, in the case of Sri Lanka, health needs to be looked at from a broader perspective.
This World Health Day, while commending the country on a great public healthcare system and better access to water and sanitation than most other countries in the region, I’m going to explore the case of how some simple taxes on items that contribute to your health can lead to complicated concerns on your health. Are Sri Lanka’s tax policies depriving you of accessibility, affordability, and availability of proper healthcare, hygiene, and sanitation?

Taxing your menstrual health
Menstrual hygiene is not commonly discussed in Sri Lanka, having very little literature and understanding of proper menstrual hygiene management. This is also probably a reason why a basic item required for proper menstrual hygiene – sanitary pads – have total taxes as high as 62.6% levied on them, despite being a country with 4.2 million menstruating women. More often than not, women are compelled to use unhealthy menstrual hygiene products or practices owing to their monetary conditions. Naturally, an intervention like taxes only worsens this situation. The most appalling of findings is that unhealthy menstrual practices can contribute to cervical cancer, one that unfortunately has proven to fall to the plight of many Sri Lankan women.

Every year, 1,136 women are diagnosed with cervical cancer and 643 die from this disease in Sri Lanka (HPV Centre, 2018). Cervical cancer ranks as the second most frequent cancer amongst women in the country, wherein poor menstrual hygiene management is a direct causal factor of this. Of our population, 52% is women, out of which 4.2 menstruating women stand the risk of being diagnosed with cervical cancer due to poor menstrual hygiene. If we are taxing something as necessary as sanitary napkins that contribute to healthy menstrual practise, are we not then making health a privilege instead of a basic human right?

Taxing your access to proper sanitation
In a recent interview, Senior Advisor at the Sri Lanka Water Partnership Kusum Athukorala stated that the main problem they have had to deal with when conducting sanitation programmes in rural schools is the lack of a proper disposal mechanism for sanitary pads. It is either this or the lack of proper toilet facilities. According to the WHO, although sanitation coverage in Sri Lanka is 92% – the best in the South Asian region – an area that they too have identified as one that requires further development is rural school sanitation. Period-friendly toilets matter.

Additionally, although over 50% of our population have access to household sanitation facilities, diving deeper into the breakdown of these numbers is important. Despite great sanitation coverage, 7.2% of our urban population, 7.6% of our rural population, and 17% of our estate population still rely on a shared toilet facility for their sanitation needs, according to the Household Income and Expenditure Survey 2016. Why then do our rural schools lack proper toilets and why does a portion of our population rely on shared toilets for their sanitation needs? The answer lies in the prohibitively high cost of building toilets.

Total import taxes on sanitary ware like commodes and squatting pans are over 60% and wall tiles, floor tiles, and finishing ceramic are taxed at over 100%. Out of our population, one million people live in temporary houses and 1.2 million people live in underserved settlements. Access to proper toilet and hygiene facilities are very limited in these types of households owing to the exorbitant cost of constructing one. Having access to sanitation is a basic human right, yet a portion of our population suffer on a daily basis from the lack of access to a clean and functioning toilet. Without toilets, untreated human waste can impact a whole community, affecting many aspects of daily life, and ultimately pose a serious risk to health. The issue runs deeper into societal impacts, such as teenage girls often leaving school at the onset of menstruation due to lack of privacy and the risk of contaminating infections due to unhygienic toilet facilities. This narrative needs to change.

This World Health Day, while we commit our country to global goals that provision for more accessible and affordable healthcare facilities for all, let’s also look at health in a broader perspective. In Sri Lanka, universal health coverage can be realised through affordability, accessibility, and availability of better health, sanitation, and hygiene facilities – end taxes on periods and toilets!

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Anuki Premachandra is the Manager – Research Communications at the Advocata Institute. She has a background in public policy with an active involvement in policy communications. She is also an advocate for the reduction of the period tax and contributes to research and policy work in that subject area. If you have any questions or feedback on this article, she could be contacted on anuki@advocata.org or @anukipr on Twitter. Advocata is an independent policy think tank based in Colombo, Sri Lanka which conducts research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka.

Should we abolish the budget?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Aneetha Warusavitarana

On the 5th of March 2019, the Ministry of Finance presented the much-delayed budget for 2019. The budget is a tool of extraordinary influence, which is used to affect government revenue, expenditures and national policy. That being said, our budgets don't appear to be exerting that influence, or creating the impact they could. According to Verité Research’s budget tracker only 8% of projects from the budget 2018 are progressing, with a staggering 59% lagging behind in implementation.

Everyone has come to expect the budget, but what purpose does it serve? Why does it exist? During the rest of the year the government continues to make decisions on policy, pass legislature and try to run the country. The allocations made during the budget to specific ministries are not set in stone. The reality is that these allocations are moved around government in a manner than bewilders all involved, and when a year passes and the next budget is announced, it is found that budget promises have not been met, and very little has actually been implemented.

Budgets by definition should focus on revenue and expenditure. In the case of Sri Lanka and the mountain of debt that we need to contend with, this is all the more important.

When looking at this year’s budget, a wide variety of topics have been touched on. The Ministry of Finance has revised taxes on multiple fronts, with a focus on reducing the indirect tax base and increasing direct taxes. However, the budget has not limited itself to detailing expenditure and revenues. There has been a substantial amount of general policy which has been included, bringing up the question of whether there is a point to their inclusion in the budget. Surely these general policies would be better suited in a national policy document or election manifesto?

The policy decisions in the budget 2019 have ranged from establishing a national pension plan, increasing government servants’ salaries, to amending labour laws, and this is where the problem lies. Increasing government servants’ salaries would technically be the duty of the Ministry of Public Administration and Disaster Management (an apt ministry to handle the government sector) and salary revisions should follow a system, and not be dependent on ad hoc decisions. A national pension plan, while much needed is not an endeavor that can be completed in a year. The same reasoning applies to amending labour laws. These two in particular will in all likelihood take at least a few years to be finalized and implemented.

The alternative?

The alternative to the current budgeting process is following a medium-term expenditure framework (MTEF). This framework integrates policy, planning and budgeting for the medium term, combining a top-down resource envelope with a bottom-up estimate of the current and medium-term cost of existing programmes. The result is the alignment of macroeconomic stability and broad policies with more specific programmes. It is essentially a three to five year rolling budget, which sets fiscal targets and allocates money for that time frame. This system addresses the reality that very few projects can be successfully implemented within one year and allows the government to acknowledge this and act accordingly.

What does a Medium-Term Expenditure Framework mean for policy?

Within this framework, policy proposals are considered in the medium to long term context. Spending agencies have a stronger voice, as they have significant input into the design of sector strategies and some flexibility in managing their resources to meet their objectives. New projects are undertaken dependent on whether they are affordable and implementable in the medium term, allowing the government to have a very clear and mostly accurate statement of fiscal policy objectives, fiscal deficit and debt management.

At a project level, this framework creates two main wins. First, both policy and funding are more reliable and predictable. Second, it allows for policy to drive funding, as opposed to the reverse. This in turn means that budgeting is linked more strongly to results, as focus shifts to specific outcomes and what resources are required to achieve them.

What happens to the annual budget?

The annual budget will be announced, but it will simply reflect what is achievable in the short-term, within the larger three to five-year framework. This is beneficial, as spending will be more specific, and tied to clear targets. Funding is not allocated for an entire project, but only for the section of the project that can be reasonably achieved during the next twelve months. The entire budget is more focused on results, and less on broad policy statements. Given the low levels of implementation mentioned earlier, it is evident that a greater degree of specificity, combined with a results-focused approach to the budget is required.

What needs to be done?

Interestingly, even now a substantial amount of planning follows the structure of a three-year rolling plan. The Public Investment Programme or the PIP, is a three-year rolling document which details government expenditure of projects and programmes. The Ministry of Finance also publishes an annual medium-term fiscal strategy which establishes the general direction or objectives of fiscal policy for the next three years. According to the Ministry of Finance website, budget estimates are prepared in the larger context of a medium-term budgetary framework.

It appears that the key components of an effective medium-term expenditure framework already exist. The next step would be to align the annual budget more clearly with these components. Allocations should be made more specific, with clear ties to the three-year plan. New projects and programmes should be introduced taking into account a three-year resource envelope and fiscal objectives. In other words, the budget in its current iteration should be completely overhauled and refined.

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Aneetha Warusavitarana is a research analyst at the Advocata Institute and her research focuses on public policy and governance. She could be contacted at aneetha@advocata.org or @AneethaW on Twitter. Advocata is an independent policy think tank based in Colombo, Sri Lanka which conducts research, provides commentary, and holds events to promote sound policy ideas compatible with a free society in Sri Lanka.

Behind the invisibility cloak: Sri Lanka’s hidden state-owned enterprises

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dilshani N. Ranawaka

Is the Government aware it has gazetted 527 SOEs?

Unveiling an invisibility cloak of the state was the first task I did as a fresh graduate. Behind 55 strategic State-Owned Enterprises (SOEs) identified by the Ministry of Finance (MoF) lies another 450+ SOEs making their contribution to the “Coordination Problem”.

Even at face value, it seems unlikely that a small country like Sri Lanka needs the government to run a pool of SOEs as large as this. Interestingly, the MoF doesn’t have a count of all its SOEs, with the Annual Report only mentioning that there are 400+ SOEs. However, there are at least 527 SOEs, subsidiaries and sub-subsidiaries gazetted. To be specific, the 527 SOEs can be broken down to 424 principals, 84 subsidiaries and 19 sub-subsidiaries.

Of the 400+ SOEs that the government is aware of, the Department of Public Enterprises tracks the profits and losses of only 55 SOEs, which they have identified as ‘strategic’.

This raises two questions.

1. Why doesn’t the government know the number of enterprises it runs? Anyone running a business should at the very least know the number of organisations it is in charge of.

2. Why does the MoF only track 55 SOEs? What are the losses that come from the remaining 450?

Let’s take the Ministry of Power and Energy and Business Development for example. The ministry’s losses add up to a cumulative net-loss of Rs. 363,945Mn during the past 11 years. The ministry governs 4 principal SOEs, 6 subsidiary SOEs and 12 sub-subsidiary SOEs adding upto a total of 22 bodies.

When one further explores these subsidiaries, it is quite logical to ponder the rationale for these categorizations. For instance; the Ceylon Electricity Board has two subsidiaries under it. The first subsidiary Lanka Electricity Company (LECO) has three sub-subsidiaries LTL Transformers, LTL Energy, and LTL Galvanizers. The second subsidiary LTL Holdings (Pvt.) has another sub-subsidiary LTL Energy (Pvt.). Is it any wonder that we have erratic power supply? A convenient way to track all these entities would be to establish all of them under one subsidiary; LTL Holdings.

It is time we question the logic of establishing so many SOEs, given that their profits and losses are not tracked, and a majority do not even publish annual reports. When the losses incurred by these entities are added to the equation, it is clear that there is large-scale mismanagement taking place.

The multiple layers of incorporation (principal, subsidiary and subsidiary bodies) enhances the divisibility of responsibilities. Furthermore, the problem with having too many entities makes it hard for them to be monitored. Since SOEs are governed by the state, the debt burden is weighed heavily on the government and then transferred to the taxpayer.

Moving beyond the profits and losses of these enterprises, an equally shocking fact is that out of the 527 SOEs that have been gazetted to date, information of their purpose (classification as commercial and non-commercial entities) of 284 SOEs is not freely available, and cannot be found from government sources.

Can these 527 enterprises be utilized or do a majority need to be shut down because of their losses? The government cannot afford to keep bailing out its mismanaged enterprises - the fiscal space simply does not exist.

The first step to addressing the problem of SOEs, is to figure out the number of entities the state governs. A bi-annual census of SOE conducted by the Department of Census and Statistics, with detailed reports (a current requirement fulfilled only by 55 SOEs) on every SOE is a must.  It is only from here, when the government has an idea of the extent of the problem that we can move into questions of improving accountability and introducing better governance structures.

The question remains, when the government is unaware of the number of entities it is responsible for, why should citizens pay for their loss making, inefficient, institutional excess?  

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.

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Dilshani Ranawaka is a Research Executive at the Advocata Institute whose main research areas are public finance, behavioural economics and labour economics. She can be contacted at dilshani@advocata.org or @dilshani_n on Twitter.

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.

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[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.

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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

Can the ECT buoy the Colombo Port?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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Sri Lanka’s location at the midpoint of international trade routes, positioned at the centre of the Indian Ocean, is a fact that we probably know by heart. But what’s important is the question whether we are exploiting this position. Our ports and good policy decisions are the tools that allow us to change geography into tangible benefits. The performance of the Colombo Port has been exemplary. It recently handled its seven millionth container and was ranked the fastest-growing port in 2018. However, with the Colombo Port operating at approximately an 80% capacity, this growth and the benefits it brings have an expiration date.

What is the ideal role of the government in the shipping industry?
The government should most definitely not be both a player and a regulator. Right now, the Government plays both roles, and the potential for a conflict of interest is enormous. It also means that it is increasingly difficult for competitive neutrality to be maintained. However, the government should not be completely removed from the industry. The role of the government lies solely in being a landlord and regulator, for if the Colombo Port is to grow while remaining efficient and profitable, regulation is required to address anti-competitive practices, monitor performance, and enforce standards. Of course, when advocating for government regulation, one wants to steer clear of the miles of red tape that the government is fond of. A caveat of this argument is that a balance be struck, so that regulation does not stifle innovation or investment.

What makes economic sense?
Establishing the hard and soft infrastructure a port requires is a capital and time-intensive task. There also needs to be strong commitment, which the Government lacks. Colombo International Container Terminal (CICT), which is a joint venture between China Merchants Port Holdings Company Ltd. and the Sri Lanka Ports Authority (SLPA), signed a BOT agreement in 2011. The terminal was operational by 2013. In comparison, the construction of the breakwater for the Jaya Container Terminal (JCT) run by the SLPA took four years, from 2008 to 2012. CICT developed an entire terminal in less time than it took the SLPA to construct the breakwater for its existing terminal.

Lack of direction and consensus from decision makers in government have resulted in the East Container Terminal (ECT) – a strategically important terminal remaining unused and idle. It is clear that the Government needs to step aside and allow the private sector to come in. This is evidenced by the performance of the South Asia Gateway Terminal (SAGT), which is operated on a BOT basis with the Government of Sri Lanka and a consortium of local and international establishments, which was awarded the “Best Terminal in the Indian Subcontinent Region” for the third consecutive year in 2019 and won the “Best Transhipment Hub Port Terminal of the year” at the Global Ports Forum.

Percentage change in TEU handling from 2016 to 2017 (Source: Ministry of Ports and Shipping, Performance Report (2017), compiled by the Advocata Institute)

When comparing the success of the different terminals, the same conclusion can be drawn. Looking at the comparison of the number of Twenty-foot Equivalent Units (TEUs) handled by the terminals from 2016 to 2017, the CICT is the best performer. Interestingly, while both SAGT and CICT have enjoyed an increase of 10.9% and 19.3% in TEU for 2017, JCT has witnessed a 4.3% drop. The privately-operated terminals outperforming the SLPA Jaya Terminal speaks volumes.

“Seaports are interfaces between several modes of transport, and thus they are centers for combined transport … they are multi-functional markets and industrial areas where goods are not only in transit, but they are also sorted, manufactured and distributed. As a matter of fact, seaports are multi-dimensional systems, which must be integrated within logistic chains to fulfill properly their functions.”

— United Nations Conference on Trade and Development

Ripple effects of private ownership

This definition by the United Nations Conference on Trade and Development succinctly describes the importance of ports and port infrastructure, and accurately shows how ports cannot work in silos. They are an integral component in a wider network of business, infrastructure, supply chains and employment. If we want profitable and efficient ports, we need similarly performing ancillary services.

Ancillary services and ports enjoy a symbiotic relationship. On one hand, ancillary services are series of economic activities which provide services and create employment; which are dependent on the port. On the other hand, the port benefits from efficient ancillary services as they make the port and its terminals more attractive to clients and boosts its own performance.

Ancillary services include logistics, bunkering, marine lubricants, freshwater supply, off shore supplies and ship chandelling, warehousing and many more. These services, and their ability to grow is affected by the general functioning of the port, and therefore is affected by the ownership of the terminals.

For a port to survive, ancillary services need to constantly innovate and remain productive. There is no need for this article to expound on how the government is not the place to go to when in search of innovation. This is clearly the forte of the private sector. This is backed up by the fact that so far, private ownership of terminals and profitability go hand in hand. In short, if profitable and productive terminal creates a well-functioning port, allowing ancillary services to grow; then we should be looking to the private sector for investment and not the government.

What is happening with the ECT?

As mentioned above, the Colombo Port is fast growing. However, if you were to look at the Colombo Port from one of the many high rises in the Fort area, spotting the East Container Terminal would not be difficult – it’s the only terminal with nothing happening. No cranes, no ships, no activity.

The East Container Terminal is not significant simply for its disuse. Compared to the West Terminal, it is situated in the middle of the new port and the old port of Colombo. This gives it an advantage as it is closer to all other terminals and moves inter-terminal cargo a smaller distance. This gives it an important edge as inter-terminal cargo is an important component of transshipment. The depth of the ECT, at 18m allows it to handle container shipments, adding to its value. In short, the ECT has a clear operational advantage.

It is evident that the country has lost out in this scenario. In a port that is as fast growing as the Colombo port, the decision makers of this country have, for a variety of reasons, not developed the ECT. The Sri Lankan government has taken many stances over the years. It both invited expressions of interest and business proposals for the development of the ECT and cancelled tenders, insistent that the ECT will be run by the Sri Lanka Ports Authority – sending mixed signals to interested parties, and effectively ensuring that investors are reticent, and development of the port has stalled.

Politics have dictated the government’s decisions on the ECT, and the result is that the country has lost out. In shipping the government has an important role to play in regulation and ensuring standards are adhered to, but it cannot be both a player and a regulator. The performance of the JCT in comparison to the private terminals makes it clear that government is not as effective as the private sector, it should limit itself to the task of regulation. In conclusion, the ECT should be opened for private ownership as soon as possible, following the precedent set by the BOT models of the CICT and SAGT.

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Aneetha Warusavitarana is a Research Analyst at the Advocata Institute. Advocata is an independent policy think tank based in Colombo, Sri Lanka. They conduct research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka. She can be contacted at aneetha@advocata.org or @AneethaW on twitter .

Colombo's traffic: can solving the problem of schools help?

Originally appeared on Echelon

By Ravi Ratnasabapathy

Children hit the books; adults hit the brakes. Back to school for them, back to the gridlock for everyone.

Travelling in Colombo is now a test of patience, traffic having reached an impossible level.

For motorists, disorderly flows of vehicles, people and animals make the roads a nightmare to navigate. Toxic fumes poison pedestrians and residents alike, leaving an unsightly haze visible from the city’s high-rise buildings. Travel forums for tourists include discussions on ‘rush hour in Colombo’ and ‘the best time to miss traffic’.

Even if one gets through the traffic, parking is almost as big a hassle. School vans permanently occupy some streets, while rows of trishaws hog other parking spaces. Traffic congestion imposes a variety of costs, some obvious, some hidden, on businesses and individuals. At the most basic level, increasing congestion means longer travel times for passengers and higher operating costs for vehicle operators.

University of Moratuwa civil engineering and transport expert Professor Amal S. Kumarage estimates that Sri Lanka incurs an economic loss of around Rs. 40 billion annually due to road traffic congestion and air pollution.

Solving the larger traffic problem requires a proper public transport system, but one of the most peculiar aspects of Colombo’s problem is school traffic. The world over, school traffic creates some problems, but for policymakers elsewhere school-related traffic congestion is confined to the overcrowding and blocking of streets on or near school property. The problem with Colombo is that school traffic extends from one end of the city to the other. During peak school hours, some areas of the city are impassable. The reasons peculiar to Colombo include a clustering of popular schools in central Colombo and adjacent areas, growth in student numbers over the years, and an increasing tendency for students to commute daily from outside the city to schools within the city.

Growth in school rolls within the city has far outgrown the capacity it was designed for, and excessive centralisation of economic activity around the Western province in general and the city in particular, which draws in large numbers of commuters. In 2001, the floating population was estimated to be 400,000; today, it is thought to be 1.5 million.

“Traffic congestion imposes a variety of costs, on businesses and individuals”

A century ago, colonial rulers encountered a similar problem with congestion in the city. The Housing and Town Improvement Ordinance No. 19 of 1915 was introduced to check “the uncontrolled and irregular building spread” in the city. “These regulations attempted to control the size, orientation, spacing, height and spatial arrangement of buildings to permit sufficient direct sunlight to the buildings and maximise ventilation. The chief features of the bill were its preventive and remedial measures. These were four-fold:

1. No building was to be erected unless roads existed to serve them.

2. No building was to exceed in height the width of the street on which it was situated.

3. Rooms were to be provided with sufficient space, ventilation and light.

4. Open spaces were to be provided in the rear of the buildings as a common channel of ventilation behind continuous rows of houses.

Following this, the Geddes plan of 1921 set the boundaries of the city and designed it to make it “The Garden City of the East”. The tree-lined streets (Bauddhaloka Mawatha) and the grid system of roads in Cinnamon Gardens are legacies of that plan. The Abercrombie Plan of 1948 noted the high concentration of economic, trade and port-related activities in the city and emphasised the decentralisation of the city’s activities to the suburban areas of Ragama, Homagama and Ratmalana as satellite towns. The plan included a ring road to link these towns and the shifting of central administrative functions to Ratmalana. This plan was not implemented and neither was anything else. Despite subsequent plans in 1978, 1985 and later, nothing was enforced. The city grew organically, in an increasingly unruly manner that paid no heed to infrastructure, land or even safety constraints. The most recent spate of building apartment complexes and hotels threatens to overwhelm the water, sanitation and waste disposal infrastructure, what some now term a ‘cancerous’ development. Development, but of a malignant kind, that can eventually choke and poison the city.

Can schools be one place to start fixing things?

It is absurd that people should have to send their children halfway across the country to attend school. To the author’s knowledge, school vans routinely travel from as far as Embiliptiya and Hikkaduwa. This is a colossal waste of fuel and bad for children who are giving up family time or extracurricular activities in exchange for commute time. Parents are lured into these insane commutes by another insane system: the perception that job, marriage and all future prospects are tied to the school one attends, regardless of the actual quality of education. Previously, parents aspired to send children to central colleges within their district that provided excellent facilities, education and the opportunity to enter university.

One of the aims of expanding the system of central colleges in 1943 (when 11 were established) was to check the shift of the rural population to urban areas. The colleges, modelled after Royal College with properly equipped with science labs, libraries, playgrounds, etc, catered to students within a six-mile radius. The number was expanded to 23, and by 1944, there were a total of 54, on the basis of one per electorate.

The schools had good teachers and the principals were selected on merit (by the Public Service Commission), making them immune to political pressure and enabling them to discharge their duties without fear or favour.

“The selection of teaching and other staff was done according to a pre-designed specific cadre. The all-round educational needs of the children were reckoned as the all-important factor, and more than not, the principal was consulted in the matter of appointments. Sometimes he was invited to serve on the selection board. There was also the assumption that teachers selected to central colleges had to be necessarily proficient in some extracurricular activity and be willing to assist in the afternoons at no extra remuneration” – CTM Fernando

The purpose of the Grade 5 scholarship exam was not to send even more children to schools in Colombo, but to gain admission to the closest central college. In its heyday, the quality of the products of the central colleges was not questioned, and that “all central colleges without exception served the purpose for which they were established is borne out by the fact that a vast majority of our professionals and other governmental and non-governmental executives are the products of these central colleges” (Fernando).

The decline of colleges was due to short-sighted politics. People were clamouring for more central colleges and the MPs responded by simply renaming small schools as “central colleges,” lacking the facilities and teaching staff. The politicisation of teacher selection meant appointments of central college principals were taken over by the ministry. “This new breed of politically appointed principals were often accommodated to ‘look after the duties of the principal’, as they lacked the requisite qualification and the experience, not to mention personality, to be one. When some of them lacked any competence in English, it was argued that English was not needed in the “Swabhasha system”.

Their knowledge of education and educational administration was woefully pathetic; but none dared to comment” (Fernando).

“The recent spate of building complexities can be termed a ‘cancerous’ development”

Can this system be recreated? Central colleges lack ‘cachet’, so we can never return to that and, depending on the politicians who destroyed an existing system, to recreate one is far too optimistic; but could affordable private schools, teaching in English, restore the system of education in the provinces?

If the government has no money to spend building schools, the logical step would be to allow the popular Colombo schools to build branches outstation. Several smaller ‘international’ schools such as Lyceum already have branches outstation. Initial funding could come from investors, either local or foreign, but on the basis that fees would be charged, which is the case at international schools. That parents pay heavily in ‘donations’ to get into popular schools is well known. Paying for extra tuition is widespread. Add to this the cost of paying for long distance school transport. If the right model can be found, paying proper fees for a decent education, close to home, would be an attractive option for parents and ease some of the chronic congestion in the city.

The government would need to implement proper planning regulations to check the growth of schools in congested areas while encouraging them to set up in key locations elsewhere. Perhaps the buildings and facilities of the old central colleges could be upgraded and rebranded to attract students from the area. Instead of the proposed purchase of Mi17 helicopters (apparently for use in UN missions), the government should spend this money on school infrastructure. Volunteer teachers from overseas and teacher training programmes could help fill in the gaps for teaching staff.

These are only suggestions, but policymakers need to start thinking outside the box; even dusting off colonial era plans would be an improvement.

Yahapalanaya: A tale of confusion and ineffectuality?

Originally appeared on Echelon

By Ravi Ratnasabapathy

“Whenever we send papers for approval, authorities first look at how to stop it. The only way to activate it is to give something and because we don’t, we have to budget 12-18 months – wait 12-18 months where they (authorities) find different excuses not to give approval.”

Many businessmen are disgusted by the state of the government: rules are uncertain and nothing ever seems to get done. Many also claim that things have got more difficult under the Yahapalanaya regime.

Is this true?

The government has two components, elected representatives (politicians) and non-elected bureaucrats. Policies are normally the result of both political and bureaucratic intervention. There is no question that Sri Lanka’s bureaucracy has been decaying for decades, but it now seems to have almost ground to a halt. It is difficult to judge if the bureaucracy has become a lot worse in the past few years – there have been few obvious changes to the system that prevailed before.

What’s changed are politicians, and particularly, a change in the structure of power. What typically used to happen in the past was that when businesses encountered obstacles in the bureaucracy, they would simply approach a politician. Under the previous regime, power was centralised and resided in a few positions.

If a businessman complained to the right channel, a quick response and a firm decision could be expected. These decisions simply cut through all red tape and regulations, which meant the bureaucracy was simply bypassed. The inefficiencies of the bureaucracy thus remained hidden from view.

Under Yahapalanaya, power is diffused and split among warring factions, contributing to an uncertain policy framework. Lacking an overarching vision, few have a clear idea of policy and even fewer are willing to take bold decisions that cut through the bureaucracy. When businesses approach politicians for solutions, they are directed into the maze of the bureaucracy where they experience the grim decline of decades.

This may explain the dilemma, but what is the solution?

Investors shy away from countries where rules are unclear or are constantly changing, and where approvals are dependent on ad-hoc decisions. What is needed are simple, clear rules and standardised processes that deliver predictable outcomes. If X paperwork is submitted, an approval should be received within Y time with no further intervention.

“The solution is not to allow politicians to bypass laws, but to fix the processes”

The solution is not to allow politicians to bypass laws and regulations, but to fix the processes. This will not just help investors and businesses, it helps the public and small businesses who must get approval for many things from cutting a tree to digging a well or obtaining an electricity connection. Migrant women have to submit a myriad of documents beyond those specified in the Circular and make multiple visits to the DS office in order to obtain the Family Background Report.

Small businesses struggle with taxes. The Inland Revenue refuses to issue VAT registration to a new business unless they can show that they have reached the threshold (Rs3 million per quarter), forcing them to incur the additional cost of VAT. Once registered, even if the business later falls below the threshold, they are harassed for payment, even though they are technically no longer liable.

Small businesses and individuals lacking access to politicians have been dealing with these issues all the time. Fixing the processes should be a priority, but this is an enormous task. It can only be approached by multiple taskforces working together.

At the top, there needs to be a central “Administrative Simplification Agency” – promoting administrative simplification “across the board” for businesses, citizens, and the public sector. The central bureau must be supported by smaller teams working in all the departments to cut and simplify paperwork. Outside taskforces, perhaps supported by external consultants, can help with co-ordination and keeping up the pace of reforms. Relevant partners and affected parties can be involved in the administrative simplification reforms, which will contribute to gaining constituency.

The agency must have the highest level of political backing. The approach is to re-engineer processes, cutting redundant regulations, approvals or documents.

The challenge is to balance the use of administrative processes to implement public policies, minimising the interferences of these requirements in terms of the resources needed to comply with them.

All this is back office work that is dull, dreary, difficult and lacks political visibility. No politician will back such a venture as they will get no political mileage from this.

Transparency is needed in the cutting of red tape, which brings public support, builds political capital and sustain reform.

There is a useful model in Peru that set up a tribunal to gather and evaluate proposals from citizens for deregulation, and to check up on how various bureaucracies were responding to the law. To encourage public participation, bright yellow boxes were placed in the agency, government offices, and at all the radio, television and newspaper outlets to make it as convenient as possible for people to deposit their grievances. The media were encouraged to review the grievances they received, and when they saw an astonishing or outrageous story, they took up the cause, creating the kind of public pressure that politicians found impossible to ignore.

“The agency must have the highest level of political backing. The approach is to re-engineer processes”

The tribunal did not cut the red tape. What it did was bring the problems to public view, and involved the public in the process. The body that cut the red tape worked after the tribunal but in Sri Lanka, the mechanism to cut the red tape must be set up beforehand. This must be done without much fanfare, otherwise the public will once again witness the delays in setting up such a body. Ideally, some preliminary analysis should be done beforehand and several solutions must be kept ready for immediate implementation once the publicity campaign is launched. People should experience real results.

The process must also include evaluation and measurement of changes so further improvements can be done. The principle is to first organise and once this is done, as far as possible, to securely digitise. (Current government efforts to digitise are rickety and intrusive, requiring registration via social media accounts, and are prone to failure).

In Peru, over the years the Tribunal was in operation —with the President, by law, in attendance—more than 200 bureaucratic knots were untied. The time previously required to fulfill hundreds of different kinds of official procedures, including obtaining a passport, applying to university and getting a marriage license, was cut across the board by at least 75 percent.

At the end of President Garcia’s term in July 1990, 79% of the population (and 84% of the poorest among them) rated the Law of Administrative Simplification as the best law enacted during the 1985-1990 legislative period.

If the government is willing to take this approach, it can result in a win-win situation for politicians and the country.

In state business, the agency problem is on steriods

Originally appeared on Echelon

By Ravi Ratnasabapathy

Inefficiency in state enterprises is a common, if not universal, problem. Citizens are often frustrated by poor service at public institutions. Public hospitals are free, but how many senior executives use them? When holidaying overseas, Sri Lankans will use the railway, but when was the last time they rode on Sri Lanka’s subsidised railway?

Where there is a choice – private hospitals or cars – people may escape poor state services by using alternatives; but the poor aren’t as fortunate.

However, there is no escape from the cost of inefficiency. Inefficiency and waste in state enterprises must eventually be paid for, either by high prices (needed to cover all the waste) or higher taxes. Why is this common in Sri Lanka, but less so in developed countries? The issue is with governance, specifically the problem of agency.

The principal-agent problem is common to any enterprise, private or public, not directly managed by its owners. When an owner manages a business, the interests of the business and the owner are perfectly aligned. When the owner hires a manager to run the business, problems arise if the interests of the manager conflict with that of the owner.

“When an owner manages a business, the interests of the business and the owner are perfectly aligned. When the owner hires a manager to run the business, problems arise if the interests of the manager conflict with that of the owner”

The problem with state enterprises is that, apart from the standard agency costs of a business, they also suffer political costs. We will come to this presently, but in effect, two sets of costs must be managed for a state enterprise to function effectively, so the regime of governance needs to be much stronger than for private entities. In Sri Lanka, the governance regime is a lot weaker, leading to underperformance and abuse.

DEFINING THE PROBLEM OF AGENCY
Shareholders, the ultimate owners of a company, as principals, elect the management to act and take decisions on their behalf. Managers are supposed to employ the resources of the business in a manner that will maximize shareholder wealth. The manager’s best interest, however, is to divert these resources to enhance their personal status (through perquisites such as chauffeured limousines, business class travel) and maximise their own wealth (through excessive pay or corruption).

An example may be seen in recent news reports of a payment of Rs75 million paid to senior managers of People’s Bank and allegedly excessive payments to the top management of SriLankan Airlines. According to a COPE report, the ETF has paid incentives amounting to Rs74.8 million and bonuses of Rs44.5 million, contrary to treasury circulars. Another instance is Hunter and Company PLC, where the auditors were dismissed when they insisted that disclosure was necessary with regard to a bungalow that was being used by key management personnel. Later, a shareholder of the company moved to convene an EGM to call for an explanation from Hunters’ directors with regard to the “disappearance of a Rs2.5 million cheque in favour of a Mr Mahesh Gajanayake and about directors’ remuneration over and above the limit set out in the company’s Article 107”.

The reduction of agency costs is regarded as the essential function of company law and corporate governance.

THE PROBLEM IN STATE ENTERPRISES: POLITICAL AND AGENCY COSTS
State ownership creates its own agency problems, which are caused by the separation of politicians and bureaucrats who oversee SOEs from “the citizens” on whose behalf the enterprises are ostensibly owned. This creates an extra level of agency.

SOEs are ultimately owned by citizens, but run by managers, who are controlled by politicians. Politicians determine or otherwise influence the appointment of key management and must hold the managers accountable.

Unlike shareholders, politicians have not invested their own money in the business. As they have no stake, there is no particular interest in ensuring that it is well run. Politicians, however, have incentives to direct SOEs to achieve economically inefficient objectives for political purposes, giving rise to political costs. These may be benign, if policies enhance social welfare, even if they fail to maximize shareholder value, but most often they are malign, favouring political allies at the expense of public welfare.

The real owners, the citizens, have no voice and little interest in how the business is run.

CITIZENS AS SHAREHOLDERS: THE COLLECTIVE ACTION PROBLEM
Citizens are the ultimate “owners”, but cannot exert any meaningful oversight as:
(a) they have no legal standing as owners; and
(b) 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, as time and effort must be spent monitoring performance if malpractice is to be detected, a task 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; they will depend on politicians for this. As discussed previously, politicians have no incentives to do so.

The main mechanisms to address these two layers of agency costs are general corporate laws on the one hand, and general political and legal institutions on the other; but for reasons discussed later, they are weak.

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

THE AGENCY PROBLEM: A DISTINCTION BETWEEN PRIVATE AND PUBLIC
As observed above, the agency problem is present in all corporate entities, but it is important to note a fundamental distinction between private shareholders and citizens.

Investors in private companies take a risk when they put money down, but it is one taken of their own volition. Shareholders subscribe voluntarily to shares; they are not compelled to invest.

Generally, people only invest in private companies if they know and trust the management. If the business does not perform to expectations, they will earn a lower return. If it fails, the shareholders will lose, but it is their own money, voluntarily invested, that is lost.

With SOEs, the important difference is that, unlike in a company where willing investors are taking conscious decisions, the investment in an SOE is by citizens who contribute involuntarily and unwittingly. Taxation is compulsory, and in the form of indirect taxation, all citizens contribute to SOEs.

In the most extreme case, if shareholders are disgusted and can find no remedy, they still enjoy a final option: exit. They may sell their shares. For citizens, unless they choose to migrate, there is no exit option.

Businesses must risk their own money when they go into trade, but governments risk other people’s money. If a business does not earn a profit, the owner will need to keep infusing funds, and this provides a powerful incentive to improve efficiency. If the owner is incapable of improving the business and is unable to infuse more funds, a mismanaged business will eventually close.

SOEs in Sri Lanka, however, enjoy implicit state guarantees and funding via state banks, which undermines even the threat of bankruptcy as a source of managerial discipline. The continuous accumulation of losses is only possible because of this factor. An example is SriLankan Airlines, which has accumulated losses of $1 billion and a negative net worth, but continues to operate with funding from state banks. For context, the current IMF facility (stand-by arrangement) is $1.5 billion.

THE PROBLEM OF AGENCY WITHIN THE POLITICAL CONTEXT OF SRI LANKA
As citizens lack the interest or wherewithal to monitor SOEs, efficiency is entirely dependent on the system of governance. Distorted incentives and weakened mechanisms present structural challenges to efficiency.

“Investors in private companies take a risk when they put money down, but it is one taken of their own volition. The investment in an SOE is by citizens who contribute involuntarily and unwittingly.”

• Patronage
  Politics in Sri Lanka is based on patronage. Ministers face pressures from constituents for jobs or favours. State sector jobs are especially prized for status and security. Politicians believe that granting jobs is a necessary condition for re-election. In general, lawmakers and ministers in Sri Lanka across party lines and ideological divides view SOEs as providing avenues to create employment.

  SOEs incorporated as limited liability companies enjoy greater autonomy in the management of their affairs, allowing the minister to bypass treasury or budget restrictions placed on recruitment. In the case of state banks, it is possible for the minister to exercise patronage by directing lending on preferred terms to selected constituents.

  This leads to problems of over-staffing. The more staff are hired, the greater the potential votes, leading to the chronic over-staffing evident in many SOEs. The allied problem is nepotism – the recruitment of people based on relationships instead of ability. Recruiting unsuitable candidates weakens the general level of competence within the SOE, which adversely impacts performance.

  Therefore, patronage is particularly harmful as it has a dual impact on performance; the hiring of excess staff adds to unnecessary costs, while nepotism leads to diminished efficiency.

  A COPE report highlights how the State Engineering Corporation recruited 4,512 employees when the available vacancies were only 41. The problem is pervasive. The Secretary to the Treasury Dr. Samaratunga noted that recruitments to SOEs take place without the approval of the Management Services Department of the Treasury. “All SOEs across the government—public corporations, statutory boards or government-owned companies—have effected recruitment without proper approval of the management services”.

• Corruption
  Corruption is endemic in Sri Lanka’s political system. The root of the problem lies in campaign finance. Changes in the 1978 constitution removed limits on campaign spending and the need to disclose sources of funding. This has led to a massive increase in spending with candidates seeking to outspend each other in order to win. Those who succeed come into office having either made major investments or incurred significant debts, usually a combination of both. This creates an in-built incentive for corruption. In the absence of strong governance mechanisms, it is hardly surprising if MPs do not succumb to temptation. spending a good deal of their time in office either recovering election spending or raising funds for their re-election campaign. This explains the scramble for positions in the government, which allows control over resources. The greater autonomy of SOEs makes them particularly tempting targets.

“Greater efficiency can only be expected through better governance, which requires addressing fundamental weaknesses in the political system and adopting a comprehensive system of corporate governance for state enterprises”

LACK OF A COMPREHENSIVE SOE CORPORATE GOVERNANCE FRAMEWORK
The Secretary to the Treasury has noted that SOEs have a “general lack of governance practices, lack of accountability mechanisms, issues associated with lack of clear policy and legal frameworks, and weak supervisory roles played by the management and board of directors”.

Many countries have adopted comprehensive corporate governance practices to strengthen the governing bodies that oversee and control (shareholders or owner meetings, board and management, internal monitoring structures), while defining clear rules of engagement between the different actors, as well as increasing transparency and accountability towards stakeholders.

These are lacking in Sri Lanka, and the overall system of governance still seems inadequate to hold SOEs to account.

Conclusion
Perverse incentives and weak governance greatly increase political and agency costs of state-owned enterprises. It is, therefore, not surprising that a study by Lalithsiri Gunaruwan found that “inefficiency is a common feature in all Sri Lankan SOEs, across all organisational categories”. Greater efficiency can only be expected through better governance, which requires addressing the fundamental weaknesses in the political system and adopting a comprehensive system of corporate governance for state enterprises.

The compelling case for greater economic freedom

Originally appeared on Daily FT

By Alexander C. R. Hammond

The Fraser Institute, a Canadian think tank, published the 22nd edition of its annual Economic Freedom of the World (EFW) report. For a long time, we’ve known that, on average, freer economies are richer, grow faster and have longer life expectancies.

But the 2018 edition of the EFW gives us more insight than ever before into the intrinsic link between economic freedom and other measures of human wellbeing — such as infant mortality, equality, happiness and extreme poverty rates. 

To rank the level of freedom for 162 economies, the EFW analyses 42 indices across five major areas (size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation), using figures from 2016 — the most recent data available.

Yet again, Hong Kong takes the top spot in the EFW rankings — a position it has held since 1980. Singapore remains second, as it has since 2005. The remaining top 10 most free nations are: New Zealand, Switzerland, Ireland, the United States, Georgia, Mauritius, the United Kingdom, Australia, and Canada, the latter two being tied for 10th spot. The three least free countries are Argentina, Libya, and Venezuela. Out of the 162 countries the EFW report measures, Sri Lanka ranks in 106th place. Sri Lanka’s position in the report is a staggering 10 places lower than it was in 2017. Of all the areas the report analyses, Sri Lanka experienced the steepest decline in ‘Legal Systems and Property Rights’ – a drop from 5.28 to 4.93. Sri Lanka specifically lags behind in judicial integrity, openness to trade, and access to sound money. 

The positions of the economies in the EFW matter because there is a significant correlation between economic freedom and human wellbeing. To analyse this, the Fraser Institute splits the 161 measured countries into quartiles (i.e. each quartile represents a quarter of the economies) based on their level of economic freedom.

The average income in the freest quartile of nations is a staggering 7.1 times higher than the average income in the least free quartile ($40,376 and $5,649 respectively). The bottom 10% of income earners in the freest countries make, on average, 7.9 times more than the poorest 10% in the least free quartile. 

Comparatively, extreme poverty (as defined by the World Bank as an income of than $1.90 per day) is almost non-existent in the freest countries. By comparison, almost a third of all people in the bottom quartile of economies live in extreme poverty. It is clear, then, that for the absolute poorest in any given society, it is unimaginably better to live in a freer economy.

Of the four quartiles, Sri Lanka belongs to the third quartile, which is suitably titled “Non-Economically Free Countries”. With an average GDP per capita of $3,842, Sri Lanka’s average income is an incredible 2.9 times lower than the average income in this quartile ($11,465). As the freest nations have an average income of $40,376 it undeniable that on average, freedom and prosperity are heavily correlated.

But economic freedom isn’t just about money. Take life expectancy for example. In the freest countries, people live on average 15 years longer than those in the most restrictive systems. For many people, that amounts to a difference between knowing one’s grandchildren—or dying before their birth.

Infant mortality is another measure that highlights the immeasurable human cost of isolationist economic policies. Measured in the number of deaths per 1000 births, the devastating death rate in the least economically free nations is 6.8 times higher than the rate in the freest —42.2 and 6.2, respectively.

Problems of misogyny also creep in. When looking to the United Nations (UN) Gender Inequality Index, where zero represents complete gender equality and one represents complete inequality, the least free countries have an average score of just 0.46–compared to 0.18 for the freest quartile.

Free people are also happier people. The UN World Happiness Index asked respondents to rank their lives on a scale of zero to 10, with 10 representing the best possible life and zero representing the worst imaginable. The most economically liberal countries once more win out: the EFW shows that the freest quartile has an average score two points higher than the least free – 6.5 compared to 4.48.

There is more good news. Despite our tendency toward pessimism about the current state of the world, the EFW shows that economic freedom has increased substantially over the last 25 years and that the largest gains have been made in developing nations.

In 1990, the average economic freedom score for a “high-income industrial” country was 7.18 out of 10, compared to just 5.28 for the average “developing” country—a gap of 1.90. By 2016, that gap had narrowed by 46%: developing economies were a mere 1.06 points behind the industrial nations. The rapid increase in the EFW score by many developing economies was primarily driven by gains in the area of trade liberalisation and sound money (meaning the stabilisation of purchasing power by combating inflation.)

The result of these advances is that, when weighted for population, the average person now lives in a far freer economy. Consider this: if the world of 1980 were a country today, its economic freedom score would place it at 160 out of 163 nations — ranking two places below war-torn Syria. But if a 2016 world was a nation in 1980, it would be the 12th freest, with a score of 6.62 — slightly above 1980 Australia.

The latest EFW once again shows the deep and continued link between economic freedom and important indicators of human wellbeing, including; wealth, poverty alleviation, life expectancy, inequality, infant mortality and happiness.

It is clear that despite the many challenges that remain, the poorest in society continue to benefit the most from secure property rights, loosened regulatory barriers, and greater trade liberalisation. Long may policymakers remember this so that the march toward greater economic freedom continues.

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(The writer is the Research Assistant for HumanProgress.org. He writes about economic freedom, globalisation, and human wellbeing. Hammond is a graduate of History and Politics, from the University of Exeter in Great Britain).

SriLankan Airlines and the Case for Privatisation

Originally appeared on Sunday Times

By Aneetha Warusavitarana

The government’s policy document ‘Vision 2025: A Country Enriched’ positions Sri Lanka as a knowledge based, highly competitive, social market economy; and much of the content of the document is in line with increasing competition, productivity and efficiency.

The state of SriLankan Airlines, however, is in the antithesis of efficiency and productivity. The airline has been raking in losses for years now, and on Monday the 7th of January, the president appointed a committee to once again work on its restructuring. The new committee will assess the previous reports and restructuring plans and have now completed their recommendations.

It is evident that state ownership of this airline is not working, so what are the solutions?

Back when SriLankan Airlines was still Air Lanka, it was privatised. The government sold a 40% shareholding to Emirates Airlines in 1998, and contracted Emirates to manage the company for ten years with the government of Sri Lanka retaining majority shareholding. In 2008, the government took back complete ownership of the airline, and from then on, the losses began [1].

Source: Sri Lankan Treasury Annual Report (2008, 2018)

Privatisation has worked in the past, and the argument for privatisation of a state-owned airline is strong. To begin with, the aviation industry is an investment heavy industry, which requires expertise and foresight. Beyond procuring airplanes and terminal space, there is a web of domestic and international regulations to navigate, not to mention standards to adhere to. From then on, once you have the planes and are ready to start, the airline needs to be competitive in order to survive. It requires strong management and effective marketing, with a team that can adapt to external shocks in fuel prices, domestic and international politics, and changes in foreign exchange rates. Even if it has the money, a government is ill-equipped for this task, evidenced by the track record of the airline in state hands. During the period of 2009-2017, when the airline was under state management, it has accumulated losses of Rs. 148,707 Mn [2]. Repeated promises of restructuring or turnaround have remained unfulfilled.

While privatisation of SOEs, and specifically the privatisation of state-owned airlines is theoretically sound, appropriate implementation is necessary. The Organization for Economic Co-operation and Development (OECD) has done extensive research on privatisation of state-owned enterprises and has identified some key features that successful privatisations have had in common. Detailed below are some features that are relevant to Sri Lanka [3].

• Strong political commitment to privatisation at the highest level in order to overcome bureaucratic inertia and to resolve inter-institution rivalries in order to move the process forward.

• Clearly identified and prioritised objectives in order to provide the policy with focus and a sense of trade-offs that may be required.

• A transparent process to enhance the integrity of the privatisation process, gain credibility with potential investors and political support from the public.

• An effective communication campaign to explain the policy objectives of privatisation and the means by which they are to be achieved in order to respond to public concerns and to gain support for the policy.

• Allocation of adequate resources in order to meet the demands of the shift to privatization.

Partial privatisation of SriLankan as a more viable solution?

Privatisation does not always have to be full divestiture of the asset; the option of partial privatisation is open. In this scenario, governments sell a minority stake and retain a degree of control, while the enterprise reaps the benefits that accompany privatisation. The process of privatisation will bring with it a much needed infusion of private equity, new management, clearly defined guidelines and a more flexible financial structure. The focus of the airline will shift towards increasing profitability and efficiency, with the aim of increasing shareholder value. Given Sri Lanka’s past success story with the partial privatisation of Air Lanka, it is possible that this solution will be pursued or at least considered.

The pitfall of partial privatisation

Drawing from the experience of privatisation in other countries when governments remain the majority shareholder, the space for political interference continues to exist [4]. This is the biggest potential pitfall, and the SriLankan experience can attest to the damage this can cause. As of now the government is struggling to create interest in the purchase of the airlines, and the fear that the government will once again step in and interfere with the management is the most probable reason behind this.

If the government is considering partial privatisation, steps should be taken to ensure that the government’s interests remain those of a shareholder and not those of a political entity. Given past track records, assurances of non-interference are unlikely to inspire confidence.

In 2015 the Hon. Prime Minister, Ranil Wickremesinghe mentioned that the government was considering the Singaporean Temasek model of a holding company as a solution to the problems of SOEs in Sri Lanka [5]. Establishing a holding company for SOEs would help bolster investor confidence and improve the functioning of the airline. It would professionalize the management and create distance from local politics [6]. It is a shame that even though this idea was brought out in 2015, it was never implemented. The question that remains is whether the government will take this into consideration and take decisive action on this problem four years later.

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[1] Ratnasabapathy, R. (2016). The renationalisation of SriLankan airlines and the follies of state enterprise. In: The State of State Enterprises in Sri Lanka. Colombo: The Advocata Institute.

[2] Ten Year Review: SriLankan Airlines Annual Report 2016/17. Colombo.

[3] Privatising State-Owned Enterprises: An Overview of Policies and Practices in OECD Countries. (2003). Paris: OECD Publishing.

[4] Ibid

[5] Wettasinghe, C. (2015). Temasek model to make public enterprises viable. Daily Mirror. (Online - Accessed 16 Jan. 2019)

[6] Kim, K. (2018). Matchmaking: Establishment of state-owned holding companies in Indonesia. Asia & the Pacific Policy Studies, 5(2), pp.313-330.

The rationale for the Sri Lanka - Singapore FTA

Originally appeared on Echelon

By Ravi Ratnasabapathy

Small countries have small domestic markets; a focus on exports will help overcome this natural limitation.

Sri Lanka’s economic growth has been sub-optimal for decades. The standard excuse for this was the war. When it ended in 2009, there was renewed hope that the country would at last reach its potential, but this was not to be. After a brief spurt, post-war growth has reverted back to the long-term average (4%) in each of the five years over 2013-2017. This will not be any better in 2018. Post-conflict countries expect to experience a sustained “peace dividend”, but Sri Lanka’s 2009-12 boom was surprisingly limited both in scale and duration.

There are several issues in the structure of the economy, the most important of which is the lack of export growth.

Small countries have small domestic markets, and a focus on exports will help overcome this natural limitation.

Sri Lanka retreated from a policy of openness since 2000’s raising tariffs and regulatory barriers, resulting in a sharp contraction in exports as a share of GDP, which fell from a high of 33.3% to about 12.7% of GDP in 2016. Sri Lanka’s share in global exports has also declined. The country’s share in world manufacturing exports increased from 0.05% in the mid-1980s to about 0.11% in 1999, but has since declined, reverting to the level in the 1980s. In Malaysia, which has a similar population, exports are 71.5% of GDP.

THE ROLE OF FREE TRADE AGREEMENTS
The government has re-prioritised international trade as a driver of economic growth, and FTAs are a part of this process. FTAs open opportunities for Sri Lankan exporters and investors to expand their businesses into overseas markets. Imports under FTAs mean greater competition in the local market, but this is no less important as it helps to maintain and stimulate the competitiveness of local firms.

It is only constant competition that drives productivity, which is the basis of sustainable growth. To take an analogy from sports, if Sri Lanka’s cricketers focused mainly on domestic club cricket, they are unlikely to perform well in the international arena.

Apart from keeping firms efficient, competition benefits local consumers through access to an increased range of better value goods and services.

There is a cost to this, as some firms may lose out; we will come to this.

GLOBAL CHALLENGES
Sri Lanka’s already-weak export game is about to take another knock from BREXIT and Trump. Therefore, it makes sense to increase regional trade to offset the potential decline in current markets. Countries generally trade with their neighbours, except in South Asia.

Regional trade in East Asia & the Pacific makes up 50% of total trade; in Sub-saharan Africa, the figure is 22%, but in South Asia, it is only 5%. Singapore is the current chair of ASEAN and one of its most respected members. For a small country thus far ignored by ASEAN due to the conflict and inconsistent policies, the FTA provides an important signal of a policy orientation towards greater trade and investment with the region.

Greater openness brings many benefits, but there are many stakeholders with different interests, so policy needs to take into account these varying interests.

THE IMPACT OF PARA TARIFFS ON PRICES
The customs tariff, together with the para tariffs of PAL and CESS, are taxes that are imposed on imported products that are not applied to the domestic equivalent. Since foreign exporters do not change the price that they charge for the product, the domestic price of the imported product rises by the amount of the tariff. The impact of this on various stakeholders is discussed below:

Domestic producers
Domestic producers competing with equivalent imports do not have to pay para tariffs, and so have an advantage over the imported product. As the prices of imported products rise, domestic producers have the opportunity to raise their own selling prices because competing with imported products now costs more.

It is always the case that the prices of domestic products rise when tariffs are imposed on imports. If it were otherwise, it would make no sense. The very purpose of the tariff is to enable the domestic producer to sell his product at a higher price. Therefore, domestic producers gain when the government imposes a tariff on competing
imports.

Domestic consumers
Domestic consumers of the product are equally affected by the imposition of the tariff. They must pay a higher price for both imported and local products. It is domestic consumers who pay for the protection of domestic producers, not foreign firms.

Government
The government collects tariff revenue on whatever quantity is imported, although they do not collect it on the local product. The benefit the government creates for the local producer by raising the price of imports is collected by the local producer.

There are two domestic winners (domestic producers and the government) and one domestic loser (domestic consumers) because of the imposition of a tariff.

On the face of it, there appears to be more winners than losers, but in terms of sheer numbers, consumers in any industry far exceed the number of producers (or their employees). Consumers, however, are unorganized, so their interests may end up being overlooked.

MANAGING THE DOWNSIDE
As seen above, there are losers and winners in tariffs. When tariffs are cut, local producers may lose, although the government may still gain as a greater volume may offset a reduced rate. Managing the downside is necessary; local firms will need to compete, but they may need support to improve productivity and a period of adjustment.

The draft Trade Adjustment Programme (TAP) prepared by the Ministry of Development Strategies and International Trade provides a framework to tackle problems faced by affected industries. The underlying principle is to smoothen the transition of firms and workers to new market conditions, post liberalisation.

The government needs to work closely with each sector to tackle policy and regulatory constraints, and fix missing ‘public goods’-inadequate public services, infrastructure, etc, that sap the productivity of local firms.

LIBERALISATION OF SERVICES, MOVEMENT OF PROFESSIONALS
There has been much debate over the movement of people. Various professional associations have alleged that the FTA will lead to an influx of incompetent people who will undercut professionals or provide substandard services.

These fears are misplaced. As per the Schedule of Specific Commitments (Chapter 7, Annex 7A ), the movement of persons is restricted to intra-firm transfers of specific categories, which is no different from current provisions under the BOI. The movement of professionals outside this limited sphere is closed, hence, the question does not arise.

In fact, Sri Lanka faces shortages of both unskilled and skilled workers. A survey by the Department of Census and Statistics indicates that nearly half a million vacancies exist in the private sector (excluding micro enterprises). The state sector employs far too many people, burdening taxpayers, while depriving the private sector of people, but even a drastic reduction in the size of the state may not solve the skills shortages and mismatches.

Labour scarcities have an adverse impact on growth, while shortages of skills impacts both productivity and growth. Studies have shown that the migration of people benefits both the sending country and the receiving country (van der Mensbrugghe and Roland-Holst 2009). The welfare gain for the destination country is because immigration increases the supply of labour, which raises employment, production and thus GDP (Ortega and Peri 2009).

A strong case can be made to allow specialised skilled migration to fill gaps that exist in the market. The skills of migrants will be complementary to those of existing workers, therefore, all workers experience increased productivity, which in turn, can be expected to lead to a rise in the wages of existing workers.

EXPERIENCE WITH THE FTA WITH INDIA
The discussion so far has been abstract, how do we know how the FTA will actually work?

The experience of the much-criticised FTA with India that was signed in 1999 may indicate some of the potential.

The Indian FTA is a very restrictive document: it outright excludes many major sectors in which both countries have comparative advantages – i.e. the very rationale for trade. India subjects 15 out of the top 20 Sri Lankan products to either a tariff or quota. Sri Lanka, in turn, offered additional concessions (of only 3.5%) on only 7 of India’s top 20 products, the rest being either excluded or were already tariff-free.

It was, in fact, an agreement designed to fail, entered into only as a formality.

Despite this, export volumes have grown significantly and India has become the third-largest destination for Sri Lankan exports:
“…nearly 70% of Sri Lanka’s exports go to India using FTA provisions… While India has been the largest source of imports for Sri Lanka (even before the FTA) for many years, India has acquired the position of being the third-largest destination for Sri Lankan exports – a rank achieved through the benefit of the tariff preferences in the FTA.” (Institute of Policy Studies)

The export basket has also diversified:
“If one looks at the Sri Lankan export basket destined for India before the FTA, which was dominated by agricultural products such as cloves, peppers, areca nuts, dried fruits, nutmeg, etc., exports have now (after the FTA) become more diversified. It includes boats/ships, wires and cables, glass and glassware, apparel, woven fabric, etc. In 2013, the largest Sri Lankan export to India was boats and ships.

Sri Lanka exported 505 product items to India before the FTA in 1999, the product items exported increased to 1062 by 2005, and to 2100 product items by 2012, after the implementation of the FTA. This quadrupling of the product items during 1999-2012 provides further evidence for Sri Lanka diversifying its export basket to India after the FTA came into operation in 2000.”

The impact of the FTA is not well known because it did not affect prominent export industries. The beneficiaries were firms that were working in other areas. Neil Marine is not exactly a household name, but is among South east Asia’s largest manufacturers of fiberglass boats. The North Sails Group, the world’s largest producer of sails and a sail technology leader, manufactures many of its products in Sri Lanka.

Trade only takes place to mutual benefit. Given sufficient time, the FTA with Singapore will have similarly beneficial outcomes.

How import taxes drive up the cost of living

Originally appeared on Daily News

By Ravi Ratnasabapathy

“The Lanka Confectionery Manufacturers Association (LCMA) is actively seeking Government intervention to introduce a ‘negative list of manufacturing’ to safeguard local firms engaged in the industry before opening up the economy to giants like India and China.” - DailyFT 25 September, 2017

The above is an illustration of a phenomenon that is common in Sri Lanka – an industry seeking protection from foreign competition. This protection generally takes the form of a tariff – a tax that is imposed on the imported product that is not applied to the domestic equivalent. In the above instance the LCMA is requesting that the existing tariff protection enjoyed by the industry is continued even if a Free Trade Agreement (FTA) is signed. (An item in the “negative list” of an FTA is not subject to the FTA). For example imported biscuits are taxed at a total of around 107% of price, if biscuits are on the negative list this tax would continue, despite the FTA.

Although a tariff is imposed, this does not generally cause foreign exporters to reduce the price that they charge for the product. Therefore the domestic price of the imported product rises by the amount of the tariff.

Domestic producers competing with these imports do not have to pay the import tax so have an advantage over the imported product. As the price of imported products rise, domestic producers have the opportunity to raise their own selling prices because competing imported products now cost more.

Will the domestic producer raise his prices? Yes, it makes no sense otherwise. If the domestic producer were to set his prices at exactly the same level he would if imports were not taxed there would be no point in seeking tariff protection from imports. They very purpose of the tariff is to enable the domestic producer to sell his product at a higher price. The domestic producer is thus better off as a result of the tariff.

What happens to consumers?

Domestic consumers of the product are equally affected by the imposition of the tariff. They must pay a higher price for both imported and local products.

In other words, the protection for domestic industry is actually paid for by domestic consumers, in the form of higher prices.

What of the Government that imposes the tariff?

The government collects tariff revenue, on whatever quantity is imported, although they do not collect it on the local product. The benefit that the Government creates for the local producer by raising the price of imports is collected by the producer. This surplus is called a “rent”, of which more below.

We thus have two domestic winners (domestic producers and the government) and one domestic loser (domestic consumers) because of the imposition of a tariff.

The local producer who is able to charge a higher price from the consumer thanks to the tariff on competing imports is said to enjoy a “rent”. In economics, a “rent”, is an unearned reward. The producer is able to charge a higher price not because of superior quality or service but because a tax imposed by the Government.

If the producer was able to charge a higher price because of better quality, even while cheaper imports were available the producer would be earning the premium price. There is an important distinction here.

Consumers would only buy a more expensive product while lower priced products are available is if they valued what they were getting. The producer must do something extra to persuade consumers that his product is superior and worth paying a higher price.

When a tariff raises the price of imports, local producers are able to charge higher prices with no increase in value to the consumers. Given a choice consumers may well chose cheaper alternatives – but the tariff makes sure that the alternative is no longer cheap. Consumers are thus forced to pay a higher price, not because they want to but because there is no alternative. This is why the premium in this instance is said to be unearned. Consumers do not perceive better value but pay more.

Thus producers gain at the expense of consumers. As noted before, it is domestic consumers (not foreign producers) who pay for the protection of domestic industries. The net impact is a transfer of wealth, from consumer to producer that is facilitated by the tariff.  Is this good policy?

If it were confined to a handful of industries it may not matter much, but in Sri Lanka it is all-pervasive. Over thirty common household items affected are listed below. This is only a selection-many others are affected. It explains why Sri Lanka’s cost of living is so high. All necessities from food (fruit, meats, pasta, jams) to toiletries (soap, shampoo, toothpaste) to household products attract taxes from 62%-101%.

Sri Lankan consumers suffer a high cost of living in order to support domestic industries. There is an argument that supporting local producers to build an industrial base will accelerate growth in the long run.

Japan, Korea and Taiwan practiced industrial policy(IP), but even proponents of the policy admit that care is needed to pick the right industries. In Japan and Korea the main industries were steel, shipbuilding, heavy electrical equipment, chemicals and later cars. Taiwan had light manufacturing (electrical appliances, textiles) before moving to heavy and chemical industries and electronics.

Sri Lanka seems to want to emulate this in toiletries, household cleaning products and food: soap, shampoo, washing powder, floor polish, pasta, cheese and biscuits.

To succeed, industrial policies need to foster a structural transformation in the economy that leads to rapid creation of jobs, especially more productive and better jobs. Selecting the right industries is important.

“it matters how realistically the target industries are selected in light of the country’s technological capabilities and world market conditions” [1]

Krugman [2] summarises some criteria advanced by proponents of IP in selecting sectors:

1. High value-added per worker. Real income can rise only if resources flow to businesses that add greater value per employee.

2. Linkage industries-such as steel and semiconductors. Industries whose outputs are used as inputs by other industries can create a cycle of industrialization. In Japan cheap, high quality steel gave downstream industries-ships, automobiles, rails, locomotives, heavy electrical equipment-a competitive advantage.

3. Present or future competitiveness on world markets. If the industry can meet this test, we can presume that resources are being allocated efficiently. Competitiveness is critical for linkage benefits to flow.

The selected industries need to target exports (albeit not exclusively)– to achieve scale economies and because it provides a “tangible criterion for the policy makers to judge the performances of the enterprises promoted by the government” [3]. The failure to promote exports is the key reason for failure of industrial policy in Latin America. (Chang, 2009)

The exports focus also ensures competitiveness. The purpose of policy is not to protect inefficiency but improve productivity.

Therefore support for industry must be conditional-on meeting performance targets.

“The results of industrial policy (or indeed of any policy in general) depends critically on how effectively the state can monitor the outcome that is desired, and change the allocation and terms of support in the light of emerging  results” [4]

Deliberation Councils were set up in Japan and Korea which would set targets together with industry. To ensure targets were stringent they also involved independent technical experts, academics and others.

Performance would be monitored and targets revised. Where a policy was seen to be ineffective it would be revised. Industrial policy is not only about picking winners but also phasing out losers.

“The success of industrial policy depends critically on how willing and able the government is to discipline the recipients of the rents that it creates through various policy means (tariffs, subsidies, entry barriers). The point is that the suspension of market discipline, which is inevitable in the conduct of industrial policy, means that the government has to play the role of a disciplinarian” [5].

This requires a bureaucracy insulated from political pressure to take impartial decisions on the support to industry-and change or withdraw support, depending on performance.

“How closely the government interacts with the private sector while not becoming its hostage is very important.” [6]

It becomes clear that successful industrial policy is a sophisticated partnership between industry and state, governed by the underlying principles of competitiveness and productivity. Unfortunately what takes place in Sri Lanka is unlike that of East Asia but similar to Latin America.

“Import substitution policies got a bad name, especially in Latin America, because the industries that were created often only survived as the result of protection. It was particularly costly when countries protected intermediate goods, because that made goods farther down the production chain less competitive. Countries often paid a high price for this kind of protectionism, and the maintenance of this protection was often associated with corruption.” [7]

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[1] Chang, H. J, 2006. Industrial policy in East Asia – lessons for Europe. An industrial policy for Europe? From concepts to action EIB Papers, [Online]. Vol 2 No.6, 106-132. (Accessed 07 January 2019)

[2] Paul R. Krugman, 1983. Targeted Industrial Policies: Theory and Evidence. [Online] (Accessed 07 January 2019)

[3] Ibid

[4] M Khan, 2018. The Role of Industrial Policy:Lessons from Asia. [Online] (Accessed 07 January 2019)

[5] Ibid

[6] Ibid

[7] Joseph E. Stiglitz. Industrial Policy, Learning, and Development. [Online] (Accessed 07 January 2019)

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For the full list of taxes on Food Items, Household Items and Personal Care items, click here.

Import Taxes and the Cost of Living

Originally appeared on Echelon

By Ravi Ratnasabapathy

The Encylopaedia Brittanica defines the cost of living as the “monetary cost of maintaining a particular standard of living, usually measured by calculating the average cost of a number of specific goods and services required by a particular group.”

“Cost of Living is the most fundamental measure of well-being; how good a life we can lead, the degree of comfort we have, and the number and types of products and services that we can buy.”

In a modern society everybody is a consumer, no one is self-sufficient. The prices we pay for our food and clothing, our necessities and luxuries, and everything else in between are what determine our cost of living.

Naturally, for anyone other than a committed ascetic this is the most important aspect of life. For any politician sensitive to the public it should top the list of priorities.

A lot of our daily necessities, from food to household products are imported. This should allow us to take advantage global efficiencies to source the cheapest or best products, depending what people want. Unfortunately high taxes and poor trade policies drive up end-costs for consumers in Sri Lanka.

Sri Lanka imposes a variety of taxes on imports: customs duty, VAT, Port and Airport Levy, Nation Building Tax and Cess. Although the maximum customs duty is only 30%, once these other taxes are added the total tax can increase to anywhere from 50% to 100%.

Heavy taxes are imposed on food (meat, dairy, vegetables, fruit, coffee, cocoa, pasta, breakfast cereal, biscuits, jams); personal care (soap, shampoo, toothpaste, diapers, sanitary napkins, shaving cream, razors), household care ( washing powder, wet wipes, polishes, brooms, brushes),  children’s needs (diapers, pens, pencils, pencil sharpeners, toys).

Older generations who experienced pre-1970s Sri Lanka may recall people cleaning their teeth with fingers (using charcoal or something called ‘tooth powder’), scrubbing dishes with a pol-mudda (coconut husk) or washing clothes by dashing them on a rock.

Toothpaste, washing powder, soap and shampoo are no longer luxuries; if they were a high tax may be understandable but they are necessities, even for the less well-off. Perversely luxuries like perfumes, wristwatches sunglasses are taxed the most lightly.

This has a significant impact on overall household budgets and the standard of living.

Voters need to ask our politicians why they need to tax these items so heavily. Baloo, the bear in the Disney cartoon sang of the bare necessities of life. Our leaders need to understand just how far their tax and trade policies are putting necessities out of reach for ordinary people; the main reason why so many seek opportunities overseas. Local salaries cannot keep up with the cost of living.

For full list of taxes, click here.

Some of the tariffs generate revenue for the government but many are imposed to protect local industry. Tariff protection for local industry comes at a cost: high prices for consumers. Supporting local industry is laudable but instead of protection the support should be targeted to help improve competitiveness and productivity. Firm level productivity depends on:

1. the sophistication with which domestic companies or foreign subsidiaries operating in the country compete, and

2.  the quality of the microeconomic business environment in which they operate.

Government support to upgrade technology, worker skills, improve access to capital, R&D and infrastructure is positive. These, together with more efficient government processes, improved infrastructure, more advanced research institutions-in short a healthier business environment; can yield long term productivity gains for the economy and the firm. Competitive pressure provides the incentive to improve productivity; the Government needs to work with firms to help this happen.  

Price protection for local industry is a blunt tool that hurts consumers and incubates inefficiency. Industry has demanded this for centuries; the French economist Frederic Bastiat explored this in satirical essay in 1845 that addresses the essence protection. It is reproduced, in an edited form, below:

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.

Open letter to the French Parliament, originally published in 1845

Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

.....We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us. 

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support. 

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged? 

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth. 

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land. 

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion. 

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc. 

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls. 

......Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense? 

We have our answer ready: 

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too. 

....The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

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For the full list of taxes, click here.

Looking back at 2018!

2018 has been nothing less than an eventful year for Sri Lanka. From growth friendly policies to growth shattering political turmoil, 2018 has indeed been a lesson. Advocata too had an eventful year. We launched our second flagship report “Price Controls in Sri Lanka” which explores the political mockery of price control policy. We hosted a discussion on whether protectionism or free trade is the country’s antidote, a lecture on accessing know-how for development, and spoke of what capitalism in Asia meant to Sri Lanka. Advocata also won $10,000 at the Think Tank Shark Tank Competition and was named in the list of Best New Think Tanks in the world by the University of Pennsylvania.

In case you’ve missed them, here’s a round-up of our most popular reads of 2018:

Ceiling price to floor bottled water industry

Originally appeared on Daily FT

By Joshua Karpinski

The recently instilled price control on bottled water seems like a positive for all consumers. How can a lower priced good hurt society? A recent report by the Advocata Institute “Price Controls in Sri Lanka” finds that price controls are of limited value in reducing costs. The report claims that price controls can cause significant welfare losses, deterioration in product quality, reduction in investment and, in the long run, higher prices. Hence, one must approach production and economic fundamentals to observe a price controls’ potentially detrimental outcomes.

As per the extraordinary gazette notification released by the government on the 5th of October 2018, the maximum retail prices of bottled water are as follows:

As shown (table), the new ceiling prices shave off a fair chunk of the bottled water seller’s margin (for instance, the cheapest common 500ml brand retailed at Rs. 45.00). This falling margin trickles down from the retailer/wholesaler to the distributor and eventually the producer (bottler). As with any economic activity, the goal is to generate profit. This aim remains with the producer to the retailer, and a ceiling price disrupts economic activity. We must observe how this industry operates.

The common water bottler sources his PET (polyethylene terephthalate) bottles from local plastic producers or importers. These bottles are a product of the petrochemical industry, a sector of rising cost due to increasing petroleum prices, internationally. Additionally, the ailing Sri Lankan Rupee has done no favours to importers.

The water is sourced from dug wells to springs and deep wells, and various brands treat the water using different techniques (like pricey reverse osmosis or cheaper chemical treatment). The water and the PET bottles need to abide by a predetermined SLS criteria and Health Ministry specifications. Additionally, they undergo licensing (with periodic renewals), site inspections, water and product testing and random checks (by the Consumer Affairs Authority).

The finished water bottles then make their way to wholesalers or retailers, to be purchased in large quantities (for events or corporates) or shelved at boutiques and supermarkets. This is done with the help of distributors, who range from large corporate in-house logistics departments, to the DIMO Batta owners outstation. This price control lowers the distributor’s margin, potentially removing the smaller distributors altogether.

The larger sellers, like Keells with “K Choice” water or Cargills’ “KIST Knuckles”, vertically integrate the entire process. It will no longer be in the interest of these supermarket oligopolies, to use up shelf space for rival brands (this is already apparent in some Keells outlets) and eventually the consumer suffers with few to no brand alternative. The price ceiling acts as a barrier to entry for new producers, as now they do not have the freedom to charge prices in line with economic forces. Existing producers may be forced out of the market or absorbed by larger entities. In economic terms, consumer choice falls.

A shift to aggressively cut costs could lead to lower quality plastic, (albeit still in line with health standards) being used and recycled. Furthermore, cheaper alternatives to water purification like chemical treatment will become the standard, despite poorer taste and lower healthy mineral content. A fall in research and development investment will lower innovation into current and future water products and services and this too will be at cost to the consumer.

Lower priced bottled water leads to higher demand and consumption. This does not bode well for the environment, owing to more plastic use and waste. Sri Lanka annually imports 9,600 tonnes of raw virgin plastic (PET) to manufacture bottles, packaging and for other requirements. 70% of this is processed and consumed as an end product in Sri Lanka and the used plastic waste creates monstrous environmental issues. Although recyclers are trying to address this issue, the price control in question could severely contribute to even greater plastic waste.

Tap water is the cheapest water option available. It usually goes through a process of basic filtration techniques like flocculation, which adds chemicals to the water to get particles to coagulate and float, so that they can be removed; sand filtration, which filters out large pieces of debris; or chlorination, which adds chlorine to kill bacteria and microorganisms. Despite tap water being considered drinkable (to some, purely out of convenience), it can lead to numerous problems. Chlorine is not ideal for human consumption (while our bodies can technically handle it, chlorine can lead to a variety of health complications and is potentially carcinogenic). The presence of microbes and impurities from pipes add health issues too. These risks have not gone unnoticed as we observe tourist forums and foreign travel bloggers strongly urging future visitors to avoid Sri Lankan tap water and to always opt for sealed bottled water. This leads on to the variety of bottled water available to consumers.

• Artesian Water: Water from a well that taps a confined aquifer (a water-bearing underground layer of rock or sand) in which the water level stands at some height above the top of the aquifer.

• Spring Water: Water derived from an underground formation from which water flows naturally to the surface of the earth.

• Purified Water: Water that has been produced by distillation, deionization, reverse osmosis, or other suitable processes.

• Distilled Water: Water that has been vaporized into steam, then cooled to re-condense it back into water. The water's minerals are left behind, leaving only pure tasting steam-distilled water.

• Mineral Water: Water that contains no less than 250 parts per million (ppm) total dissolved solids (TDS).

It is evident that a variety of water sources can be tapped and different purification methods can be employed to produce consumable water. This “clean, drinkable water” is then bottled and intensely marketed across a spectrum of brands, along with their source and unique purification methodology.

Below, tabulated, is a collection of some local branded water. (Source: bottle label/bottler website)

These bottles contain drinking water that was sourced differently. It was then processed (filtered/purified) differently. The plastic it is contained in is not standardized (it just has to fulfil a minimum health and quality requirement). These aspects of a seemingly simple good exposes variety with differentiability, and this may sway demand for one brand over the other. This should influence price and create a variation of prices for different brands, at the stimulus of consumer choice.

However, in essence, this price control has homogenized a differentiable good. The consumer now pays one price across a range of bottled water.

The price ceiling, although seemingly to help us buy cheaper bottled water, could cycle back to hinder the bottled water industry from giving the end consumer the best possible product. Water is not a scarce good (yet) in Sri Lanka and there are plenty of existing alternatives to bottled water. Has the government truly taken this into consideration? How have the new prices been calculated? What research has been carried out? Has a cost benefit analysis been performed? If so, where is it? Where is the data? Despite multiple attempts to communicate with senior employees at the CAA, we failed to gather any meaningful answers, useful information nor a compliant contact. Why does the CAA pass the buck to its ministry who in turn has no one willing to answer these queries? Does society truly benefit from this seemingly positive, yet irrational gazette? Who really stands to benefit from this decision in the long run?

Consumers rear-ended by reer depreciation?

Originally appeared on Echelon

By Ravi Ratnasabapathy

What really is driving the currency weakness? The Central Bank must consider both fundamentals and monetary factors.

Sri Lanka’s currency has fallen rapidly over the last two months, raising fears of yet another crisis. Sri Lanka’s Rupee depreciation over the past six months against the US Dollar is at a much higher rate than the historic annual average of around 10% over the last couple of decades. A stable exchange rate reduces transaction costs and uncertainty in international trade, thereby stimulating trade. It is one of the most important macroeconomic variables in the economy; it affects inflation, exports, imports and economic activity. Budget deficits are the source of much instability. The painful tax increases that addressed this issue were expected to result in stabilisation of interest rates, exchange rates and inflation. The recent depreciation of the currency is therefore puzzling and worrying.

The problem seems to be in the new inflation targeting regime based on the Real Effective Exchange Rate. What this means is that Sri Lanka will target an inflation-adjusted exchange rate index relative to competitors to keep the Rupee competitive. It appears that the depreciation of other currencies has led the Central Bank to loosen monetary policy, causing the currency to fall. What are the implications of such a policy?

Export growth is correctly identified as critical for development, and the Central Bank objective seems to be to keep the exchange rate competitive; but is this necessary? Previously, competitive exchange rates were seen to be crucial for exports, but a recent paper published by the World Bank in 2015 (Depreciation without Exports? Global Value Chains and the Exchange Rate Elasticity of Exports) suggests this is changing (although the view is not universal; other studies seem to contradict this).

The paper finds that the emergence of global value chains (GVCs) has resulted in a decline in the effect of real exchange rates on export performance. This has been linked with the emergence of GVCs through the following three mechanisms:
1. Firms need to import to be able to export; therefore, their exports contain not just domestic but also foreign inputs.
2. Stable supplier-buyer links are valuable, so the cost of switching suppliers in case of a real exchange rate change in a given partner’s country becomes non-negligible.
3. Large leading firms account for an increasingly larger portion of world trade, and these firms may find it easier to hedge against real exchange rate changes along their production network.

The study finds that when firms’ share of imported intermediates is greater than 30 percent, the effect of real exchange rates on export participation fades. Thus, as countries become more integrated in global production processes, currency depreciation only improves the competitiveness of a fraction of the value of final goods exports. The objective of Sri Lanka’s new export strategy is to integrate to GVC. If this paper is correct, the currency may not play a significant role in improving our entry into GVCs.

As yet, Sri Lanka is not well integrated into global value chains; so does the currency depreciation help existing exports? This does not appear to be the case.

“It appears that the depreciation of the other currencies has led the Central Bank to loosen monetary policy, causing the currency to fall. What are the implications of such a policy? ”

A Central Bank staff research paper by U P Alawattage in 2005 titled Exchange Rate, Competitiveness and Balance of Payment Performance examined the effectiveness of the exchange rate policy in Sri Lanka in achieving external competitiveness since the liberalisation of the economy in 1977. It analyses quarterly data covering the period of 1978:1 to 2000:4 and finds that the Real Effective Exchange Rate (REER) does not have a significant impact on improving the trade balance, particularly in the short term.

The other major concern is the impact of the currency on domestic prices and confidence. For small economies, changes in the exchange rate can have an important influence on prices. It not only affects prices of imports but also import-competing goods, and local goods that are tradeable internationally. When the currency depreciates, local prices of these goods and services tend to rise quite quickly, and by a similar amount as the depreciation of the exchange rate.

When import prices rise, demand is driven towards domestically produced goods and services. In the absence of offsetting factors, this results in more pressure on local production capacity and a bidding up of prices. This leads to increased demand for labour and capital pushing wages and interest rates.

The direct effect of the currency depreciation will generally contribute to an overall price level increase in proportion to the share of tradeable goods and services in GDP. Published as a Central Bank study in 2017, a paper by S M Wimalasuriya titled Exchange Rate Pass-Through: To what extent do prices change in Sri Lanka? suggests that the exchange rate pass-through into import prices is around 50%; that is, import prices increase by about 0.5% (and those of other consumer prices by 0.3%) as a result of a 1% depreciation of the Nominal Effective Exchange Rate.

Therefore, the overall cost of living will rise further. Tax increases – VAT from 11% to 15%, PAL from 5% to 7.5% – and the currency depreciation over the last couple of years has already added significant costs to household budgets. Add to this increases in fuel, gas – all necessary due to increases in global prices – and the combined burden is huge. To add even further inflation through currency depreciation will impoverish many and increase popular discontent. Pursuing unpopular policies is sometimes necessary but the combination of depreciation amid fiscal tightening looks dangerous and perhaps even unnecessary.

Exchange rates can move for a range of reasons, which can be simplified into two categories: “real” factors, or in other words, changes in relative fundamentals; and “monetary” factors. “Fundamentals” would, for example, include changes in the terms of trade and productivity, while “Monetary” factors are changes in the money supply.

In practice, policymakers may find it difficult to distinguish how much of a movement in the exchange rate is due to changes in the fundamentals and how much may be inflationary (or deflationary), although in the current situation, monetary factors seem to be the cause.

Thus, in Sri Lanka, where inflation expectations are not well anchored, the prudent monetary policy response would be to tighten rates, at least until there are grounds for being more confident that it was the fundamentals that had changed. The immediate political considerations suggest the same action.

A currency’s exchange rate contains important information about the country’s monetary position and the credibility of domestic monetary policy. The popular perception of the current stance is that it is either weak or out of control. For businesses, it is creating a new level of uncertainty, which is not being helped by ad hoc administrative measures (increasing LC margins on cars for example) to arrest some of the effects. For consumers, it fuels inflation, adding to the woes of fiscal tightening.

The Central Bank should revisit its inflation-targeting regime and tighten rates to stabilize the currency.

අර්බුදයේ ගැඹුර

චන්ද්‍රා ජයරත්න

පරිවර්තනය- Advocata Institute

හැම රජයක්ම  පසුගිය කාලයේ උත්සහ  කළේ උපයන ප්‍රමාණයට වඩා පරිභෝජනයට රටත් මිනිස්සුන්වත් පුරුදු කරපු එක. ආර්ථිකය දියුණු කිරීමට කල් පවතින ප්‍රතිපත්ති ගෙන ඒම වෙනුවට පැවතුනු හැම ආණ්ඩුවක්ම කළේ තමන්ගේ සමීපතම ගජ මිතුරන්ට වාසි සැලසෙන (Crony capitalism) ආරක්ෂණවදී ප්‍රතිපත්ති ඉදිරිපත් කිරීම සහ එම ගජ මිතුරු නිළධාරීවාදය එක්ක දේශපාලන සමීපතමයන්ට වැඩිපුර සල්ලි හම්බකරන්න පුලුවන්  විදියට නීති වෙනස් කරපු (Rent seeking) එක විතරයි.

මේ ව්‍යයසනකාරී ප්‍රතිපත්තියේ ප්‍රතිඵලය අද අපිට ලැබිල තියනවා. අපි රටක් විදියට අද ජීවත් වෙන්නෙ අපිට ජීවත් වෙන්න පුලුවන් ධාරිතාවයෙන් ගව ගණනාවක්  ඔබ්බට ගිහිල්ල. [“living beyond our means”]

අපේ ආනයන අපනයන වගේ දෙගුණයක්. එම පරතරය පියවන්නේ සංචාරක කර්මාන්තයෙන්, විදේශ ශ්‍රමිකයන් එවන පිටරන මුදල් වලින් සහ දිනපතා වැඩිවෙන මහා ණය කන්දරාවකින්.

ණය මුදල් වාරික සහ පොළී මුදල් ගෙවීම දිගටම ඉහළ යමින් පවතිනවා. රුපියල අවප්‍රමාණ වෙමින් වියදම එන්න එන්නම වැඩි වෙද්දි සාමාන්‍ය ජනතාව කබලෙන් ලිපට වැටෙමින්  දුක් කන්දරාවක් විඳවනවා. ණය ගෙවන්න යන මුදල් ප්‍රමාණය වැඩි වෙන නිසාත් ආර්ථික ප්‍රතිලාභ ලැබෙන ආයෝජන අඩු කරන්න වෙලා තියන නිසා දැන් ආර්ථික වර්ධනය එන්න එන්නම අඩු වෙනවා. අපි විදේශ විනිමය/ මුදල් උපයන වේගයට සහ ප්‍රමාණයට වඩා වැඩි වේගයකින් විදේශ මුදල් ණයට ගැනීම නිසා අර්බුදයේ සංකීර්ණම අවස්ථාවට දැන් අපි පැමිණ තිබෙනවා. එම සංකීර්ණ අර්බුදයේ සංකේත ආර්ථිකයේ දැනටම දැකිය හැකියි. [සටහන 1]

රටේ ආර්ථිකයේ [ සාර්ව ආර්ථිකයේ] පෙනෙන අර්බුදයට වඩා ගැඹුරු අර්බුදයක් සාමාන්‍ය මිනිසුන්ගේ නිවාස වල ආර්ථිකයේ ජනිත වෙමින් පවතිනවා. ආර්ථික වර්ධනය අඩුවීම, රුපියල අවප්‍රමාණ වීම, රැකියා අඩු වීම, අදායම අඩු වීම නිසා සෑම නිවාස කුටුම්බයක්ම ණය අර්බුදයක හිර වී තිබෙනවා [සටහන 2]

මේ මොහොත වනවිට රටේ ආර්ථිකයේ අර්බුදයත් ගෙදර ආර්ථිකයේ අර්බුදයත් එකිනෙකට එක් වෙමින් දේශපාලන අර්බුදය සමඟ එක්ව ඉතා තීව්‍ර ආර්ථික කැළඹීමක් ඇතිකර අවසානයි  

මේ අර්බුදයට විසඳුම කුමක්ද?

මුලින්ම අපි දැවෙන ආර්ථික අර්බුදයක සිටින බවත් එම අර්බුදයෙන් ගොඩ ඒමට පහසු මාර්ගයක් නොමැති බවත් පිළිගන්න අවශ්‍යයයි. මෙම අර්බුදයෙන් ගොඩ එන්න පුලුවන් එකම ක්‍රමය මහන්සි වී වැඩ කිරීමත් අපගේ පරිභෝජනය පිලිබඳ සිතා බැලීමත් පමණයි.

දෙවනුව සියලුම පක්ෂ ජාතික මට්ටමේ එකඟතාවයක් ඇති කරගත යුතුයි. සියලුම මට්ටම් වල සමාජ නායකයන් සහ ආගමික නායකයන් මහන්සි වී වැඩ කිරීම පිලිබඳව, තම තරඟකාරීත්ය්වයෙන් තොරව ව්‍යාපාර වලට වාසි ලැබෙන නීති රීතිවලට එරෙහිව (Rent seeking) , සේවයකින් ලබා දීමෙන් තොරව/ වටිනා කමක් එකතු කිරීමෙන් තොරව මුදල් උපයන රැකියා වලට එරෙහිව සමාජය දැනුවත් කලයුතු සේම සමාජ මතයක් ගොඩ නැගිය යුතුයි.

තෙවනුව , දූෂණය, නාස්තිය සහ සුපෝගභෝගී පාරිභෝජන රටාව නැවැත්විය යුතුයි.

සිව්වෙනුව යටිතල පහසුකම් දියුණු කිරීමේ ප්‍රමුඛතාව කෙටිකාලීන අවශ්‍යතා වලින් තොරව දිගු සහ මධ්‍යකාලීන ඉලක්ක කරා යොමුවිය යුතුයි. උදා: අධිවේගී මාර්ග වෙනුවට රේල් පාරවල්, විශාළ වාරි කර්මාන්ත ව්‍යාපෘති වෙනුවට කුඩා වැව් සහ වාරි කර්මාන්ත

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සටහන 1

2011 වසරේ විදේශ ණය වාරික සඳහා ගෙවීම ඇමරිකන් ඩොලර් බිලියන 1. එය වසර 7ක් තුල දෙගුණයක් කරමින් 2017 වසරේදී විදෙශ ණය වාරික ගෙවීම් සඳහා ඇමරිකන් ඩොලර් බිලියන 2ක් ගෙවිය යුතුයි. වසර දෙකකදි ණය වාරික දෙගුණ වෙමින් 2019 වසරේදී ඇමරිකන් ඩොලර් බිලියන 4 ක් ගෙවිය යුතුයි. අවුරුදු 5 ඩොලර් බැඳුම්කර සඳහා පොළී අනුපාතිකය 2016 දී පැවති 4% පොළී අනුපාතිකය දැන් 9% දක්වා ඉහළගොස් තිබෙනවා. විදෙස් ශ්‍රමිකයන් ශ්‍රී ලංකාවට එවන මුදල් ප්‍රමානය අවම වන අතර අපනයන, ආනයන වලට සාපෙක්ෂව වර්ධනය වන්නේ ඉතාම සෙමින්. සැබවින්ම භයංකාර අර්බුදයක්.  

සටහන 2

2016 දී ජන සහ සංඛ්‍යා ලේඛණ දෙපාර්තමේන්තුවේ ගෘහස්ත ආදායම් වියදම් සමීක්ෂණයට [House hold income and expenditure survey - HIES] අනුව නිවසක සාමාන්‍ය ආදායම රු. 62,227ක් වන අතර ගෘහස්ත මාසික වියදම රු. 54,999. සියලුම නිවාස වලින් 60% ක් පමණ රු. මිලියන 1.4ක ණය ප්‍රමාණයකට [ එක් නිවාස ඒකකයක් ] යටත් වී තිබෙනවා. ඒ අනුව රු. 7,238 ක ඉතුරු මුදලින් ණය මුදල පමණක් පියවීම සඳහා අවම වශයෙන් මාස 193ක [අවුරුදු 16ක් ] කාලයක් ගතවනවා. ආර්ථික වර්ධනය අවම වුවහොත් මෙම කාලය තවත් දීර්ඝ වනු ඇති.

සටහන 3

වාණිජ බැංකු ණය මුදල් ආපසු අය කරගැනීමේදී  ලක්ව ඇති අභියෝගය තහවුරු වන්නේ නිසි පරිදි නොගෙවන ණය ප්‍රමාණ වලින් [Non performing loans - NPL]. ස්වාධීන Moody’s ආයතනයට අනුව 2018 මාර්තු මාසයේදී නිසි පරිදි නොගෙවන ණය වල වාටිනාකම වත්කම් වල ප්‍රතිශතයක් [Non performing loan as a percentage of assets] ලෙස 2.7% සිට 3.0% දක්වා ඉහල ගියා.

Constitutionality of Sri Lanka's politics turmoil

By Suri Ratnapala

This opinion addresses the following questions presented by Upul Jayasuriya, Attorney-at-Law. 

1. Is the purported dismissal Ranil Wickremesinghe from the office of Prime Minister by the President constitutionally valid? 
2. Is the purported appointment of Mahinda Rajapaksa as Prime Minister constitutionally valid? 
3. Is the Presidential proclamation of 9 November 2018 purporting to dissolve the Parliament constitutionally valid? 

For the reasons herein stated, the answer to each question is negative.   

Purported dismissal of the PM and the appointment of another person as PM 

The President has no power to dismiss Wickremesinghe as Prime Minister. The argument that the power to appoint the PM carries an inherent power to remove the PM is incorrect. There is no such power under Westminster convention or the provisions of the Sri Lanka Constitution. 

This argument is founded on a misapprehension that the PM serves at the pleasure of the President. Even an employer at common law cannot lawfully dismiss an employee except in accordance with the terms of the contract and applicable legislation.   

The Prime Minister’s tenure in office is defined by Art 46(2) which provides: 

(2) The Prime Minister shall continue to hold office throughout the period during which the Cabinet of Ministers continues to function under the provisions of the Constitution unless he– 
(a) resigns his office by a writing under his hand addressed to the President; or 
(b) ceases to be a Member of Parliament. 

Wickremesinghe has not resigned his office. He has not ceased to be a Member of Parliament. (As stated in this Opinion, the purported dissolution of Parliament is null and void.) He has not vacated his office by death. The question then is whether the Cabinet of Ministers continues or has ceased to function. This matter is governed by Art 48 (1) and (2) which provides: 

48. (1) On the Prime Minister ceasing to hold office by death, resignation or otherwise, except during the period intervening between the dissolution of Parliament and the conclusion of the General Election, the Cabinet of Ministers shall, unless the President has in the exercise of his powers under Article 70, dissolved Parliament, stand dissolved … 

(2) If Parliament rejects the Statement of Government Policy or the Appropriation Bill or passes a vote of no-confidence in the Government, the Cabinet of Ministers shall stand dissolved … 

Wickremesinghe, to reiterate, has not ceased to hold office as PM by death or resignation or by ceasing to be a Member of Parliament. Therefore, the Cabinet of Ministers will stand dissolved during the life of the Parliament only if Parliament: 
(a) rejects the Statement of Government Policy,  
(b) rejects the Appropriation Bill, or  
(c)  passes a vote of no-confidence in the Government. 

None of these events has occurred. Since no event that could constitutionally terminate the office of Wickremesinghe has occurred, he remains the Prime Minister and there is no vacancy of the office of Prime Minister.  

It should be noted that even if there was a valid dissolution of the current Parliament, Wickremesinghe and the Cabinet would have remained as the Caretaker Government until the General Election by virtue of Art 47(1). Therefore, the President has no constitutional authority to appoint Rajapaksa as the Prime Minister.   

The Sinhala text of the Constitution leads to the same result 

The President has claimed the authority to dismiss Wickremesinghe from the office of PM based on the Sinhala text of Art 48(1) of the Constitution. This claim is unwarranted. The relevant Sinhala words are ‘dhoorayen ivath karanu labeemen ho illaa as veemen ho anyaakaarayakin’. These words in English translation means ‘removal from office, resignation or otherwise’. 

The words ‘removal from office’ refers to the circumstance of being removed from office according to the Constitution. Under the Constitution the power of removing the PM is vested solely in Parliament which could do so only by rejecting the Statement of Government Policy or the Appropriation Bill or by passing a vote of no-confidence in the Government.   

Therefore, the claimed power based on the Sinhala text of the Constitution has no merit.  

The purported dissolution of the current Parliament  

The President, by proclamation of 9 November 2018, has purported to dissolve the current Parliament. On 13 November 2018, the Supreme Court in response to several petitions, made interim orders suspending the effect of the Proclamation until 7 December 2018. The Court is scheduled to hear arguments on 4, 5 and 6 December.  

The Proclamation has been made in clear and direct violation of Article 70(1) which provides as follows. 

(1)The President may by Proclamation, summon, prorogue and dissolve Parliament: 

Provided that the President shall not dissolve Parliament until the expiration of a period of not less than four years and six months from the date appointed for its first meeting, unless Parliament requests the President to do so by a resolution passed by not less than two-thirds of the whole number of Members (including those not present), voting in its favour. 

Parliament has not made a request for its dissolution.  

The President is the sole authority under the Constitution with power to ‘summon, prorogue and dissolve Parliament’. (Art 33(2)) However this power is not absolute but must be exercised according to the Constitution. Therefore, it must be exercised in accordance with Art 70(1) as amended by the Nineteenth Amendment of the Constitution. Two important presumptions of statutory interpretation are relevant to this question.

First is the presumption that the general provision does not detract from the specific provision. (Generalia specialibus non derogant.) In other words, the general provision is qualified by the special provision on the same subject. The proviso of Art 70(1) qualifies and limits the power granted by Art 33(2) and Art 70.  

Second is the presumption that the later enactment prevails over the earlier contrary enactment. (Leges posteriores priores contrarias abrogant.) Art 70(1) as introduced by the Nineteenth Amendment is the later enactment that was clearly intended and has effect of qualifying and limiting the power of the President to dissolve Parliament.  

The Attorney-General’s argument has no merit 

The Attorney-General is reported to have made the following argument before the Supreme Court at the hearing on 13 November 2018.  

‘No provision of the 19th Amendment was called for a referendum and pruning of President’s powers must have been done via referendum. The 19th Amendment did not require a referendum because executive power was intact as it stood before the referendum. Executive powers cannot be eroded. It can be approved by people exercising the franchise. 

‘The Article 70(1) cannot be read in isolation when all provisions of the 19th Amendment taken together did not require a referendum because it did not erode the powers of the President’. (The Daily Mirror 13 November 2018) 

This argument is without merit.  

The Supreme Court considered and delivered its judgment on the Nineteenth Amendment Bill in S.D. Nos. 4-19/2015 heard on 1, 2 and 6 April 2015. Since the Bill was described in its Long Title as being for the amendment of provisions of the Constitution, the only question which the Supreme Court could determine was whether the Bill required approval by the People at a Referendum by virtue of the provisions of Article 83. (Art 120 proviso (a)) It determined that the Bill did not require referendum approval.  

The petitioners in that proceeding made precisely the same argument that the Attorney-General now makes, namely that the President’s executive power could not be restricted without the approval of the People at a Referendum. The argument was considered and rejected by the Supreme Court. 

The limitation of the President’s discretion by the establishment of the Constitutional Council was previously considered by the Supreme Court in its Judgement on the Seventeenth Amendment Bill. The Court held that the fetter on the Presidential discretion to make appointments to high offices was consistent with the sovereignty of the people established by Articles 3 and 4.  In the Judgment on the Nineteenth Amendment Their Lordships emphasised the President’s responsibility to Parliament established by Art 42 and concluded: 

Because the Constitution must be read as a whole, Article 4(b) must also be read in the light of Article 42. Clearly, the Constitution did not intend the President to function as an unfettered repository of executive power unconstrained by other organs of governance. (Emphasis added)  

The power to dissolve Parliament derives from the old Royal prerogative which was restrained in the past only by convention. It is not in the nature of strict executive power. In the UK, Australia, New Zealand and Canada it is considered part of the reserve power of the monarch. The limitation of the Presidential power to dissolve Parliament and its location in Parliament itself enhances the sovereignty of the people.  

Conclusion 

For the reasons stated above: 

(a) The purported dismissal of Wickremesinghe from the office of Prime Minister is unconstitutional. 
(b) The purported appointment of Rajapaksa as Prime Minister is unconstitutional. 
(c) The purported dissolution of the current Parliament by the Proclamation of 9 November 2018 is unconstitutional.  

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Prof. Suri Ratnapala is an Attorney-at-Law and Emeritus Professor of Law, the University of Queensland. He is also an advisor to the Advocata Institute and his views are his own.