Advocata Institute

Perverse incentives and a lack of accountability lead to rampant corruption in State

A new report by The Advocata Institute, titled “The State of State Enterprises in Sri Lanka: Systemic Misgovernance” identifies the systemic issues that plague state-owned enterprises (SOEs) leading to substantial losses. This flagship publication builds on the analysis and data from the first ‘State of State-Owned Enterprises’ report which was released in 2016.

The essays in the report attempt to analyse the causes for the structural weaknesses and propose simple recommendations to establish basic central government control over SOEs and improve accountability.

Figure 1

Figure 1

The report identifies the lack of an official government definition of state-owned enterprises as a point from which many systemic issues arise. The lack of a definition means that the government does not have an authoritative list of all SOEs. To fill this information gap, the Advocata Institute has compiled a list of all known state enterprises, their subsidiaries and their subsidiaries.

Figure 1 provides a quick overview of the data, emphasizing the excessive number of state enterprises.

The structural problems of state-owned enterprises emerge from the problem of multiple actors (bureaucrats, politicians and citizens) with conflicting interests. This makes state owned enterprises vulnerable to mismanagement and corruption because of potential conflicts between the ownership and policy-making functions of the government, and undue political influence on their policies, appointments, and business practices.

The report finds that internal control, monitoring and governance frameworks appear inadequate to deal with these problems – of the 527 entities regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Financials are routinely late and only a minority obtain ‘clean’ audit reports. In 2017, the total losses incurred amounted to LKR 87.78Bn. To put this value in context, the government budget allocated LKR 44Bn for Samurdhi payments in the same year.

Extracts from reports of COPE and the Auditor General which are included in Advocata’s report highlight repeated instances of fraud, mismanagement, corruption and negligence. The issues no longer appear to be isolated incidents of opportunistic behavior by individuals or occasional lapses in control but point to deeper, structural weaknesses. While internal control and accountability mechanisms are important in checking abuses, they are insufficient in themselves.

The report elaborates on how a trend for SOEs to be incorporated as limited liability companies allows politicians to bypass treasury or budget restrictions and evade parliamentary accountability. Complex corporate structures provide a convenient shroud for abuse. A review of the reports of the Auditor General and the Committee on Public Enterprises paints a dismal picture of systemic failures of governance leading to gross misappropriation of public funds.

The reports concludes with three main recommendations:

  1. Compiling a comprehensive list of all SOEs and setting basic reporting procedures

  2. Strengthening COPE and COPA

  3. Implementing the OECD Principles of Corporate Governance

“A lack of accountability is leading to flagrant abuse within SOE's. The Finance Ministry must act urgently to prevent it spiraling out of control” says Ravi Ratnasabapathy, Resident Fellow of Advocata and co-author of the “State of State Enterprises in Sri Lanka” report.

The immediate antidote to corruption is increasing and improving transparency and accountability. The ideal reform of the recommended three to address the problems that plague are SOEs is to introduce and enforce the OECD Guidelines on Corporate Governance.


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

Advocata Institute to host Asia Liberty Forum 2019

Over 200 participants, comprising leading academics, policy makers and intellectuals from over 30 countries will come together in Colombo, Sri Lanka for the 2019 Asia Liberty Forum to discuss challenges facing the Asian region and to learn from each other on how to most effectively advance free-market reforms.

Asia Liberty forum is an annual event by the United States based Atlas Network, co-hosted in partnership with Advocata Institute.

The Asia Liberty Forum will be held from the 28th of February - 01st of March at the Hilton Colombo and is the largest gathering of pro-market think tanks, business leaders, professionals, high net worth individuals and policy leaders in Asia. It’s a platform to discuss and present policy solutions for economic concerns in Asia and Sri Lanka.

The 2019 Asia Liberty Forum (ALF) will be held at the Hilton Colombo, from 28th February to 01st March 2019.  Prof. Pratap Bhanu Mehta, Vice Chancellor of the Ashoka University, India, will deliver the keynote address on ‘Freedom at Risk’ at the Freedom Dinner on the 28th of March, while other dignitaries, business leaders and academics will grace the event.

Themes explored this year includes the State of Capitalism and freedom in Asia, privacy issues in the digital age,  fast-tracking courts, currency depreciation and urbanization.

Distinguished speakers at the forum include, Prof. Razeen Sally (National University of Singapore); Prof. Rohan Samarajiva (Chair - LirneAsia); Dr. Ajay Shah (National Institute for Public Finance and Policy, India); Nighat Dad (Digital Rights Foundation, Pakistan) Dr Tom Palmer (Atlas network, USA) , Dr Christer Ljunwall (ENC Global, China) and Dr. Ross McCleod (Australian National University) amongst others.

The Asia Liberty Forum is a rare opportunity to meet, network and interact with some incredible minds in the field of economics and policy. For more information on the forum, speakers, schedule and tickets visit www.alf19.com.


Ailing rupee and Price Controls may lead to a shortage of Milk Powder

A cup of tea is every Sri Lankan’s morning mantra. This might not be the case much longer as Sri Lanka may face a shortage of milk powder as several leading milk powder importers are reported to have taken a collective decision to suspend imports. The recent depreciation of the rupee has caused a significant increase in import costs and importers say they are now unable to sell at the controlled price, hence the decision to suspend imports. The same impact will be felt in other industries subject to price controls. The pharmaceutical industry withdrew eleven drugs from the market citing similar reasons.  

The currency has depreciated by 10% in the past two months and over 20% in the past year, which will raise landed costs of  import products significantly. Importers of goods subject to price controls will continue to be squeezed as their price margins reduce and this will eventually lead to a halt in imports, like in the evident case of milk powder.

Imported milk powder is taxed at a total of 45% in Sri Lanka, with the objective of protecting local farmers and achieving self-sufficiency in milk products. Despite this self-sufficiency goal, local production meets below 40% of the total domestic milk requirement, considerably below 80% levels in the 1970s. Therefore, majority of the demand in milk products is met through imports, mostly from New Zealand and Australia. Over the last decade, in 7 out of 10 years, imports of milk powder has grown at a higher pace than the growth in local production.

Milk Powder Taxes.PNG

Additionally, in May 2018, changes to existing Price Controls on Milk Prices have raised the controlled price for milk powder to Rs. 345/400g pack and Rs. 860/1kg pack. This price control was enforced by the Consumer Affairs Authority, despite a rise in the global prices of milk. Global milk powder prices fell in 2015 and 2016 and climbed in 2017 and 2018 and now the cost of one metric ton of milk powder in the world market is US$ 3250-3350.

Furthermore, the depreciating rupee, now valued at Rs. 184 to a dollar has only continued to worsen the situation, making it more expensive to import milk powder.  “Importers of milk powder are squeezed between the tax (which raises costs), the controlled price which sets a ceiling at which the product retails, and now the depreciating rupee which further raises import costs” says Ravi Ratnasabapathy, Resident Fellow of the Advocata Institute.

The floor price encourages production which the market is sometimes unable to absorb, leading to gluts which cannot be converted to powder (the only long term storage form of milk) due to the controlled price.

A recent report by the Advocata Institute, Price Controls in Sri Lanka, emphasizes the contradictory trajectory of policies in the dairy industry. This tangle of taxes and controls comes at a cost to consumers. Our costs are increasingly becoming apparent by visible shortages of milk powder in the market.

Key Recommendations

  1. High import taxes lead to massive costs for milk powder importers. Changing this would not only mean cheaper milk for consumers, but also cheaper raw materials for downstream processors such as the biscuit or confectionery industry.

  2. The removal of the Maximum Retail Price would allow for a higher level of healthy competition among both importers and local dairy manufacturers, allowing market forces to decide prices.

  3. It is necessary that the government recognises that given the several supply constraints, the objective of self sufficiency is not realistically attainable in the Sri Lankan context. Thus, authorities should recognise the importance if imports in meeting demands of consumers and implement well-thought out measures to level the playing field between importers and domestic producers.

Panel Discussion on Price Controls - Why should they be abolished?

Ravi Ratnasabapathy, Resident Fellow Advocata Institute; Travis Gomes, Product Head Frontier Research and Dilini Jayasuriya, Managing Director Breakthrough Business Intelligence, discuss Advocata's latest report “Price Controls in Sri Lanka: Political Theatre”, that finds that consumer price controls lead to unintended outcomes including lower quality.


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

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

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


Price controls dominate political debate but may not help consumers

A new report by The Advocata Institute, titled “Price Controls in Sri Lanka: Political Theatre” finds that consumer price controls lead to unintended outcomes including lower quality. Politicians have imposed price controls on a variety of items in the belief that capping prices will lower costs but our survey shows that they are of limited value in controlling the cost of goods.

According to a limited survey carried out by Advocata, a comparison of controlled prices (over a ten month period) against retail prices as per the open market weekly average retail prices, showed that of 13 basic groceries only one (milk powder) was being consistently sold at the controlled price throughout the entire period. No one, not even the Consumer Affairs Authority (CAA), possesses a comprehensive list of items subject to price control.

Price Controls.PNG

Serious enforcement seems confined to items produced by multinationals or large corporates (milk powder, cement, cooking gas) which are administratively easier to police. In contrast, there only appears to be token enforcement in the unorganised sector. Loose enforcement prevents the most obvious symptoms of price controls from manifesting but at the expense of consumer choice and quality. Where price controls are enforced (eg: cement, milk powder) it is done so in consultation with the industry, leading to a stickiness in prices. Retail prices are slow to rise when world market prices rise but are equally slow to fall when world market prices decline.

The report also highlights how the Government’s approach to prices is schizophrenic; taxes are imposed that raise costs but the same products are then subject to price controls, supposedly to lower prices. The survey seems to indicate that price controls are of limited value in reducing costs and damage markets by preventing the supply of products rising to meet demand. They can cause significant welfare losses, a deterioration in product quality, a reduction in investment and, in the long run, higher prices.

A survey of traders indicate that 67% of retailers and 46% of wholesalers react to raids by the CAA by temporarily adjusting prices. They later revert to business as usual. Traders even claimed that paying fines for non-adherence was more profitable than retailing products at controlled prices. This was particularly true in the case of small tea and hopper sellers.

Tea and Hopper shops were subject to an arbitrary price control in 2015, but it is rarely enforced. At best, the control is useless and at worst, it works against these small entrepreneurs legitimate business activity and opens up potential for clandestine business. Advocata strongly believes that this control should be abolished.

Key recommendations of the report:

  • Little serious attempt appears to be made to impose the price controls on basic foodstuffs, particularly in the public markets. The controls encourage sub-optimal behaviour including the sourcing of poor quality or substandard items. Abolishing the controls will have minimal impact on prices while improving choice.  

  • Taxes, specifically the Special Commodity Levy and CESS play a significant role in raising consumer prices. Creating the fiscal space for simplification of the system, moving to uniform rates and the lowering taxes of taxes should lead to lower prices.

Price controls, tend to have unintended consequences and product quality can suffer
— Ravi Ratnasabapathy, Resident Fellow of Advocata and co-author of the “Price Controls in Sri Lanka” report

This report highlights that price controls are of limited value in reducing costs. They can cause significant welfare losses, a deterioration in product quality, a reduction in investment and, in the long run, higher prices. Advocata strongly believes that fostering competition and improving productivity are the best form of price control in Sri Lanka.


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

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

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


The Government should rethink price controls on bottled water

In an extraordinary gazette notification released earlier this week, the Sri Lanka Consumer Affairs Authority (CAA) imposed price controls on bottled water, to be enforced starting today (Oct 5).

Advocata notes that this decision will introduce distortion into the market possibly resulting in lower quality or shortages. As more than 120 companies battle for a foothold in Sri Lanka’s competitive bottled drinking water market, worries over unsafe and low quality products is concerning.

The maximum retail prices enforced through this gazette are as follows:

Control Price.PNG

In principle, the action of setting maximum prices on goods and services is known as a “Price Ceiling”. These are meant to “protect” consumers from being exploited.  Yet the reality may be different. A publication slated to release next week by Advocata, “Price Controls in Sri Lanka; Political Theatre” reveal that for the items surveyed price controls do not serve the intended purpose. Coupled with loose enforcement, consumer price controls in Sri Lanka have skewed the market towards a preference for lower quality products. The Price controls on water bottles, will likely to do the same.

According to a basic survey carried out by Advocata, market prices of bottled water for a 500 ml bottle, prior to the enforcement of the price control was as follows:

Market Price.PNG

The bottled water industry has 120+ entrants in the market. This means that until today, consumers had the choice of purchasing a 500ml water bottle at Rs. 45, Rs. 50 or at Rs. 80. Consumers were given the choice to buy bottled water as per their personal preferences and budgetary constraints. This is no longer the case.

In Sri Lanka, bottled water is regulated by the Ministry of Health through the Food (Bottled or Packaged Water) Regulations, 2005 framed under the Food Act No. 26 of 1980. There had not been major health and quality related concerns until 2016, where a CAA directive indicated that plastic mineral water bottling standards were enforced starting September 1, 2016 following the authority detecting several brands using low quality plastic bottles.

The likely result of the introduction of this new price control -- limiting the sale of a 500ml water bottle to Rs.35 -- is that producers have to now cut down on production costs, to reduce the final cost per bottle. Low production cost lead to the sourcing of low quality raw materials, in this case; water and plastic.  It also unclear whether the price controls also apply to glass bottles, which may be priced out of the market.

“In responding to price controls, the usual case is that producers would resort to producing low quality products in order to remain within the vicinity of the controlled price” says Ravi Ratnasabapathy, Resident Advocata Fellow and co-author of “Price Controls in Sri Lanka” report.

Advocata urges the government to engage relevant stakeholders and reverse the decision to unnecessarily intervene in an already competitive market.  

Full speech: Anushka Wijesinha at the Advocata Economic Freedom Summit

Published on Colombo Telegraph

Good Morning ladies and gentleman, honourable State Minister Eran Wickramaratne, a lot of other familiar faces in the room, and of course the dynamic team at Advocata who have really taken this think tank from a start up to really making waves in the Sri Lankan think tank circuit.

It’s a real pleasure to be with you this morning and deliver a keynote at the Advocata and Fraser institute Economic Freedom Summit.

In my remarks to you today I’ll highlight some aspects of Economic freedom from my own perspective. They don’t neatly tie into the economic freedom index necessarily-my comments are a little broader- but you’ll realize through some of the running threads that they link up quite a bit with some of the elements of the Economic Freedom Index.

Much of these remarks will be from my own perspective, my own personal viewpoint. And some of they may find some resonance with you and try to provide food for thought for further discussion whether it’s for today’s proceedings, or for institutes like Advocata to take forward later on. It’s of course by no means an exhaustive discussion about economic freedom in Sri Lanka. I’m sure you’ll find many things you wish I had said, and you’ll find fault with me for that, but I’ll try and keep it to some perspectives for you to ponder on.

My keynote will be on three parts: part one is on policy orientations and the role of the state-might be an unusual point to start on given that this is a largely a free market discussion but I think it’s an important discussion to have on policy orientations and the role of the state, in part two I flag a few examples of contradictions or tensions in our economic debate where I think the lens of economic freedom needs to come in very strongly and very quickly that will enrich the debate here in Sri Lanka, and in part three my comments will be about how we can create and shape a popular narrative around economic freedom in our country.

Lets dive right into part one with a few thoughts on policy orientations and the role of the state. I must state upfront that I’m not a believer of absolutes, either blindly following that market forces can solve everything and we should just leave it to that, or that the state must overbearingly do everything because there are too many market failures. I think to be absolute in this debate will be missing the opportunity to make real change and really influence policy, but might be disconnected to the growing acknowledgement globally that there is a need for both the market and the state so long as we get the balance right. But hey, I guess that’s the big elephant in the room-getting that balance right- and we seem to have not gotten that balance right lately.

I recall a conversation that I had with the chief of UNIDO (United Nations International Development Organization) a year or so back. We were driving to the SLINTEC Nano tech facility in Homagama and we had a chance to chat. I asked him having seen so many policy orientations across the world with his work, what would his one piece of advice be to Sri Lanka. And he answered choose pragmatism over dogma. And he recalled, once again you might find it odd that in an economic freedom discussion we are referring to China- but this is just his remarks, he recalled Deng Xiaoping’s famous remarks —  “It doesn’t matter whether the cat is black or white as long as it catches mice”.

So he went onto argue that for too long academics have been preoccupied with trying to classify development paradigms to neat, discrete categories. But given the complexity of our world today, the impatience of societies to prosper, and the pragmatism required of politicians, clinging on to particular ideologies may not help. Instead he argued whatever policies that can get the job done. In this case, gets the job done of expanding prosperity to more Sri Lankans is where the focus should be. So we need to be pragmatic about our policy mix but it certainly doesn’t mean that we shouldn’t focus on economic freedom — that should be our anchor.

But really what I’m saying is that we need to figure out what’s the best part to advocate for it in order to make the change. So focusing on economic policies that affect the prosperity of our people and the success of our firms would be a good way to go about it, and I think that it’s exactly what this summit tries to do today.

A useful way to anchor a policy debate on the role of the state is in my mind is about the government knowing when it should help create the way and knowing when it should entirely get out of the way.

So on the first part of that- on getting out of the way. You and I would both agree that we would love less government in our lives to deal with. An important part of this agenda is improving business regulations. The good news on this is that we are seeing a lot of attention on this and some progress. There are now eight ease of doing business task forces under the Ministry of development strategies and international trade with a roadmap of reforms for 8 areas on the World Bank’s ease of doing business index ranging from the speed of starting a business, the speed of obtaining construction permits, to the speed of settling commercial disputes.

So I think that’s definitely steady progress and I think  the jury’s still out on how soon we will  see results on but I certainly think that’s a lot of progress. But there are also regulatory issues beyond these often sighted ones. An important process that uncovered these business regulations beyond the ones we hear in these indices was the National Export strategy that we are now finalizing and the private sector has very much been a part of this process. During this, which took a sector by sector approach, there were several bottlenecks identified in particular sectors and across export sectors. For example in the IT sector (the honourable State minister has heard this at a recent meeting with us) for an IT company to bring in from overseas, a specialized person with a specialized skill set that’s not available here and can help take that company to the next level,  the company has to make a request from the Department of Immigration for visas, but, that request has to then be forwarded to the relevant line ministry relevant to that company, so in this case, the Ministry of Digital infrastructure and telecommunication,  who in turn refers that to a competent line institution, in this case, the ICT agency, who in turn takes a call on whether that company actually requires that particular person and that particular person’s skill set or not and then gives approval and then finally the visa is issued. This is an example of these kinds of regulation but thanks to the process we are having now and the support from the ministry of finance I believe, this is to be soon, streamlined.

Another example that I would like to cite. There’s a really cool manufacturer of wooden framed sunglasses. And he has to get a permit from the ministry of forestry for every batch of “Sunnies” that he exports. And that permit only lasts for a few weeks, and even if hundred sunglass frames are made from one tree and he has got the permit evidence that this has been sustainably forested and so on, he has to get a permit for every single shipment. And he wanted to go down the ecommerce route, and in ecommerce you don’t ship a hundred units in one go. Right, so you would order one from Canada, one from India and another person orders it from Belgium, so all of these would go in individual units so imagine having to go and get a permit for every single occasion.

But you can’t blame these institutions because for many years, they’ve been wired to think about protecting, so now the challenge is to rewire them to think about facilitating. There’s an economic problem here apart from just economic freedom and regulatory processes, because it makes the difference between him being able to capture value in Sri Lanka, retail value, versus capturing wholesale value which is what he has to do now. And these are just some examples at the national level.

We often talk about the Doing Business Index. But by its very design, the DBI only measures the business climate in a country’s largest commercial city – so in this case, Colombo. Having done a lot of work on SMEs I can tell you that the sub national business climate is very different, and I think we’ll all agree that these have important links back to economic freedom.  

One thing I must confess here is that in the agenda of advocating where the state should get out of the way and reforming regulatory and procedural issues, I found that our private sector has also disappointed us.

At the Ceylon Chamber, whenever regulatory issues arise and companies tell us about it, we always say tell us what the specific regulation or act you are having trouble with, send in something in writing, help us make the case for it so that we can take it up quickly with the government. Often, the complaints come, but the follow up documents rarely ever do. Or we get very generic one liners like reform labour regulations or we get lengthy complained essays without anything specific. Now this makes it so much harder for us to advocate for regulatory changes and business and trade associations really know best what is pinching them. Folks are quick to complain but when it really comes to specifying what the issue is, either they don’t know or haven’t thought about it, or they just can’t be bothered putting pen to paper and would prefer to keep blaming the government for it. So many of these issues get unresolved because we just don’t find the bandwidth or interest even in government for them to take this on and dig in deeper. So here’s where I feel that we must do more.

Now the reason I bring this up is not to make one party look good and the other look bad, but if we are really keen about regulatory reforms we have got to be a part of it.  And we have got to be proactive- it’s not going to happen with the click of a finger like magic.

Anyway this was all about the government getting out of the way. How about creating the way- does the government have a role there?

Now here is where I think it gets a bit contentious. Beyond the usual provision of public goods, health, education and so on I believe there is one area in which I think it’s a no brainer and that is supporting R&D and innovation. A lot of innovation activities globally, including in the countries that are the most economically free –so there isn’t mutual exclusivity there- are supported in some way by the government. Sri Lanka has a few examples of how good partnership with the state can catalyze innovation. The Sri Lankan Nano technology centre, for example, and the Science Park there, trace expert city. One of my favourite examples is the Gamma irradiation facility where private rubber gloves manufacturers can use this facility as a shared technology resource to make their gloves into surgical rubber gloves, which requires it go through this gamma radiation. And they’re able to capture more lucrative export markets.

I believe that the government will be launching soon an innovation and entrepreneurship initiative that provides exporters with support to develop new products, test and prototype, upgrade their technology and also an additional programme to support very early stage start ups. Now these are all examples of where the state can create the way whilst it gets out of the way in other areas.

Moving on to part two, I will highlight a few contradictions or tensions that I see, just a couple of examples in our debate on economic issues. Things that bug me and it might be bugging you too.

The first relates to trade and investment policies. We often here about the desire to promote exports as an important strategy of attaining faster growth and achieving greater prosperity. Yet we often hear about the desire to curb imports- exports good, imports bad. This really links back to our trade policy and the kind of protectionism we have.

Whether it’s in the public sector or in the private sector, I’ve heard few people explore the virtues of imports. Their idea of economic freedom is that we must export as much as we can but prevent imports as much as we can too. This thinking was particularly relevant under the economic management of the previous administration, but remnants of it still remain in both the public and private sector today. We must recognize that exports and imports are two sides of the same coin and it’s especially important considering contemporary trade patterns which are dominated by what economists call global production networks, where importing parts, components and raw materials at sensible prices are integral for a firm’s ability to be successful as exporters. Curbing imports while trying to boost exports is somewhat oxymoronic.

Another aspect is FDI. I’ve received many a letter from our members at the Chamber who want me to advocate for tighter controls on foreign investments, from companies that are pretty successful in overseas markets. They have benefited from open, investor friendly policies overseas, but are adamant that Sri Lanka should curb the freedoms of foreign investors here at home.

The second aspect in my contradictions and tensions theme relates to issues in the labour market. At meetings this week on finalizing the national export strategy, several industries complained of a shortage of workers. Not only shortage of skills necessarily, but a shortage of absolute numbers, particularly in manufacturing. They are just unable to attract young people into manufacturing.

All of them seem to have this one fantastic solution for it, and are adamant that it is the solution. “We must stop them all from becoming three wheel drivers”- and I’m sure you’ve heard these similar sentiments. The issue is that young people’s aspirations are changing; their mindsets and attitudes towards certain occupations are changing. Many are placing a premium on flexibility than a steady job; many are discounting future earnings and are taking an unorthodox approach.

Many are also having, what economists call a high reservation wage, where they would rather work as a three wheeler driver at that level of income than going for a manufacturing job. The challenge is that whilst this is a problem, too many folks I know think that the solution is to ban them from becoming three wheel drivers, or worse, curb the three wheel population as a whole.

I think this is a classic economic freedom issue that is being highlighted here.

I’ll be the first person to admit that there are many three wheel drivers who drive like crazy people in the city, and I’m sure you’ve had your fair share of close shaves due to their bad driving but the problem with making rather binary policy decisions is that we fail to realize the economic freedom element in this.

During the course of my work, I visited a number of tea estates and rural areas, and the amount of utility they gain from having a three wheeler is immense. For inhabitants of rural estates, the three wheeler is their last mile connectivity. It is their de facto public transport. It is that three wheeler that gets a mother from the estate line room to the estate clinic in time. That gets a child to a tuition class. That enables a grandmother to bring her shopping from the weekly pola. By introducing the high LTV (loan to value) ratios on three wheeler purchases, to stop young people from going into it, or to reduce the number of three-wheelers in the city, I think we’ve just vilified the three-wheeler as a whole and the reason I spent a little bit of time on this seemingly small example is because I thought it captures the case in point being the need to reshape the debate around economic freedom.

I’ll give you another example before moving on to the next part. There was a meeting once again hosted by the ministry of finance a couple of weeks ago with tech companies to discuss what needs to be done to boost the tech sector. Many folks, like I said, discussed about the need to reform payment regulations, making it easier to attract global talent and during the conversation, a point about Sri Lanka’s limited skill pool, a couple of individuals suggested that we must find a way to limit the migration of Sri Lankan IT graduates- there is too much brain drain.

I think a lot of us were rather alarmed to hear this from the industry. Now intuitively at first glance, it may sound sensible at first glance. Sri Lanka’s IT sector is growing, has great potential, IT sector is constrained by the limited skill pool, a lot of IT people getting educated here and leaving, so this must be stopped. But I think the economic freedom implications of this are rather serious.

These areas I think are areas of tensions or contradictions in economic thinking where I think an economic freedom lens needs to come in quite strongly and Advocata can help to shape that debate.

Next to part three, on creating a popular narrative around economic freedom. And for this I argue that we should take budgets and government spending as our starting point. I share with you two perspectives on that. The first is how Sri Lanka, rather ironically, taxes enterprises to support enterprises. Confused? Let me elaborate.

Sri Lanka has dozens of institutions from national level to local level that have been set up to either promote enterprise development, or industrial development. They are present in every district, in every province. They are well staffed at HQ, and on the ground. But many of these are not working the way they should anymore. They have outsized budgets compared to the services they deliver and they have rarely been questioned on the efficacy of their programmes. But they run on the taxes of entrepreneurs and workers. Imagine this, we are taxing entrepreneurs who are already operating in a rather unsupportive business climate at the local level to then fund state institutions across the country that are supposedly supporting enterprise development but really aren’t very useful or effective. I can understand the tax money going to fund roads, bridges, police, schools and hospitals-no entrepreneur is going to argue with that- but, to take tax money to fund these institutions to me seems so wrong. And to add insult to injury, it is these institutions that have been used to provide unemployed university graduates with jobs as so called development officers.

So it’s a double whammy for a tax paying entrepreneur; not only did your tax money pay for someone’s undergraduate education, but it’s also going to pay the wages of that undergraduate to work at these institutions that have been set up to support enterprise development.

You know, I’m really surprised there hasn’t been a revolt by provincial enterprises. Now the radical solution would be to shut them all down and shove off part of the tax burden from enterprises, but I doubt this will happen in the short term. So I think we should at least agitate to get more value for money. I had a very interesting discussion with UK’s former head of the Small Business agency, David Irwin. He came from the private sector and this was his first public sector job. And so he was determined to get real value from his state agency that was meant to support small businesses. And one of the first things he did was to get his officers to go out and meet enterprises to understand their needs. This is something our institutions can do too, in the short term. Get all of these officers to go out, be foot soldiers, meet enterprises, understand what they need, resolve their issues or connect them to someone who can.

So this is just one example of why we need a strong and popular narrative around the size of government, value for money for public spending, and overall economic freedom.

The second perspective relating to this is about SOE losses. I need to say upfront of how proud I am to see Advocata take this issue head on and in their first public document last year, it was totally dedicated to the issue of state owned enterprises and kick started debate on SOEs that had been lost for many years. Taxation, SOEs, budgets have never really been sexy topics for anyone but I think we need to make them sexy.

We need to help people relate to these issues, help them understand how they matter to people’s lives. Few years ago I remember publishing a short blog post about SOEs where I made a small attempt to make them relatable. I put forward about nine alarming facts about SOE losses-this was around 2014- the two that got the most attention were relating to the two airlines at the time (2014). One- the projected losses of the two state owned airlines in the next three years will be ten times what Sri Lanka spends each year on education related welfare, like textbooks, uniforms and school meals.  This was from the ministry of finance report back in 2014.  

The second one that animated people – The losses of Mihin Lanka Pvt Ltd in 2013 is equal to the entire amount the government spent that year on crucial welfare programmes like Triposha, poshana malla and fresh milk for preschool children. Mihin had just three aircrafts, and these programmes served over one million people. Suddenly you take this from an economic reform debate, or an SOE reform debate, a public finance debate, a fiscal prudence debate into a debate around value for money and spending priorities for people.

I think that if we are to succeed in holding the public sector accountable the money collected from current and future taxpayers- we need to get better at creating a more interesting narrative that gets more people animated. One of my favourite approaches is how the New Delhi based, Centre for Budget Governance and Accountability (a private think tank) uses cartoons published in a leading Hindi Weekly newspaper highlighting budget issues, highlighting contradictions, highlighting irony, in a crafty and attractive way and its really gained ground.

Maybe we need to go a bit further; we need a few gimmicks and public spectacles Green Peace style. Here are a few radical ideas I would like put to Advocata to think about pursuing.  Ahead of the budget next month, take a Mercedes Benz S class to the entrance of the University of Colombo, park it there and advertise that by cutting one luxury car from the cabinet of ministers we can fund a state of the art computer lab with 150 computers. For vesak next year, have a massive butter cake dansala in the centre of Kurunegala and as you begin to cut up this massive butter cake, for distribution tell people about your research on food taxes and how much of their cake goes on tax. Stand outside the Sri Lankan airlines office with bags of Triposha and flag how many more school meals estate children could have been provided- and by the way, child malnutrition in estates is the highest in the country.

As the final bit to this part I would like to put forward two key areas for further thought- these both relate to part three’s main theme on how do we create a popular narrative among people and also among policy makers. The first really is about aligning ideas of economic freedom to other ideas of economic thought that maybe more familiar to policy makers here and abroad.

And in this, I submit that the conceptual framework of inclusive growth is probably the most compelling piece of mainstream economic thinking that matches economic freedom. The problem so far has been that we tend to conflate the idea of inclusive growth with redistribution, or just welfare. Actually, inclusive growth is more about economic freedom than we realize. Inclusive growth is not just about more people benefiting from growth, but it’s equally about more people being part of creating that growth, whilst redistribution simply means growth happens in a few sectors, in a few regions in the country, you take those surpluses and then you provide welfare. That model is what we followed during the colonial plantation economy, but inclusive growth is about enabling more sectors, more people, more regions of the country to play an active and productive role in generating that growth- not just in Colombo, but everywhere. And I think this is where the entrepreneurship climate comes in, this is where opportunity and freedom comes in, this is where fair play and better government performance comes in. Inclusive growth is really about creating a climate where more people in society, where more entrepreneurs have the opportunity to thrive. And not be held back by bad procedures, and an unfair, or uneven playing field or a lack of investment in people’s health and education. So that’s one aspect of economic freedom to consider- linking economic freedom to the inclusive growth discussion. The other final aspect is how do we measure the outcomes of economic freedom in a way that matters to people.

I think Fred highlighted some metrics, particularly around the usual GDP per capita income measures, and I think the most important contribution of economic freedom Index, is that it gives us a good sense of the input factors – what are the pillars or elements that tell us the degree of economic freedom in the country. We now need to look at how we can capture something beyond that; how can we capture the degree of economic freedom felt by economic agents in an economy. I think there’s more work to be done on that, especially from a Sri Lankan perspective. If we are to create a popular narrative around economic freedom, institutions like Advocata and others would need to work on how to relate economic freedom to policy outcomes that governments seek, how to relate it to the lives of citizens and entrepreneurs, and to be able to answer a key question- what does economic freedom mean to you.

Thank you very much.

EFS Kick Off : Has the Open Economy Worked in Sri Lanka?

Advocata Economic Freedom Summit kicked off with a panel discussion on “Has the Open Economy worked in Sri Lanka?”  It was the historic year of 1977, that the voters used the power of the ballot to remove a government promoting  a restrictive state-controlled socialist oriented economy that stifled growth and opportunity.

Political change often is associated with economic change; since 1977, Sri Lanka has gradually opened up its economy- but to what extent has progress been made?

Forty years after the political change Advocata wanted to revisit the debate with representatives from both sides of the debate  as the front-runner to the Economic Freedom Summit and policy audit in partnership with Canada’s Fraser Institute and Atlas Network.

The discussion moderated by Ms. Anisha Guruge of Verite Research, had three panelists with varying views

Arguing against the opening up of the economy, Mr. Vinod Moonesinghe, a journalist and political researcher,  argued that Sri Lanka inherited a colonial economy from the British, dominated by a mercantilist class who were not interested in investment, a gap that needed to be filled by the state. He argued under the closed economy era of ‘72 the state invested in Plantations and other industries; coincidentally, there was a great deal of innovation associated with state investment in these sectors. By pointing to the the examples of the protectionist policies of East Asia before the countries in the region opened up its economies , especially South Korea and Taiwan, he argued that a closed economy was needed, at least in the short run to provide a platform for Sri Lanka to project itself when the country is ready to adopt a more free trade regime.

Mr Ajith Perakum Jayasinghe, a well-read political observer and blogger disagreed with the notion that Sri Lanka in fact opened up the economy in 1977.  He said that only partial reforms were done in ‘78.  Alluding to the anti-SAITM protests, Mr Jayasinhe argued  if Sri Lanka did really open up there wouldn’t be protests on the street calling for the denial of education freedoms of people.   Calling himself a ‘socialist’, Mr Jayasinghe said the best way forward is a liberalized but regulated economy.

On the other hand, Mr. Chanuka Wattegama, believed that the reforms in the post 1977 era has definitely worked although much remains to be done.  Establishing comparisons of pre-1977 era and since, he substantiated his stance by showing how freer trade translated into tangible benefits that ordinary citizens can relate to, like greater choice and increased incomes.

The point of conflict was the question of innovation- which economic system facilitates it better?

Whilst admitting that certain East Asian economies has some success under industrial policy and a degree of protectionism,   Mr Wattegama vehemently disagreed with the notion that closed economies spurs innovation.  “Then North Korea and Cuba would be the most innovative countries” he claimed. Mr Wattegama went on to cite the obvious disparity of quality between the inferior computer printers made in India under a closed market regime,compared to the far superior Epson printers available at the time. As mentioned in his opening and subsequent statements, Mr. Moonesinghe continued to oppose this notion.

The audience questions and the panel made up for a passionate discussion that addressed a key division in the economic policy debate in Sri Lanka.

The event was streamed online by YAMU TV and the video can be accessed through the following and now available on Advocata’s youtube channel.

Dhananath Fernando, the COO of Advocata said that the institution is committed to providing a platform to discuss contemporary issues in an accessible way.

Dr Ganeshan Wiganaraja delivers public lecture : Is the era of export-led growth over?

Sri Lankan-born economist Dr Ganeshan Wignaraja delivered a public lecture on the question of whether the era of export-led growth is over.   Dr Wignaraja is an advisor to the Asian Development Bank with decades of experience in various development organizations, focusing on Asia. 

As Asian trade slows down and with the increase of protectionist rhetoric from the west, the model of the East Asian countries, i.e. the export-led growth has been called into question.    Dr Wignaraja says that although the returns to such models have now become less, and it is now more difficult, he does not believe the era of export-led growth is over.

For Sri Lanka, he says basic reforms in trade liberalization in the areas of 'para tariffs' is needed, as well as improving delivery, and price quality of services and products.  Sri Lanka has failed to get into global value chains with the exception of garments. It hasn't happened in the BPO/ICT sector as expected, said the ADB economist. 

Dr Wignaraja says that as China now is moving up value chains,  rising wages and a upwardly mobile middle class is making China follow the model of Japan and subsequently South Korea in higher value added production and building innovation capability.  This opens up opportunities for Sri Lanka and other ASEAN countries argues Dr Wignaraja. Sri Lanka could attract export oriented Foreign investment from China to replace some of the labour intensive activities.  

In a new more difficult trading regime,  trading in services is likely to emerge as an important avenue of trade growth says Dr Wignaraja. Sri Lanka should focus on reforming internal barriers to trade in services by addressing skill gaps, trade barriers and infrastructure requirements in the area of basic power and digital infrastructure.  

With the expected death of the US-led Trans Pacific Partnership (TPP),  the China-focused Regional Comprehensive Economic Partnership (RCEP) is likely to come to fore as the major multi-lateral trade agreement in the region says Dr Wignaraja.  

Whilst Sri Lanka should pursue free trade agreements with India, China and other Asian countries, the correct sequence is to figure out the domestic reform agenda rather first and enter into trade agreements rather than the trade agreements dictate the reforms warns Dr Wignaraja.

Commenting on the use of Industrial policy and the government picking winners and sunshine industries in a country like Sri Lanka, Dr Wignaraja said that industrial policy requires a high-level of government capability, which at the moment Sri Lanka lacks,  and in such an environment, it's better to follow the market-led approach rather than try out sophisticated industrial policy measures according to the economist.

Dr Wignaraja also urged the policy makers to look into safety-nets and pay attention to the losers of trade liberalization, as addressing their concerns are vital to build support for trade liberalization.

Privatisation popular according to an online Poll

An online poll conducted by roar.lk amongst it’s readers indicates, that privatisation remains a popular option with an overwhelming majority saying that Sri Lanka cannot move forward without at least some form of privatisation.


Readers of the website however tend to be from the more urbane, english-speaking part of the population and unlikely to be representative of the country in general.  

 

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During the panel discussion at our event on State Enterprise reform in Sri Lanka,  panelists discussed the reasons for why the general public seems somewhat against privatisation.  

 

National press coverage for Advocata Institute’s Launch and Report on SOEs

Advocata Institute’s launch event as well as the report on “The State of State Enterprises in Sri Lanka”, has been receiving national press coverage,  with several national daily and weekend newspapers carrying articles.

"The Advocata Institute is a new think tank formed by a group of Sri Lankans with an interest in promoting sound, liberal, economic policy. Advocata will publish reports on key areas for reform."   - Daily News
"The institute will be dedicated to economic development through free-markets and will promote sound policy ideas compatible with a free society in Sri Lanka, its officials said."      - Lanka Business Online
"In the last 10 years, six state enterprises - Ceylon Petroleum Corporation, Ceylon Electricity Board, SriLankan Airlines, Mihin Air and Sri Lanka Transport Board - lost Rs605 billion, a report compiled by Advocata Institute, a think tank focusing on economic freedom, showed" - Economy Next
"'So yes I would use the P (Privatization) without feeling embarresd about it' Prof. Razeen Sally said at the launching ceremony of the free market think tank "The Advocata Institute" last Thursday evening." - Ceylon Today
"Advocata, an independent policy think tank based in Colombo, is urging the government and the politicians to engage in an open discussion that at least keeps privatisation in the mix of policy options." - Sunday Times
"The opinion polls jointly conducted by the Business Times and the Research Consultancy Bureau under the BT-RCB tag came into focus at the launch of Advocata, an independent policy think tank, in Colombo on Thursday." - Sunday Times
"Over the next six months, the debt-ridden national carrier SriLankan Airlines is scheduled to go through a major restructuring process that will, hopefully, pave the way to implement a sustainable business model." - Sunday Observer
"The findings of a new Colombo-based think tank show that the absence of crucial financial details of most of the state-owned enterprises (SoEs) in the public domain is a major obstacle holding them accountable to the people, whose funds are invested in them." - Daily Mirror
"Further the Advocata Institute highlighted that although there are 245 State Owned Enterprises in the country, the General Treasury has summarized the financial information of only 55 Enterprises that are strategically important." - Daily News
"As Sri Lanka plans to draw inspiration from the Singapore-styled Temasek Holdings in managing the continuously loss-making state-owned-enterprises (SOE), the island nation should look to place only selected SOEs in the event such a state-owned investment company is set up and not all of them, a top Economist has advocated." - The Nation
"'The institute will be dedicated to economic development through free-markets and will promote sound policy ideas compatible with a free society in Sri Lanka,' Wickramaratne said at the launch of Advocata Institute, a new independent policy think tank based in Colombo, and its report on SOEs." - The Island 
"It is worth taking a look at exactly how our SOEs have been performing over the years. The Advocata Institute., a recently established independent policy think tank, was kind enough to share with us its latest findings in this regard." - Roar.lk

Advocata Institute Launched in Colombo

Advocata Institute was launched yesterday with the release of our inaugural report titled “The State of State Enterprises”.  The event was held at the Lakshman Kadirgamar Institute Auditorium in Colombo and was attended by high ranking public officials, deputy ministers, academics and invitees. Deputy Minister Wickramaratne was presented with the inaugural copy of the report.
 

The event was keynoted  by Prof. Rohan Samarajiva, an advisor to Advocata and included speeches by Advocata COO Dhananath Fernando and Prof Razeen Sally.  Prof Samarajiva offered potential ideas for the state enterprise reform and spoke about his experience as a regulator during what was hailed as the successful part-privatisation of Sri Lanka Telecom.

Prof Razeen Sally speaking about the importance of a think tank working on issues related to economic freedom said, that much needed to be done in Sri Lanka to stem the tide of reversing liberalisation that the country has experienced in recent years.

The event also  featured a panel discussion that included the chief guest of the evening Deputy Minister of Public Enterprise Development, Eran Wickramaratne,  Advocata fellow Ravi Ratnasabapathy, as well as Prof Rohan Samarajiva and Prof Razeen Sally.   

The panel discussed reform ideas, including the holding company model after successes in the Singapore Temasek holdings. Several commentators in the panel discussed however the need for privatisation to be brought back into the public conscious as an ultimate solution.  Deputy Minister insisted that the government is looking at reforms on an industry-by-industry and case-by-case basis.

Dhananath fernando, the chief operating officer of Advocata Institute said that Advocata hopes to be an independent voice advocating liberal economic ideas based on sound research.


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