22nd – 28th November 2010 - fccisl.lk alerts/en/2010/November 28, 2010.pdf · ¾ Need to...

22nd – 28th November 2010

FCCISL News Alert Weekly Business Highlight 22nd – 28th November 2010

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Content Page 1. DEVELOPMENT ECONOMICS

Magampura Port to exploit Lanka's locational advantage 05 Restoration of GSP+ needed 08 EPF will not be replaced by proposed pension scheme 11 Budget aims at productive economy - Dr. P.B. Jayasundera 13

2. INVESTMENT

Making Sri Lanka a more attractive destination for FDI 17 3. MANAGEMENT

Supply chain and the rules of the game 20 'Objectives' setting for corporate excellence 23

4. TRADE & MARKETING

John Keells Tea Market Report 30 Need to integrate marketing and sales 32

5. MONEY & BANKING

Budget benefits for all 35 ‘Govt should be careful when picking and choosing’ 56 Budgets of the past... 58 Exchange controls relaxed to promote exports,

develop local capital markets 59 Central Bank relaxes exchange control regulations in line with Budget 2011 61 NSB post tax profits up 40% 64 Interests from deposits 66 Open Budget Index 2010 68 Budget 2011- a compromise between the economically desirable

and the politically feasible 70 Budget 2011- Export-oriented economic growth perspective 73

6. TOURISM Tourism industry confident of targets 76


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7. EXPORTS & IMPORTS Pakistan mulls export credit line 79 Sri Lankan gems glitter at Beijing Show 80

8. STOCK MARKET

Market awaits direction 84 Bourse gains slightly, turnover improves 85 Turnover Rs.1.4 bn., indices down 86

9. BUSINESS

Chambers seek simple tax formula From the Business Desk 89 Adding color to brand Sri Lanka 92

10. AGRICULTURE

Helping farming communities to be sustainable 96 Vanilla and ginger growers earn big bucks 98 Agriculture, a lucrative business 100 Agriculture and economic development: A response 103

11. ICT

Why ICT is important to the BPO sector 108 12. FCCISL NEWS IN MEDIA

FCCISL welcomes ‘development oriented’ budget 2011 112 FCCISL seminar 114


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Development Economics


Daily News – November 22, 2010

Magampura Port to exploit Lanka's locational advantage Capt. Nihal Keppetipola Managing Director Sri Lanka Ports Authority

The ships which arrive from Middle East and Africa and sail from Asia and Oceania need to have an interim point to get their facilities and Hambantota is the most suitable place for the purpose. The Magampura Port can perform a prominent role as a fuel and crew changing centre as well as for receiving water, drugs, foods and fruits. It is an international requirement and a mechanism of generating foreign exchange to the country as well.

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Hambantota can be utilized in facility as a cargo exchange centre for the trade between west and east of Indian sub continent. The reputation of Hongkong, Singapore, Dubai Ports will be attracted by Hambantota Port when Sri Lanka would become a hub centre in the international trade network gathered around India and China. It has been intended to grant 2000 hectares Government land

to industrialists all over the world with tax holidays and land owned by the Government with rent favours. Foreign investors are able to utilize the Hambantota Port in a warless peaceful environment as they wish.

Inland facts The major Local factor for construction Hambantota Port is the Panchabala Kendra concept of Mahinda Chinthana. Hambantota becomes the ideal area to construct a Port and to plan a modern city under this concept. People of several districts will benefit after the construction of this Port in a more difficult and poverty stricken area. Some benefits are as follows: 5000 to 6000 direct employment opportunity for the youths 25000 to 50000 indirect employment opportunities for permanent residents in the area. Creation of an international market for vegetables and fruits for the farmers in the area. Opportunities for skilled workers to join as International Seafarers on-board vessels. Creating and receiving new business opportunities. Utilizing as an industrial harbour for the development requirements. The possibility of regional development and the focus on economic development in the country by generating foreign exchange are among the local factors. Having an appropriate deep sea, free of tidal waves and the dry climatic conditions are also favourable attributes. The land where the Magampura Port is constructed can be identified as the most suitable land for a new Port. This can be identified as a combined project of the on-going combined development projects in poverty stricken zones such as Matara, Hambantota, Moneragala. Mega factories, highways, international grounds, international Airport, International Conference Halls, Rail roads and water supply schemes have already been implemented under this project.


The background for the H'tota Port At a time of dreaming of Magampura Harbour, signing of the agreement with Chinese President Hu Jintao, and President Mahinda Rajapakse, during his visit to China commemorating the Golden Jubilee of bilateral relationship between China and Sri Lanka made the path to become the dream a reality.

Construction work on the Magampura port

continues at a rapid pace

As a result, 85 percent out of the US $360 million investment to construct the Magampura Port was granted as a special patronage of the Chinese Government. The relevant project reports were reviewed by the Cabinet appointed special discussion Committee and submitted to the Cabinet for approval to construct the Magampura Harbour was given to China. It was approved by the Cabinet. The agreement for the construction of the "Magampura" Harbour was signed between the Sri Lanka Ports Authority and the China Harbour Engineering Company Ltd., and Syno Hydro Co-operation Ltd Group Company Board on March 12, 2007.

Combined development plan With the idea of the Magampura Port coming into effect we can see that it has been developed alongside the Hambantota Combined Development Plan. The thoughts of the people about Hambantota were arid and harsh. Now their minds are being transformed as a developing land zone. The pioneer of this change is the Port. Attention was paid regarding the necessary infrastructure when the basic plans were prepared for the construction of Magampura Port. This was developed as the Combined Development Plan and under the guidance of His Excellency the President and the following major projects are being implemented. * International Port of Magampura * Hambantota International Cricket Ground * Hambantota International Conference Hall * Ranmihithenna Tele Cinema village * Dry Zone Botanical Gardens * Railway services to Kataragama * Mattala International Airport * Highway system * Administrative Complex

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The Hambantota New Town Plan is also combined to the above. Additionally development of projects and schools, houses, towns, water, electricity are being implemented and arrangements are under way for a Free Trade Zone in Hambantota too. All government institutions and offices including Sri Lanka Ports Authority are dedicating their services for this purpose. Environmental balance of Magampura Port as an artificial harbour. As the Magampura Port was developed as an environmentally friendly Port from the


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initial stages, there have not been any environmental issues which many development projects have to undergo. The Garden Port concept which many countries follow is utilized to join the complex mechanism process and the environment, and it creates a good mental status for an employee. Comparing the environmental condition of Hambantota, there are several factors which led to the environment friendly nature of the Magampura Port such as: * Previous experience gained from large scale projects * Geographical diversity of Hambantota * The weather and climatic conditions in Hambantota A land around the port which is 15 kilometres in extent is scheduled to be maintained with appropriate plants as a green belt. It is noted that the designs of Magampura Port have been prepared in accordance with Sri Lanka Environmental Act. Recycling of water and garbage used in the Port was in the basic plan of the Magampura. Wind and hot sunrays are the common climatic feature of Hambantota. The plan is to utilize them as a source of energy in the future activities of the Port. Port basin for the second stage would be constructed with a depth of 17 metres Ship turning circle of 600 metres and the existing access road will be deepened up to 18 metres, a Quay wall of 2,140 metres with six berths will be constructed.

The second stage of Magampura Port Agreements have been signed for the second stage of the Magampura Port. Accordingly, ship turning basin has to be extended upto the depth of 17 metres and 600 metres the circle access channel road is deepened upto 18 metres and the terminal dam consisting of six berths would be constructed. Parallel to this it is expected to create an island near the coast with an extent of 50 acres using the soil removed after the excavation of the Port. The Karagam levaya and surroundings of 2000 hectares in extent where 450 families resided were acquired for the new Port Project of Magampura. Compensation and land were granted for land owners and all the infrastructure too for those lands were provided. A new road was constructed instead of the old road and all the obstacles for a suitable location for a port have been removed by now. The public of the area have been made aware of the all sectors of the project. The series of seminars conducted in schools in the area were helpful to inculcate positive expectations over the developments in the benefits of people in Hambantota area. The filling of sea water for the Magampura Port of Hambantota which commenced from August 15 has been almost completed. Attention of the local and foreign investors has been drawn to the Magampura Port as an attractive investment centre just after the Magampura port is full of water. Accordingly the project committee appointed for the consideration of the request of the investors who are interested for the investments in Magampura port premises issued 63 applications locally and internationally and 27 investors have submitted their proposals for the investments. Feasibility studies are being done by the project committee for 27 applicants who submitted applications. Six cement factories, two factories of warehouse packing, a sugar factory, a fertilizer factory and a can packing factory and some other identified fields who have agreed to start factories. These proposed factories will commence in the 2000 hectares which has been reserved for the Hambantota Port project by now. With all these development activities it is to be expected that Hambantota will become the second capital in Sri Lanka.



Restoration of GSP+ needed Sent by Hiran Bandaranayake, Secretary General, Sri Lanka Garment Buying Offices Association The European Union withdrew the GSP+ tariff concession granted to Sri Lanka under special privileges to economically vulnerable developing countries since 2005, on August 15, 2010 in relation to what was regarded as shortcomings in Sri Lanka on the implementation of International Conventions which is an integral part of the trade benefit. EU Ambassador in Colombo Bernard Savage has stated recently that the Government and the EU are not involved in fresh talks to revive the GSP plus trade benefits for the country. He has stated that the Government had not made any approach to resume negotiations on the issue and so the matter was now closed. During the recent past, one of the most crucial trade concessions Sri Lanka received was the granting of

GSP+ status in the EU market, following the ‘Tsunami’ of December 26, 2004. This provided duty-free access for 7,200 items and the most beneficiary of the concession is the Apparel sector. Few countries provide such an attractive Import Duty concession except under a Free- Trade-Agreement (FTA).

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Garments has been promoted as an engine of development in Sri Lanka. It certainly brings in dollars. This provision of duty-free access to EU Market is regarded as having facilitated substantial growth in the country’s exports and especially apparel, in the region since its implementation in year 2005.

Major impact Apparel exports alone to the EU, climbed from US $ 997 million in 2004- the year before Sri Lanka was granted GSP+ benefits- to US $ 1,647 million in 2009 an increase of 65.2 percent and thus EU became the top market for Sri Lanka’s apparels in 2008 replacing United States who has been the top market since inception of the apparel industry in early 1980’s. Its export

share which was 37.6 percent in 2004 also climbed to 52.9 percent in 2009. It is widely accepted that the withdrawal of GSP+ will have a major impact on the apparel industry. The fear is that the growing number of European buyers will find Sri Lanka’s apparels increasingly uncompetitive and shift their sourcing to rival producers. The table also indicates that due to the EU- GSP+ concession, total apparel exports also gradually increased year after year, except for year 2009, where the entire global apparel industry was affected due to a world-wide economic recession. During 2009-with Sri Lanka while enjoying EU-GSP+ concessions, was the eight Leading exporter to EU Market. China topped with US $ 38,057 million, followed by Turkey-US $ 9,967 million, Bangladesh-US $ 7,126 million, India-US $ 6,316 million, Tunisia-US $ 3,185 million, Morocco-US $ 2,813 million, Vietnam- US $ 1,752 million and Sri Lanka-US $ 1,687 million and closely followed by Indonesia US $


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1,603 million and Pakistan US $ 1,568 million. Now with Sri Lanka not enjoying the GSP+ concession with effect from August 15, 2010, Sri Lanka obviously will be at a disadvantage. Pakistan which was behind Sri Lanka will probably receive the GSP+ in 2011 to 2013, will also be a threat to Sri Lanka. The above countries are the main competitors of Sri Lanka in the global apparel market. Source - World Trade Organization (WTO) The country thus stands to lose millions of dollars worth of apparel exports to the 27-nations EU market and the livelihood of thousands of apparel sector workers are at stake, as the withdrawal of the privileges is expected to affect large nu0mber of factories. According to Industrialists, the loss of the GSP+ benefit will exert tight pressure of profit margin, for when the benefits are lost, sellers will have to bear the cost of additional tariff. Under the GSP+ concessions Sri Lankan goods entering the EU need to pay no duty, but now the privilege is lost and the standard GSP kicked in and thus Sri Lankan apparel became subject to concession of only 2-2.4 percent duty which is 20 percent of standard tariff averaging 10-12 percent as against zero duty which enjoyed prior to withdrawal of GSP+ in August 15, 2010. Meanwhile, despite Sri Lanka enjoying the GSP+ privileges in the EU, Sri Lanka’s Apparel exports to EU market contracted by 8.4 percent during the first eight months of current year from the year ago level.

Decline in exports The apparel exports to EU during January to August, 2010 was US $ 986 million as against US $ 1,077 million during same period 2009. The European Commission (EC) announcement of February 15, 2010 of its intention to suspend the GSP+ concession granted to Sri Lanka with effect from August 15, 2010 would have also have affected for above decline in exports. Joint Apparel Association Forum Chairman Sukumaran has said recently that it is most likely that the apparel exports, which is Sri Lanka’s key industrial exports, would come down by 10 to 15 percent this year, reaching US $ 2.7 to 2.8 billion, as compared to last year. (Source - Fibre2Fashion News Desk - India) According to Joint Apparel Association Forum Secretary General Rohan Masakorale around 250 factories may get affected due to this withdrawal. It is seen from the above table the apparel exports to USA has declined by from US $ 1,556 million in 2004 to US $ 1,297 million in 2009, which is a drop of 16.6 percent. The share also has dropped to 41.6 percent in 2009 from 58.7 percent in 2004. The apparel exports to USA during the first eight months of 2010 declined by 4.6 percent over the same period year ago. The exports during the period January to August, 2010 was US $ 833 million as against US $ 873 million during January to August, 2009. The major global market for apparel imports right throughout are EU and USA. In 2009, EU (US $ 160 billion) and USA (US $ 72 billion) totalling US $ 232 billion and these two markets accounted for 73 percent of global total apparel imports. Similarly Sri Lanka’s two major apparel export markets are EU (US $ 1,65 billion) and USA (US $ 1.3 billion) and both these markets accounted for 94.5 percent of total apparel exports in 2009.

Cheaper sources In today’s market place, it has become a norm to source clothing from countries with low costs. Furthermore the buyers are being forced to look for cheaper sources in order to satisfy consumers who are increasingly demanding, while competition in the retail level continue to get tougher. However, there is still a gap in the market for manufacturers based in Western Europe and the United States who produce goods in their own country for sale in the domestic market and for export.


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Of course, production costs are usually much higher in developed countries. Indeed labour costs alone in Western Europe can be over many times as high as those in Asian countries, Nonetheless, manufacturing in developed countries bring in number of benefits. One benefit is flexibility in being able to offer smaller production runs and short delivery times. While distant suppliers may be cheaper, buyers often demand minimum quantities which can be economically not possible. The buyers are looking increasingly to source from factories which adhere to Corporate Social Responsibility - CSR programs in general-and fair labour practices in particular. Our ‘Garments Without Guilt’ is well-known both locally and internationally as superior garments. On the employment side-media reports quoted that the future looks bleak and fears of retrenchment are worrying the workers, but the figures can rise with the withdrawal. Thus causing loss of job opportunities in the apparel industry it will also no doubt affect the inflow of foreign currency from export earnings. Sri Lanka has gained a reputation of exporting top brands to leading buyers in the world but will soon lose that status if we don’t regain the GSP+. International Textile Manufacturing Federation-ITMF, at its annual meeting in Brazil expressed concern about the soaring cotton prices and their negative implications for the international cotton textile value chain from fibre to retail. The ITMF stated that the textile industry all over the world is not in a position to absorb any longer cotton price increases of unprecedented dimensions recorded during the past months without risking its own existence. Further in addition to above stated facts, increases in prices of cotton, freight cost, currency fluctuation and competition from other countries with GSP+ with all this taking place in the global apparel industry and with an additional payment of 9.6 percent to 12 percent duty on Sri Lankan products makes Sri Lanka extremely expensive compared to our competitors. Any decline in apparel exports will also affect the local textile industry as obviously requirements from apparel industry will be gradually reduced. EU Ambassador Bernard Savage’s recent statement that the Government and the European Union (EU) are not involved in fresh talks to revive the GSP plus trade benefits for the country, comes as a fresh blow to a dying industry intensifying the shock. Therefore taking above facts into consideration, if the GSP+ status is not restored in the near future, Sri Lanka’s apparel industry which is the major foreign exchange earner of the country for many decades may have to face bad times with decline in exports and employment opportunities. The outcome will not be good for the economy of the country and thus the Government and the EU should pursue its dialogue without further delay and both must arrive at a win-win situation and ensure the restoration of the GSP+ at the earliest.


The Island – November 24, 2010

EPF will not be replaced by proposed pension scheme

The government proposed an Employees’ Pension Fund (also EPF, adding to the confusion) in the Budget 2011 which has cast fear among workers that they would lose their lump-sum entitlements from the Employee’s Provident Fund (EPF) and Employees’ Trust Fund (ETF) upon retirement. Many workers depend on their EPF/ETF entitlements to invest in a new business or income generating venture, a home, medical expenses, open fixed deposits, or even to give their children away in marriage. But President Mahinda Rajapaksa’s proposal for the Employees’ Pension Fund (EPS for Employees’ Pension Scheme to avoid confusion with the EPF) in the budget speech was clear that the it would require a contribution of 2 percent each from employer and employee but the President failed to be clear on several important issues.

"I propose a 2 percent contribution from employees and a 2 percent contribution from employers to this fund. The employers will be required to transfer the entirety of the gratuity payment to this fund. Employees too will be required to transfer 2 percent of their Pension Fund balance at the time they withdraw the Pension Fund, in lieu of future pension benefits from the Employees’ Pension Fund. I also propose that everybody must contribute for a minimum 10 year period to earn a pension. The Employees’ Pension Fund will be managed by the Monetary Board of the Central Bank," the President said in his budget speech.

He does not mention the fate of the EPF and ETF schemes already in place and his statement that there was a need for employers to transfer gratuity payments to the fund and employees to transfer 2 percent of their pension fund balance has caused confusion. Employees are concerned that the government was trying to attempt to deny them their entitlements, and the 2 percent contribution would further diminish their disposal incomes. Employers are concerned that this would increase wage costs further. The government is on a rapid development drive and its need for financing is understandable. The EPF has always been and is a captive source of cheap funds for the government. Employees are concerned the government was trying to merge the EPF/ETF with this new scheme and deny them any lump sum payment, while the government continues to access the funds to achieve it development goals. But a senior Central Bank official said these fears were unfounded.

Speaking to The Island Financial Review, Central Bank Deputy Governor K. G. D. D. Dheerasinghe said the EPF, managed by the bank, would remain as it is. "Employees should immediately allay such fears. The EPF would continue as it is and there will be no changes," he said. "The pension fund is still in a conceptual stage. The intension is to provide a steady flow of income to retirees apart from the lump sum entitlements from the EPF and ETF. Nothing is finalized as yet, but the transfer of gratuity to the

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fund could be an attempt to create seed capital at the initial stages," Dheerasinghe said. "The workforce is around 8 million and only 2 million contribute to EPF which means nothing can be done forcefully. But the government is trying to implement something that would guarantee a steady flow of income from the time a person retires and until he or she passes away, and this requires a 2 percent contribution for a minimum of ten years in order to be eligible for a pension," he said.

"As the economy progresses interest rates would be much lower which would lead to lower interest incomes, so a pension scheme would be beneficial as fixed deposits opened with EPF funds would have low yields," Dheerasinghe said. Established almost fifty years ago, the net worth of the EPF grew 17.8 percent last year to Rs.769.4 billion from Rs.653.2 billion the previous year. The number of active employees (members) contributing to the fund in 2009 fell 13 percent to 2 million from 2.3 million while the number of non-contributing members increased by 4.9 percent from 10.2 million in 2008 to 10.7 million last year.

Member contributions amounted to Rs.48.7 billion, a 6 percent growth from Rs.46 billion the previous year. The Employment Provident Fund (EPF) made a return of 13.75 percent in interest income amounting to Rs.90.7 billion for 2009, which was the highest ever in the fund’s history with real returns amounting to 10.01 percent after accounting for inflation which was 3.4 percent (annual rate), the Central Bank and Ministry of Labour announced in March. The fund’s investment portfolio amounted to Rs.738.1 billion, an increase of 17.66 percent from Rs.627.3 billion in 2008. Investments in government securities accounted for 97.1 percent of the total portfolio, corporate bonds 1.1 percent, equities 1.3 percent and reverse repose 0.5 percent.

Net investment income increased by 37.9 percent from Rs.78.8 billion to Rs.101.2 billion, after taxes amounting to Rs.7.6 billion were accounted for. The tax liability increased by 40.1 percent from Rs.5.4 billion in 2008.

Interest paid on members’ balances amounted to Rs.90.7 billion, a 21 percent increase from Rs.75 billion in 2008.

Over the past 15 years the fund has made, on average, a 1.42 percent real return.

The government also proposed to initiate a pension scheme for migrant workers and employees in the informal sector.


Sunday Observer – November 28, 2010

IRD called upon to be efficient, client-friendly: Budget aims at productive economy - Dr. P.B. Jayasundera By Sureka Galagoda The Budget is aiming at a very efficient productive economy, said Treasury Secretary Dr. P.B.

Jayasundera addressing the Budget seminar organized by the Department of Inland Revenue (IRD) on the eve of the Budget. He said that our nation is lagging behind 25 years compared to other economies in the region. Therefore, we have to do 35 years of work in 10 years. The work which should have been done 35 years ago must be done now.

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The Government is concentrating on IT, productivity, efficiency and innovative technologies to achieve a higher growth. Today the world is talking of a 10 percent growth. Until recently the world considered a 3-4 percent growth as good, but not any more. China is growing at 10.2 percent while India is also encountering tremendous growth. The Budget for 2011 is very comprehensive and covers all sectors of society from the unborn child to the

elder and from banking to IT and SME. The Government’s aim is to move from manufacturing to value addition. It is not discussing subsistence but food security in addition to comprehensive and transparent fiscal policies. Tax administration is very simple since corporate taxes as well as income taxes are very low after many years. Dr. Jayasundera said that the Budget gave up many things it was saddled with. The debit tax which was generating about Rs.10-15 bln of revenue for the government was dropped. Several taxes were given up while concentrating on generating more revenue through a small number of taxes. After April 1, 20,000 tax files will be eliminated. Since the IRD will have less work the department should concentrate on doing serious professional work. In addition the Budget has proposed to establish an independent tax commission for settling of tax disputes within 90 days. This will save time spent on disputes. Dr. Jayasundera told tax officials, “Let them pay what they can, believe them, trust them and win them over without treating them as rogues.” The IRD should concentrate on domestic taxes, as well as have a comprehensive tax system by April next year. The Customs Department has already begun shifting towards technology and will be on that mode by January. The IRD will also have to move in that direction as very little collections will happen.


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Dr. Jayasundera said that the thresholds are lucrative for the next 10 years. If inflation takes the trend of the last year then we can achieve a growth of 8 percent while inflation can be curtailed at 6 percent. The poverty level is 7.6 percent. It was 15 percent in 2006. It will be further reduced to 5 percent. Personal income tax has been simplified while the debit tax is eliminated. Banks can’t grumble as taxes have been reduced from 70 to 40 percent. Banks will have to concentrate on long term lending to customers at affordable rates. He said that banks will have to play the role of investment bankers and provide 7-10 year loans for agriculture, industry and services. In the next three months banks have a responsibility to become investment/development bankers. Bankers will have to bear with the customers until the harvest is reaped. The conflict is over, infrastructure is available and the openings are quite good. New sectors are opening for investments. The Budget deficit is 6.8 percent of GDP or Rs.434 bln which is a tolerable figure. This money is earmarked for capital formulation in the sectors of ports, power, irrigation, roads as well as for education and skills development. Don’t worry about the Budget deficit as all the projects will generate income, said Dr. Jayasundera. The world is quite buoyant while the Asian region is witnessing a growth of over 10 percent. The Deputy Prime Minister of China speaks of Sri Lanka as an emerging economy. All indicators point at a prosperous economy. The Budget and the President swearing-in are over. So, Let’s get back to work. There is a need to develop seeds and planting material. There is a five year tax holiday for agriculture and seed development. SMEs will be linked to big players, have been recognized as engines of growth and have been exempted from ESC. The Government has mobilised a $ 50 mln funding facility with a 40-year repayment period. The Budget also has spelled out incentives for the private, public sector to work together in the area of research. Originally the tax was 35 percent for corporates while it was 15 percent concessional for exports. Now the 35 percent has become 40 percent for sectors such as liquor, cigarettes while the 15 percent has been reduced to 12 percent. The corporate tax is 10 percent if the value addition is 60 percent or more. In this scenario exporters don’t have to worry about GSP as quality products will attract customers. If the product is of quality the market will come to you instead of you going to find the market. A five star hotel room should fetch a price of $ 125. If a hotelier can’t sell a room at that price he can sell it at any amount but pay a tax of $ 80 in addition to VAT. If the room gets the stipulated price there is no additional tax but only the VAT. Dr. Jayasundera said that no investment will be promoted on the basis of cheap labour. It will be a skilled workforce that will be available. Also political stability and infrastructure. The country will be able to attract quality investment. As the country is moving towards a skilled economy the tax system too would be forward looking while simplicity is the theme. He said that 20 commodities such as wrist watches, cameras will only be liable to PAL and NBL which sums up to 8 percent. Telecommunication has been identified as a key sector and to make it more efficient it has been made VAT free. Now only a single tax is applicable. Earlier it was 30 percent now it has been reduced to 20 percent. At present the government is trying to identify machinery, which is needed by the sector and


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will be made tax free. Another change is that administration of taxes has been streamlined with some taxes being taken by the central government and the share of the provincial governments given to them or the two organizations taking separate taxes. Development is central in the Budget and it is multifaceted- be it small or informal all sectors have been considered. Machinery over four years is considered depreciated while for buildings it is 10 years. The BOI has 12 zones and all of them have space which is underutilized. Steps will be taken to utilize the space while approvals on paper were cancelled from midnight November 22. In addition the owners of unutilized land have been requested to grow or give the land to the government. The IRD was requested to be efficient and client friendly. The Budget clearly addressed all sectors and in some instances has even spelt out the HS codes as the government wants to develop the country to be a middle income country by 2015. Dr. Jayasundera called upon all citizens to help Sri Lanka become a middle income country so that every citizen can be proud to live here.


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Investment


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Making Sri Lanka a more attractive destination for FDI By Dinesh Weerakkody

Foreign direct investment (FDI) generally refers to long-term participation by one country in another country. It usually involves participation in a JV, capital transfer, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment.

There is substantial evidence that such investments benefit host countries. In Sri Lanka, during periods of relative economic and political stability, foreign direct investment inflows have responded positively. For example, during the periods 1979-1982, 1990-1993 and 2002, foreign direct investments increased to a maximum of US$ 242 million. In 2003, the inflows of foreign direct investments including privatization proceeds increased by US $ 30 million. The realized inward investment flow was mainly to power and energy sectors, port related developments, telecommunications, and manufacturing.

However, the net foreign direct investment was marginally lower in 2003 owing to larger outflow of US $ 27 million as compared to outflow of US $ 11 million in 2002. Since the end of the war Sri Lanka’s foreign direct investment (FDI) flows in the first six months of 2008 reached 425 million US dollars. According to Board of Investment estimates, in 2008, the services sector attracted 362.3 million dollars worth of investments, with telecom leading with 290.7 million dollars followed by power generation with 46 million dollars. Property development had brought in 7.2 million dollars, hotels 2.07 million, other services 7.5 million and business process outsourcing (BPO) and information technology 9.05 million dollars. Sri Lanka expects foreign direct investment to more than quadruple to $4 billion by 2012.

Why we need FDI Undoubtedly FDI, benefits the host country, however its potential impact should be carefully and practically accessed. FDI is viewed as the "good cholesterol" HDL, where as international debt flow of short term varieties are considered "bad cholesterol" LDL. FDI is thought to be "bolted down and cannot leave so easily at the first sign of trouble". Unlike short-term debt, direct investments in a country are straight away reprised in the event of a crisis. Foreign direct investment has been proven to many to be resilient during a financial crisis.

A good example would be the Mexican crisis that took place during 1994-1995 and the Latino crisis in the 1980’s. The resilient of foreign direct investment during a financial crisis can lead to many developing countries to monitor it as private capital inflow of choice, rather than investing in other forms of private capital such as portfolio equity’s, debt flows, and in particular, short term flows which were all subjected to large reversals during the same period. Generally, private capital flows across borders, because it allows capital to seek out the highest rate of return. Countries often choose to exempt some of its revenue when they cut corporate tax rates in an attempt to attract FDI from other countries.

FDI also allows the transfer of expertise and technology, particularly in the form of varieties of capital inputs, which cannot be got via financial investments or trade in goods and services. However, there are many findings that show FDI is a relatively bigger portion of total inward investment in some countries,


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where the risks are very high. This is often because FDI tends to take advantage of the countries where the market is inefficient. It happens because of foreign investors prefer more to operate directly instead of relying on local financial markets, supplies, or legal arrangements.

In high-risk countries, the share of total inflows is higher and the risk is measured by the countries credit ratings. Also, FDI may not be beneficial to developing countries when foreign investors increase vital inside information about the productivity of the firms under their control. That fact gives them an information advantage over "uniformed" domestic savers, whose buying of shares in domestic firms does not involve control. Taking advantage of this superior information, foreign direct investors will tend to retain high productivity firms under their ownership and control, and sell low productivity firms to the uniformed small time retail players.

Attracting FDI The best solution for developing countries to increase their overall amount of inward investment of all kind is to focus on concentrating on improving the environment for investment, the functioning of capital markets and private companies need to improve governance within their enterprises, skills level, internationalize and work towards becoming multinational enterprises. By doing so, they are likely to be rewarded with increased investment as well as with more capital inflows. Although it is very likely that FDI is higher, as a share of capital inflows, where domestic policies and institutions are weak, this cannot be regarded as a criticism of FDI per se. Indeed, without it, the host countries could well be very much poorer.

The growth that was received in FDI in recent years slowed with the impact of the financial crisis and investors are now turning towards developing economies. FDI inflows grew from just USD $58 million in 1982 to nearly USD $100 billion in 2005 and more than USD $1400 billion in 2008.

The global stock of FDI is now in excess of USD $1500 billion. The global recession is speeding up the shift of focus to frontier and emerging markets since they remain the only source of growth in the world economy. Sri Lanka could very well attract more foreign investment, and develop faster, if we improve our infrastructure, workforce skills, have efficient capital markets, provide sustainable legal guarantees to protect investment and strengthen governance in both the public and private sectors.


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Management



Supply chain and the rules of the game Peter Barbut CMILT Country Representative Supply Chain Asia - Forum This article is a continuation of the writer’s intention to make public awareness of the ‘supply chain’

process and for the benefit of students who would like to take-up career’s in this field which is today developing a good demand in the manufacturing sectors due to ‘globalization’.

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Supply chain management is a difficult game to master. It requires you to move a great many pieces in a very specific ways, and you have to choreograph those moves to make each piece arrive in the right place at the right time. It’s also a game that plays out on grand scale, with a playing field that spans the

entire planet. Fortunately, the rules of the game - the descriptions of the pieces and the ways they move - are simple enough to be summarized in a few pages. In a nutshell, supply chains consists of production and storage facilities connected by transportation lanes, and they exist to support the flow of demand, supply and cash. The difficulty of managing supply chain comes primarily from the complexity that creeps into their structure and the variability that characterizes their flows. It’s this complexity and variability that makes an easy game hard to master. Facilities and links A supply chain is a network of facilities, connected by transportation lanes, Facilities, Production facilities, storage facilities. Transport lanes are mode of transportation; they include roadways, railways, waterways, sea lanes, air lanes, and pipelines. Viewed in the largest context, supply chains consumers of the finished good, the people who actually put those goods to their intended purpose. Facilities contain controlled quantities of materials called inventories. Production facilities hold inventory in three different forms: Raw materials inventory consist of materials ready for utilization in the production: work-in-process (WIP), inventory includes all materials currently being worked on: and finished goods inventory holds completed products ready for shipment. Storage facilities vary: Warehouses usually contain only a single kind of inventory, but distribution centers that do the final assembly all three kinds.


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Cross docks, which are used only to transfer goods between trucks, do not contain any in separately managed inventory. Retail stores also vary in, this regard. Custom bicycle shops have all three types if inventory warehouse-style stores contain only one and some appliance stores carry none at all. Lanes are used by vehicles and containers Lanes are used to move inventory between facilities along a particular mode of transportation, using a combination of vehicles and containers. Some vehicles, such as a truck and railway engines, can be decoupled from their containers, whereas other such as delivery vans and tanker ships, have container holds the cargo built in. Decoupling is an important consideration because it offers more flexibility in routing, dispatching, temporary storage, and other transportation activities. In case of pipelines, the functions of the vehicle and the container are merged with the lane itself, with pumps providing the motive force and pipes containing the inventory in transit.

Transport modes offer trade-offs Each mode of transportation offers a unique mix of speed, cost, availability, and capability. For example, shipping by air is fast, expensive, available from all large cities, and limited to small and lightweight packages. By contrast, shipping by sea is slow, cheap and availability only to cities with ports, and virtually unlimited with regard to size and weight. There are also different volume trade-offs within each mode. In trucking it is much cheaper to send full truckload (FTL) shipments than to use less-than truckload (LTL) shipments, and the FTL option offers tighter control over the routing and timing of the shipment. However, using FTL shipments requires building up more finished goods inventory and may cause delays in shipments. Similar trade-offs apply in the other modes.

Shipments can use multiple modes Shipping within a limited geographical region normally uses a single mode from source to destination. For larger distances, including most international trade, shipments generally use two or more modes, a practice known as Intern-modal transportation. For example, a shipment might travel by rail to the nearest seaport, cross the ocean by ship, and travel rest of the way by truck. Inter-modal shipments are usually enclosed in steel containers that can be transferred between specially fitted rail cars, container ships, and tractor trailers. Like facilities, transportation lanes contains inventory. This in-transit inventory bridges the gap between the shipping facility’s finished goods inventory and receiving facility’s raw material inventory. In-transit inventory is different from other forms, in that it is unavailable for use. Is at high risk of loss from theft and accidents, and is subject to delays due to vehicle breakdown and lane congestion. Along with raw materials, work in progress, and finished goods, In-transit inventory represents the fourth major type of inventory. The distinction between in-transit inventory and the two inventories it connects is often blurred in practice. Trailers or railcars are frequently used to store finished goods at production facilities until full loads are produced, In which case the goods are still part of the plant’s finished goods inventory. But if the storage is brief and the destination of the goods is determined by the choice of containers, the goods in the container may be treated as inventor in transit as soon as they are loaded. Similar issues come up at the destination.


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Where full containers may sit for days or weeks in a yard before being unloaded. In one rather perverse practice, railway care are actually kept on the move, circling in wide arcs around the facility, until there is space to park them in the yard. This is a very expensive way to hold inventory.

Package carriers are viewed as a mode Although they don’t make use of a separate transportation medium, package carriers such as UPS and FedEx are commonly viewed as a distinct mode when making transportation decisions. In reality, these carriers use a mix of air and highway transport to deliver their packages, using their own fleets of aircraft and trucks. As a practical matter, however, it doesn’t matter how a package is conveyed because that decision is out of the shipper’s hands, so using a packages carrier is viewed as an alternative on a par with shipping by air, land or water. The trade-offs discussed for the other modes also apply to package carriers. They are fast, relatively expensive, available in most locations, and limited to relatively small, lightweight products.

Demand, supply, and cash The essential goal in managing a supply chain is to achieve an orderly flow of goods from extractors to consumers. It should not be surprising, then, that the deepest roots of the discipline can be found in transportation management, which is responsible for moving finished goods to the next link in the chain. Over time, transportation management merged with a related function, materials management, to form the broader discipline of logistics, which handles the flow of materials all the way from suppliers through the three internal inventories already explained in this article to the end customer.



Organizational objectives and personal objectives: 'Objectives' setting for corporate excellence Dr K Kuhathasan

The term "objective" implies desired result or s ituation in the future. It is something expected or hoped for at a point of t ime in future. According to Ansoff, "Objectives are decision rules which management to guide and measure the organization's performance." A statement of objectives should answer the following questions: * What is to be achieved? * How much to be achieved? * When it is to be achieved? * By whom it is to be achieved? Take some time to consider examples of objectives for job roles in your own organization. It is quite likely you initially think of numerical targets such as: * Improve sales by 20 percent * Decrease errors by 70 percent * Achieve an efficiency ratio of 95 percent on production machines * Halve the number of customer complaints * Produce 3,000 units in the next month

* Recruit 30 graduate trainees by September * Reduce the level of unauthorized absence to no more than six days per person in the rolling year. * Bring down labour turnover to under 6 percent When realistically set, these numerical objectives are useful and they could apply at various levels. Organizational, departmental or individual. If set for one person this type of target is geared towards the individual contributing to the wider aims of the business. Certainly if it is possible to build a realistic figure into such a target. This will help both manager and subordinate share the same understanding of what is to be achieved. This will make assessment much easier at a later stage and ensure that there are no awkward discussions about what was originally agreed in terms of the degree of difficulty of standards. First, it is important when expressing an objective target in quantitative terms to provide some guidance on how the individual might achieve the numerical aspect of the target. If the figure relates to a departmental or organizational goal the target should be broken down to provide more specific guidance. 23


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Second, when setting objective targets for a member of staff it is vital to strike a balance between targets which focus on the departmental or organizational goals and targets which are specifically intended to develop the individual. Clearly stated objectives, also provide a basis for monitoring progress towards the mission. Without clear objectives, it is difficult to know how it should proceed to achieve its mission. Similarly, without measurable objectives it is difficult for a Corporation to realize just how it is progressing towards its mission. Selection of the target areas may to based on, for example: * Linking the job to organizational objectives * Developing managerial skills. * Developing inter-personal skills * Improving ability to perform current tasks * Preparing for the future * Improving communications * Broadening knowledge * Achieving qualifications * Generating income, sales, fees, etc. A typical objective in business planning is to maintain or increase sales volume. Sales volume is a primary source of liquid resources (e.g., cash, accounts receivable and notes receivable), which managers can use to finance the firm's activities. Factors beyond the control of management also affect sales. Such external factors include the price of competing and substitute products, competitors' marketing and sales activities and general economic conditions (expansion, recession, inflation). Although managers cannot control many of the factors that determine sales volume, forecasting remains a valuable managerial tool. "Smart" Formula When developing objectives, it is necessary to adopt to the Smart formula. Your objectives must be, * Specific * Measurable * Achievable * Realistic * Timely Here are few examples of objective setting. * "Achieve a 15 percent return on investment." * "Maintain a 40 percent share of the market." * "Develop middle managers for executive positions." * "Held to ensure that clean air is maintained in all geographical areas in which the firm has plant locations." * "Provide working conditions that constantly exceed industry wide safety levels." * "Manufacture all products as efficiently as possible". * "Maintain and improve employee satisfaction to levels consistent with those in our own and similar industries." Plans define expected behaviour. In management terms, expected behaviour are performance standards. For example, the success of a plan by a bank to improve service quality is highly dependent on the expected behaviour of the individuals carrying out the task. If bank employees are unable to provide customers with quick decisions, a minimum of waiting, personalized caring service, and front-line


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responsiveness and empathy, then the plan to improve service quality will most definitely fail. As plans are implemented throughout an organization, the objectives and course of action assigned to each individual and group are the basis for standards, which can be used to assess actual performance. In some instances, the objectives provide the standards: A manager's performance can be assessed in terms of how close her unit comes to accomplishing its objective. In other instances, the courses of action are the standards: A production worker can be held accountable for doing a job in the prescribed manner. Through planning, management derives a rational, objective basis for developing performance standards. Without planning, performance standards are likely to be nonrational and subjective. Setting Goals and targets for individual job holders Once divisional or departmental goals have been determined, the next step is to translate them into personal objectives for everyone. This process of target setting is the mechanism through which corporate goals are eventually achieved. Breaking Down Goals Goals Breakdown is the process of translating operational goals into personal targets at every level and for every person in the unit or department. The following example uses the theme of attendance rate to illustrate how this can be achieved. Divisional Goal * Achieve attendance rate of 97 percent by March 31 this year. Operational Level Goal * Propose action to reduce absence to the lowest level consistent with research into frequency, duration, date of absence with particular reference to the divisional target of 97 percent attendance. * Proposal by December 15 this year. Implement actions when agreed, on January 1 next year. First Line Manager Targets (Objectives) * Analyze absence by frequency, duration, date, by November 15 this year. * Review possible methods of reducing absence and calculate attendance rate with reference to the unit target of 97 percent by November 30 this year. * Carry out return to work interviews on the day of return from absence, from January 1 next year. * Establish sick reporting on the first morning of absence from January 1 next year. * Communicate the emphasis on attendance to staff by December 22 this year. The purpose of targets (Objectives) You may need to get managers to think about just what the overall purpose of targets is and this is best done in your short workshops set up to introduce performance management. The obvious answer is to achieve the goals, but there are other reasons too. For example: * To develop individuals and train them. * To change priorities where circumstances dictate. * To encourage a continuous improvement of performance. * To re-establish 'Slipping' targets. * To promote innovation. * To broaden skills.


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* To develop new areas of work. * To achieve things that otherwise get neglected. * To focus attention on priorities. * To assist work Planning. * To improve job satisfaction. Why strategic planning fails? * The Chief Executive dominates the decision-making process. * The culture, leadership style, products and services of the organization are perceived as being unchangeable. * Change is introduced for the sake of novelty rather than in response to a new vision or internal or external forces. * Time cannot be found to fully develop strategies and develop a comprehensive written plan. * Hidden agendas and company policies are allowed to motivate contributions. * The people involved are not committed to ensure that the organization does measurably better as a result of planning that it has ever done before. * The plan is not communicated to all those whose efforts and commitment will be needed to make it work quickly; in simple concrete language. * Reasonable aspirations of employees, management, shareholders and other stakeholders are ignored. * The establishment of objectives is rushed and goals are vague. * The company is so close to going 'belly up' that long-term planning is irrelevant to survival. * The Chief Executive does not believe in the planning process and senior management is not committed. * The top management team fails to demonstrate its commitment through its consistent behaviour. Implementing the plan Implementation is carrying out the steps specified in the objectives. It is where the organization goes from the "think" mode to the "doing" mode. Typically, the plan describes the steps to be carried out but not how to carry them out, especially what decisions are to be made at each step and what information must be known to make the decision. In a clothing store, implementation calls for purchasing the items of women's clothing to be sold. How much? What specific items? What quality and style? Decision-making is a major managerial task that requires, among others, technical and interpersonal skills. In addition, it also calls for the management activities of organization, leading, and controlling. The implementation stage is where many plans come undone. Many managers think of implementation as being merely "administrative" or "technical" and not worthy of full managerial involvement. Nothing could be further from the truth. A plan means nothing unless it is actually carried out and it contributed to the accomplishment of the organization's major goals. Thus, if the above organization creates a plan for "x" but implements poorly-selecting poor quality clothing that the customers reject-then "x" will not accomplish his goals. "X" must ensure that the plan is implemented fully. This requires realistic decision-making at each step of the implementation. Hasty decisions not based on facts are often very costly. Evaluating the results of the plan Did we get there? Evaluating the results of planning is essential. A well-done assessment of the outcomes that resulted from the plan provides valuable feedback. The company can learn which goals are possible


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and which may not be, as well as which steps can be implemented easily and which cannot. Evaluation should, in most cases, be relatively easy and straightforward. Goals should include information about how much of what should be accomplished, by when and what is to be measured. Evaluation means that the information specified in the goal statement is gathered and compared against the results of the plan. Techniques of goals achievement A good leader insists on positive outcomes for both short-term goals and for the long-term vision. Make sure that team members know what your desired result is and monitor their performance as individuals and as a team in terms of output. Monitoring progress It is essential to keep an eye on how plans are progressing so that you can spot problems early on. If all is going well, you may want to raise targets to exploit the opportunity. The key is to make progress measurable. For example, build in key dates and quality targets and compare budgets with actual expenditure. Regular checks should help you and your staff to adjust targets, budgets and so on, while keeping teams on course to achieve the desired outcome. As a leader, you are in a good position to see the overall picture - if several aspects are going bad, drastic action may be needed. Choosing a monitoring system Written Reports Staff provide written summary of actions, results, and figures. Encourages staff to organize their thoughts and review their actions clearly. Personal Reports Regular meetings are held with each team member to assess progress. Allows for informal updates and facilitates early airings of potential problems. Open-Door Policy Individuals are encouraged to discuss day-to-day problems at any time. Shows strong support, but may prevent team members from using their initiative. Appraisal Formal interviews are held to assess performance and set improvement targets. Appraisal produces improved results if practiced continuously and informally. Judging output Are your staff contributing enough towards the overall desired outcome? If the answer is "Yes", your leadership has passed the first and most important test. If the reply is "No", you have two options. Either tell people precisely what you want from them and how you want it achieved, or be clear about the outcome but leave the choice of route and methods to them. Raising output Annual appraisals provide an opportunity for a leader to discuss performance and output with staff and to set targets for improvement. However, you will find the process far easier if you practice continuous appraisal, talking to everyone about their jobs. This informal contact helps to keep people focused on desired outcomes, as well as keeping you up to date with their progress. Provide feedback to ensure that staff feel a sense of direction and achievement; ask for and act on their input; and provide support and


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training readily when necessary. Continuous involvement should help to boost morale and thus raise output. Helping people to improve output It is important to talk to people regularly about their jobs and how you and they think performance could be improved. Remember to include your own role in the discussion. Always use positive questions, such as the following: * "Is there anything that could be done better?" * "Can I be of some help to you to complete the assignment?" * "Can I do something that would help you to excel?" * "Is there any way in which we could change the design to achieve better results?"


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Trade & Marketing



John Keells Tea Market Report: Weak market for liquoring teas The inter monsoonal evening thunder storms that is the precursor to the North East monsoon usually commence in early October. This year, in September the tail end of the South West monsoon came in strong and October was relatively dry. The convergence of winds has now commenced and Colombo received 440 mm of rain in 12 hours. This was the highest in 18 years, and resulted in disruptions to the transportation system in the city. The Meteorological Dept forecasts that evening thunder storms will persist until the middle of December. This would indicate a deviation from the usual weather pattern and could be as a result of Global warming. Hitherto, the monsoons have not been unduly delayed.

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However, some changes are being witnessed and one such scenario is that Hydro Power Reservoirs filled up in September, including Kotmale and Victoria, which usually does well during the North and East monsoon. Another is that in the past, the crop increased as the sun came out after rain. In recent times, the intensity of the rains have curtailed crop whilst no sooner the sun comes out, the conditions appear very dry, thus limiting crop. A close study is therefore needed to overcome these scenarios, as the cost of production remains high, for extended periods. The market for liquoring teas was weaker last week, with the high priced teas falling the most. More buyers appeared to be active but at lower levels. The Tea bag sector was active but Russian interest appeared less. Buying for Japan was evident.

Most of the fairly good western teas were selling around the Rs.400 level whilst the best sold between Rs.420 and Rs.450. Low grown CTC teas continued to weaken in the wake of larger offerings, except for two of the most established marks which held a good premium over the others. The 3.7 mkg of Low Growns that came under the hammer this week met with widespread demand but at lower levels. It appeared that there was less Russian interest. In the Leafy category. BOP1/OP1s continued to sell well, however at slightly lower levels. Demand for the Pekoe grade continued with the bulk of the offerings selling around Rs.390 - to Rs.420. OPAs too sold well, however once again at slightly lower levels to previous week. In the Small leaf category the best FBOP/FF1s were barely steady but others declined as the sale progressed. The poorest were difficult of sale. There was less inquiry from Russia, however Iran, Iraq and Syria were quite strong. Libya, Dubai, Jordon, Saudi Arabia also lent useful support.

Western Teas Select Best BOPs declined Rs.10 to Rs.15, other good invoices were firm to marginally easier, Below best sorts declined Rs.10 and more, plainer varieties were firm to Rs.5 easier. Select Best BOPs declined Rs.15 - to Rs.20 other good invoices shed Rs.10, Below Best sorts declined Rs.10 - to Rs.15 on average, plainer varieties were Rs.10 easier. Medium BOPs were firm. BOPFs shed Rs.5 to Rs.10.


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Nuwara Eliya Teas Brighter BOPs declined Rs.10, others declined substantially. BOPFs shed Rs.20 to Rs.30 on average.

Uva Teas BOPs eased Rs.10 to Rs.15, whilst BOPFs were firm to Rs.5 easier. Udapussellawa BOPs declined Rs.15 to Rs.20 and more. BOPFs shed Rs.5 - to Rs.10 on average.

CTC Teas Select Best PF1s declined Rs.15 to Rs.20, others shed Rs.30 and more with a large volume remaining unsold. BP1s declined Rs.15 to Rs.20. High & Medium PF1s declined Rs.5 to Rs.10. BP1s were firm to Rs.5 easier.

Low Growns

Fair demand. Select Best OP1s eased Rs.10 on average, balance too were lower by Rs.10 to Rs.15, Below Best and poor types were mainly neglected due to lack of sufficient bids. Select Best BOP1s maintained last levels, however Best and Below Best types declined Rs.5 to Rs.10, poor sorts too were irregularly lower by a similar margin. Select Best OPs shed Rs.20 to Rs.30, the Best types too were lower by Rs.10 to Rs.15 and more at times, Below Best and poor sorts eased Rs.5 to Rs.10. Select Best OPAs were firm on last levels, however the Best types were irregularly lower by Rs.5 to Rs.10, Below Best types were steady, bold types tended lower by Rs.5 to Rs.10. Select Best Pekoes tended lower, Best types declined Rs.10 to Rs.15, bold Pekoe varieties along with the flaky types too were irregularly lower by Rs.5 to Rs.10. Shotty Pekoe1s shed Rs.20 to Rs.40, Best types were lower by Rs.10 to Rs.20, Below Best and poor sorts were irregularly lower by Rs.5 to Rs.10 Select Best and Best BOP/BOPSP eased Rs.5 to Rs.10, Below Best types were firm, poorer types were irregularly lower to last. Select Best FBOPs advanced Rs.10 per kg, Best and Below Best types eased Rs.5 to Rs.10, poorer sorts too declined Rs.5 to Rs.10. Select Best FBOPF1s were firm, however Best and Below Best types shed Rs.5 to Rs.10, poorer types too were lower by a similar margin. Select Best and Best Tippy varieties declined substantially on last levels, Below Best types were barely steady, poorer sorts declined Rs.20.

Off Grades Select Best liquoring Fngs1s appreciated Rs.10 to Rs.15, whilst the Best and the Below Best types were dearer by Rs.10, poorer sorts appreciated Rs.10 and more at times. All BPs sold at firm levels. Select Best BMs were dearer by Rs.5 to Rs.10, Best and the Below Best types were irregularly dearer by Rs.5 poorer sorts eased by Rs.10 to Rs.15. Select Best, Best and Below Best Low Grown Fngs were firm to dearer by Rs.10, whilst poorer sorts depreciated Rs.10 to Rs.15. Select Best and Best BOP1As were firm to dearer by Rs.5 to Rs.10, Below Best however eased by an average of Rs.10, poorer sorts too declined by Rs.15 to Rs.25 and more at times with poor demand.

Dust Select Best Dust1s declined Rs.10 to Rs.15, other Dust1s in the Best and Below Best category were firm following quality, whilst the balance declined Rs.10 to Rs.15. Clean secondary Dust appreciated Rs.10 to Rs.15, whilst the balance were firm. Best Low Grown Dust/Dust1s were firm, whilst the balance were Rs.10 to Rs.15 easier.



Need to integrate marketing and sales Marketing and selling in tough economic conditions: Prasanna Perera Marketing and Management Consultant, Chartered Marketeer, CIM UK In many organizations, Marketing and Sales have been separated. I wonder if this is for operational reasons, habitual reasons or for no reason! It must be remembered that Marketing is a holistic discipline and Sales is a part of it. (Of course an important part).

Should it be Marketing Vs Sales or Marketing and Sales?

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I have been observing that in many organizations, there is a confrontation between Marketing and Sales. Why? Firstly, top management encourages it, so that neither Marketing and Sales personnel become too important or powerful. Secondly, there is a clear lack of understanding of what Marketing and Sales is about. Thirdly, it is now a fashionable thing to practice. Creating a confrontation between Marketing and Sales, will be detrimental to the organization in the long term. Marketing and Sales are like two sides of the same coin. Distinguishable but inseparable. Hence, what must happen is an integration between Marketing and Sales, so that the organization is able to achieve its

objectives.

Prasanna Perera

Marketing Vs Sales ---> One More Time! What is Marketing? It is a management process responsible for the identification, anticipation and satisfaction of consumer needs, through products and services that meet the identified consumer requirements, at a profit. Sales on the other hand, is a transaction, between a buyer and a seller. In short, sales is the action part of Marketing. (Makes Marketing happen). Marketing develops products, services and brands, prices them, brands products, promotes them etc., On the other hand, Sales identifies customers and sells products and brands to them. Basically, making the right product and service available to the customer at the right time. (Distribution and Personal Selling). As can be observed from this diagram, Marketing is a 'holistic' discipline, that contains many components. 'Sales' is a very key component and is the "action" part of Marketing. Hence, Marketing does not equal Sales. This must be kept in mind. Sales is a sub-component of Marketing. (But an important one). How to Integrate Marketing and Sales? There has to be representation of Marketing at board level, such as a Director or Marketing or Director of Marketing and Sales. This individual has the responsibility to ensure that Marketing Strategy delivers shareholder value. If Marketing and Sales are separated for operation reasons, this board level representative must integrate both together. Clear job descriptions and responsibilities must be given to the Marketing Manager and Sales Manager. This is important for creating a strategic focus and to avoid duplication of tasks. Both the Marketing Manager and Sales Manager must be educated on how their respective responsibilities integrate.


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No internal politics must be entertained from either the Marketing Manager or Sales Manager. This sales belief of not requiring Marketing inputs to sell, must be addressed and corrected. How long are you going to sell, if the product and pricing is not correct? If no advertising and sales promotional support is given? Rotate Marketing and Sales persons to obtain exposure in both areas. This will create a better understanding of the need to work together, for the common good of the organization. To become a top marketer, selling experience is also essential, besides Marketing. Get the salespersons professionally qualified in Marketing. This will open up their minds to appreciate the synergies between Marketing and Sales. The organizational culture too plays an important role, in creating integration between Marketing and Sales. A short term thinking culture, creates an overtly sales oriented outlook. A long term focused culture, creates a more marketing oriented outlook. Hence the leadership of an organization plays an important part in integrating Marketing and Sales. The Benefits of an Integrated Marketing and Sales operation The benefits are many both for the organization and the employees. Through an integrated approach to marketing and sales, organizational profitability, sales revenue and productivity can be improved. This will ensure that shareholder value is delivered. Less friction between Marketing and Sales, will create a more favourable organizational culture and climate. This will also lead to greater employee and customer satisfaction. The synergistic impact will also propel organizations to achieve above average growth, so vital in highly competitive and difficult times. An integrated Marketing and Sales effort will also lead to better co-ordination between Marketing and Sales and other functional departments. This will create teamwork cross-functionally as well. As outlined in this brief article, Marketing and Sales are not two separate functions but one. Sales is a part of Marketing, albeit a very important one. The inter-dependency between Marketing and Sales should be nurtured, to the benefit of all stakeholders. "Marketing and Sales are like two sides of the same coin. Distinguishable but inseparable."


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Money & Banking



Budget benefits for all Budget 2011 speech delivered by President Mahinda Rajapaksa in his capacity as Finance and Planning Minister in Parliament yesterday: As you chair the proceedings of this august assembly, the image of my father late D A Rajapaksa who occupied your seat once as the Deputy Speaker comes into my mind. I recall him crossing over to the opposition with late S W R D Bandaranaike and several others to give a leadership to transform Sri Lanka to be a truly independent and prosperous country in Asia. It was a transformation based on our national heritage, culture, value system and our own identity. That mission was not accomplished. Having ended the 26 year old conflict and implemented a major country-wide development program since 2006, I sought a fresh mandate from the people prior to ending the first term of my office. I presented Mahinda Chintana - Vision for the Future at the 2010 Presidential Election. When introducing it to the people, I reminded that in my first term of office I won them the peace that they were yearning for. I also assured my deepest commitment to fulfill their future aspirations. I was elected with a majority of 1.84 million votes. This was a stronger mandate than the majority of 180,786 votes that I received at the 2005 Presidential Election. At the subsequent Parliamentary Elections, the United People Freedom Alliance led by me won 144 seats out of the 225 member Parliament. Today the Government commands a 2/3 majority in this Parliament. People have placed their confidence in us to lead our beloved motherland to a brighter future. They want a decent living, a clean environment and a better life for their children. I remain firmly committed to give an uncompromising leadership to fulfill their aspirations. It is with that commitment I rise here today to present the 2011 Budget. I am also humbly proud as the Finance and Planning Minister for being able to reduce poverty to 7.6 percent during last five years while taking our country forward as an emerging economy in Asia.

At the time I took office as President, there was no stability in the country. I did not have even a majority in Parliament. Challenges were many. The country was in the midst of a prolonged conflict and on the verge of being divided. The country was overshadowed by separatism, terrorism, communalism and external interferences. The popular view was that the LTTE was an unbeatable force. Even confronting the LTTE was considered a grave mistake. The country had been shattered by the 2004 tsunami. Our environment had been destroyed over many years. Forest cover had been reduced. Above all, I inherited a large budget deficit that had prevailed even much longer than the LTTE terrorism. There was no fiscal space.

ds required even to protect the sovereign state from terrorists were not ilable. Neo-liberal policies had taken deep roots. Hence home grown solutions, l competencies and capabilities were considered inferior. The sale of state assets,

pruning capital spending and subsidies to the poor, granting lucrative tax amenities etc. were regular policy prescriptions. The outcome was, the country being without a clear direction. This legacy is now history. The war has ended and the country is unified. No room can be left for separatism and terrorism again. We have entered in

Funavaloca

President Mahinda Rajapaksa presenting the Budget proposals for 2011 in Parliament yesterday. Picture by Sudath Silva

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to a new phase to emerge as a strong middle income economy by 2016 while rebuilding damaged areas as rapidly as possible. We all know that the brave men and women in our security forces, paved way for this journey forward. Many of our soldiers lost their lives. Some were injured and disabled. It is our duty to look after their long-term welfare. Therefore I propose at the very outset to allocate Rs3,000 million over a period of three years to address economic difficulties of service men and women who have suffered as well as their families. I also propose to grant an allowance of Rs.100,000 per family for a live birth of a third child of families of armed force personnel, to promote their family environment.

Development approach Unlike past Governments, we did not forget the economy while fighting the war. With the victory in 2006 we immediately embarked on a massive infrastructure development drive. We have created adequate capacity in power generation and port services. The entire nation must have access to electricity and global trade. We expanded public investments in building roads and bridges island wide. The construction of Moragahakanda, Uma Oya and Deduru Oya irrigation schemes together with the rehabilitation of 32 major irrigation systems and reservoirs have been undertaken. Government expenditure has also been diverted to expand the availability of drinking water at both national and community level to ensure that people will have access to quality drinking water. Investments in education and health to modernize school facilities and universities as well as hospital facilities have also been our priority. All of us now witness the massive development activities taking place in our country. Empowering the village is our central theme in development. In this endeavour we focus on rural development initiatives to ensure that people in every village will have access to electricity, a road network, drinking water, telecommunication facilities, market places and townships. Above all they must have food and energy security and a green environment to live in. Gama Neguma program has completed 72,105 small projects at a cost of Rs.27,888 million during 2006-2010. These projects have benefited 11.9 million people up to now. The rural centric initiatives have enabled community participation in a big way. Credible expectations have therefore been created that every single village will be developed through Gama Neguma. No village in Sri Lanka will be left out of this massive development drive during the next three years. We implemented Mathata Thitha a special initiative to liberate our people from the use of illicit liquor and narcotics. Smoking has declined by 18 percent over the last four years. A survey conducted by the Colombo University, reveals that the consumption of illicit liquor is also on the decline. I undertook a Pre Budget Review of all 25 districts and provincial level work. I wish to share some evidence of progress. Sri Lanka’s poverty which was 15.2 percent in 2006 has declined to 7.6 percent in 2010. Most important development is that poverty in rural areas has declined from 15.7 percent to 7.6 percent while in the estate areas, it has declined from 32 percent to 9.2 percent. We will direct our strategies to reduce poverty below five percent within the next five years. Let me show you how this progress has been achieved. Access to electricity in the rural sector has increased from 78.5 percent in 2006 to 83.2 percent in 2009, while it has raised from 62.3 percent to 84 percent in the estate sector. Access to safe drinking water has increased from 84 percent to 87 percent countrywide, while in the estate sector, it has increased from 46 percent to 65 percent. In 2006, only 98 percent of the children in urban and rural areas attended school. It has increased to almost 100 percent in 2009. Estates sector school attendance has increased from 92 percent in 2006 to 97.4 percent in 2009. Let me assure this Parliament that we will place Sri Lanka as the leading nation in achieving the Millennium Development Goals.


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All island unemployment which was 7.2 percent in 2005 has dropped to 5.8 percent by 2009. In addition, earnings of our farmers and the labour force have increased. In 2005, farmers could not secure even Rs10 for a kilo of paddy they produced. We managed to maintain it in the range of Rs.24-28 per kilo. Higher producer prices also prevail for several other crops such as maize, onion, potatoes, and soya beans. We give fertilizer at Rs.350 per 50 kg bag to paddy farmers. Dairy farmers who were receiving Rs.18 per liter of fresh milk now receive Rs.44 per litre. Tea, rubber and spice growers have been able to attract remunerative prices. Daily wages of our working people in agriculture, industry and services have also increased by 100 percent between 2005 and 2009. So, our economic program has given them widespread benefits regardless of whether they live in the urban, rural or estate areas. Even in the liberated areas, the progress we have achieved since the date of liberation is remarkable. The Government has been able to resettle 263,000 people. Only 15,000 people remain to be resettled. A vast area of farm lands, public places, and residential areas have been demined. Provision of electricity, irrigation facilities, construction of roads and bridges, restoration of schools, health facilities and other public places have turned the Northern and the Eastern provinces to normalcy. The economic connectivity established through these initiatives also aims at connecting hearts and minds of our multi ethnic and multi cultural society. The Government has implemented a US $ two billion reconstruction program in the North. These major reconstruction activities are expected to be completed by 2012. Due credit must be given to our public servants and security forces who spearheaded such peace and development initiatives. I believe that the public sector has a special role to play. As we all know, there was a period within which the public sector was marginalized. During the last five years our Government reversed this trend. Public servants have been increased to 1.3 million. Wage increases have been given to all categories of employees and many of their grievances have been resolved. They are also given a cost-of-living allowance and housing and other loans at subsidized interest rates. In 2006 I introduced a contributory medical scheme to provide relief to public servants. I propose to extend these insurance benefits to pensioners. Therefore, I propose the National Insurance Trust Fund to upgrade and maintain selected wards in national and district hospitals, dedicated for public servants and pensioners. Such hospitals can recover the expenses of medicine and surgeries under this scheme. National Insurance Trust Fund will allocate Rs.1,000 million to upgrade and maintain such facilities in key hospitals. I expect this proposal to provide considerable relief to nearly 450,000 pensioners and 1.3 million public servants.

The way forward Our economy took over 25 years from 1977 to 2004 to increase the per capita income from US $ 300 to US $ 1,000. But we took only five years to double the per capita income despite several adversities. The per capita income this year is expected to be around US $ 2,375 in comparison to US $ 1,000, five years ago. While consolidating as a middle income country within the overall Mahinda Chintana Policy Framework, we have been able to correct several ill conceived economic ideologies and strategies to make development an inclusive and a beneficial process to the ordinary people. We have been able to bring back several assets such as Telecom, SriLankan, Insurance and Gas to public ownership for the greater benefit of the people. Having ended the war, and with vital infrastructure in place, we are now in a better position to engage in an accelerated development process within the next six years. Liberation of the Eastern and the Northern districts from terrorists has enabled us to use massive areas of land and sea for development. Our country has now become a safe and preferred destination for tourism. Our country is ranked first in the world in the health and survival indicators, sixth in the political


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empowerment indicators and among the top 20 in the world in gender equality indicators as well as a location attractive for outsourcing. Our performance in education and health is above average. These are added strengths and potentials that must be fully exploited to ensure that the 26 year suffering will never be repeated in this land. What we now need is to devolve development rapidly to the provinces and our villages equitably. That is also the thrust of a political solution. The global economy is slowly recovering with a growth rate of around five percent. More encouragingly India, China, and all other major countries in Asia are providing a major impetus for regional and global growth that is beneficial for us. This is why in Mahinda Chintana - Vision for the Future we projected Sri Lanka as a dynamic global hub. Taking advantage of Sri Lanka’s strategic location, our next massive leap forward is to develop our motherland as a naval, aviation, commercial, energy and knowledge hub being a key link between the east and the west. ‘Mahinda Chintana - Vision for the Future’ targets a per capita income in excess of US $ 4,000 by 2016. A high per capita economy will help us to regain many opportunities we have lost during the last 26 years. This will provide a better life for the present and future generations. We have targeted to increase private investments from both foreign and domestic sources from the present level of 19-21 percent of GDP to a range of 26-28 percent over the next six years. This together with public investment of around 6-7 percent, our total investment can be raised from around 25-27 percent to 32-35 percent of GDP, to support the targeted economic growth in excess of eight percent in the medium term and 10 percent thereafter.

The tax structure for a value added economy In support of this overall vision, I intend to revamp our entire taxation strategy. The findings of the Presidential Commission of Taxation provided some valuable ideas. We all agree that our tax system is complex, tax rates are too high and taxation is narrowly based. I propose to make some drastic changes. Let me focus on the import and export of goods and services which was about US $ 21 billion or about 50 percent of GDP in 2009. The export-import economy is strategic for our growth. A remarkable progress has been achieved in diversifying export products and their markets. However, most exports of tea, garments, leather, rubber, gem and jewellery products, several valuable spices as well as many raw materials are without sufficient value addition. Our manufactured products can be promoted through branding and better marketing efforts. The export potential of value added, branded exports has been estimated in excess of US $ five billion over the medium term. We still rely heavily on the importation of pharmaceuticals, wheat flour, food grains and energy sources. Space for import substitution in these areas is well in excess of US $ two billion. Our production drive in this decade should aim at expanding exports and replacing imports. Our international trade strategy must aim at phasing out the trade deficit. Therefore, we need to be more productive and competitive in export and import activities. In this context, I propose the following. First, I propose to impose a CESS on all exports in raw and semi processed form to encourage value added exports from Sri Lanka. Exports of finished goods will only be free from such CESS. Second, I propose to reduce duties and taxes on machinery, equipment and raw material to enable our enterprises to have affordable access to world class technology. Third, I propose to lower income tax from 15 percent to 10 percent for industries with domestic value addition in excess of 65 percent and Sri Lankan brand names with patent rights reserved in Sri Lanka. Fourth, income tax of all export companies will be reduced from 15 percent to 12 percent to encourage general exports. Fifth, to promote domestic manufacturing enterprises to increase their production, I


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propose to reduce income tax on profits from 35 percent to 28 percent. I hope these drastic reductions of taxes will promote our export- import economy to increase its contribution from 50 percent to 60 percent during this decade. Sri Lanka has immense prospects in generating income and employment from tourism. Tourism should be a billion dollar business. Although tourist arrivals have picked up and expected to be around 600,000 this year, earnings from tourism shows only a moderate increase. This is largely because the industry as a whole is underpriced. Therefore, I propose to impose a levy of US $ 20 per bed on all five star hotels which charge a room rate that is less than US $ 125 per night from January 2011 to compel all hotels to charge better rates. We must get ready to facilitate 2.5 million high spending tourists by 2016. Tourists must see our richness and diversity. Over the next few years the capacity of this industry need to be tripled from the current level of around 15,000 rooms. Since our country is emerging as a middle income country, local tourism itself is expected to increase significantly. In this investment drive we must link with domestic construction companies and architects and other professionals. I also propose to refurbish all rest houses and Government circuit bungalows in support of local tourism. The tourist industry must use our local agriculture and industries in its expansion strategy for greater benefits to the local economy. Therefore, I propose to reduce tax on income earnings from tourism and related business from 15 percent to 12 percent. I also propose to reduce duties and taxes on passenger transportation vehicles by 25 percent. I propose to exempt the importation of electric and highbred vehicles from Excise Tax and VAT in order to promote environmental friendly tourism. Custom duties and VAT on various machinery and equipment which are not available here will also be reduced to facilitate refurbishment and expansion. I have already reduced excessive taxes on branded consumer durable to popularize domestic shopping for tourists and local consumers. We must make our banking and financial institutions to make a greater contribution to our development efforts. We will continue to engage in our efforts to maintain low interest rates. We will promote our people to get closer to banking and financial institutions. Therefore, I propose to abolish the bank debit tax so that withdrawals from banks will not be liable for any tax. I also propose to reduce VAT on financial services from 20 percent to 12 percent. Further, I propose to reduce tax on profits of banking and financial institutions, from 35 percent to 28 percent. This will apply uniformly to all off-shore and domestic banks as well as to finance companies, leasing, insurance and other specialized banking and financial services. I also propose that all banking and financial institutions will be required to register separate Investment Fund Accounts with the Central Bank to transfer all tax savings arising from these proposals. The Central Bank and the Department of Inland Revenue will issue specific Regulations requiring banks to adopt low interest rates and longer term maturity for lending these funds since tax savings must be used more productively in our economy. I also propose to appoint a Presidential Commission on Banking and Financial Services to examine the changes required to develop the sectors further in the context of emerging economy status and towards transforming Sri Lanka as a regional financial hub. In order to increase the market capitalization from Rs two trillion to Rs three Trillion, we need to encourage listing of new companies and debt instruments. Therefore, I propose to recognize expenditure in relation to such activities as a deductible expenditure for tax purposes subject to a 1 percent of the value of the IPO. As there is no capital gains tax in our country, I propose to increase the Share Transaction Levy from 0.2 percent to 0.3 percent. Withholding tax on corporate debt securities will be treated on par with government securities. I also propose to exempt re-insurance commissions and claims from VAT to reduce the transaction cost of insurance. In


order to promote unit trusts to mobilize savings, I propose to exempt them from the Economic Service Charge. Exchange control restrictions on foreigners and foreign funds investing in unit trusts will also be exempted. I also propose to exempt income derived by unit trusts from investments in listed debentures and equity, from income tax. Sri Lanka is fast emerging as a niche global destination attracting outsourcing of IT and BPO services. It has become the fifth largest exporter. At present, the country is ranked seventh among the 50 best emerging global cities that attract outsourcing. More and more e-governance applications are now in the pipeline to serve people and businesses.

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The Government has launched various programs to increase ICT literacy to 75 percent by 2016. A widespread tele-centre network consisting of Nanasalas, Vidhatha centres and school PC labs, has been established. Universities and vocational training institutions have been geared towards popularizing ICT education. I propose to establish a knowledge city in each province linked to university townships. I also propose to intensify the tax incentives already available for IT/BPO businesses. I further propose to remove VAT and Nation Building Tax on software. Our aim is to make this industry a US$ 2 billion export activity by 2016. The Telecommunications industry is the backbone of modern economies. The tax applicable to this sector is complex. Therefore, I propose to combine all such taxes and impose a Telecommunications Levy of 20 percent. In place of licence fees and CESS imposed by the Telecommunication Regulatory Commission, I propose a two percent licence fee on gross revenue.

President Mahinda Rajapaksa arriving in the well of the House to present the Budget for 2011. Picture by Sudath Silva

As the industry depends heavily on high-tech equipment and machinery, I also propose to exempt those items from duties and VAT at the point of Customs. I propose a levy of Rs.2 per minute for outgoing International calls. I also propose to reduce the minimum floor rate for local calls from Rs.2 per minute to Rs.1.50 per minute from July 2011 for the benefit of consumers. I have requested the Telecommunication Regulatory Commission to regulate the broadband costs in order to increase broadband penetration. Various incentives introduced during last five years to promote the gem and jewellery industry have worked effectively. Its foreign exchange earnings have increased to about US $ 400 million from US $ 200 million in 2005. This industry has the potential to double its foreign exchange earnings by 2015. Therefore, as a further incentive, I propose to increase the foreign exchange allowances granted to import raw gem stone from US $ 10,000 to US $ 50,000 per person. A simplified procedure will be introduced jointly by the Customs, Exchange Control and Export and Import Control Departments to facilitate importation of gems to the country for processing and value addition. I also propose to remove all taxes on raw gem stones at the point of import. The Geological and Mines Bureau will undertake a national survey to assess country’s gemming resources and to work out a long term strategy relating to gem mining in Sri Lanka. Sri Lanka’s export industry is often hampered by anti competitive practices of shipping lines. As a result, Sri Lankan exporters are often subject to various charges imposed by shipping lines. Most of these collections from FOB exporters


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are not legally backed by international shipping rules. These charges not only result in anti competitive practices but also cause a serious drain of foreign exchange and tax evasions.

These charges are also imposed on imports. Consequently Sri Lanka’s trade oriented SME centric economy is in a disadvantage position. Therefore, I propose to introduce new legislation within first 100 days of 2011, towards countering anti competitive practices in shipping and trade. Sri Lanka’s Apparel industry continues to manufacture world renowned quality apparels for global brands. It has always adhered to ethical practices and environment standards. The industry has a huge potential to become a US $ 5 billion industry. Towards this, further facilities will be arranged to promote entrepot trade involving imports, processing and re-exports as well as transshipment business in apparel clothing. Incentives have been given to promote textile, apparel and leather product related high value added activities. As such, machinery and equipment to manufacture textile, leather, footwear and bags will be exempted from import duties and VAT. The Government also plans to attract leading buyers to establish their headquarters in Sri Lanka for management, finance, supply chain and billing operations. I also propose to exempt foreign exchange earnings from such activities from income taxes. In order to promote these activities the exchange control requirements and Custom procedures will be simplified.

A Productive Economy Our key goal in this decade of development is to improve our productivity by five to six percent per annum. This will require skills development, enterprise restructuring, improved access to financing, simplified taxation and access to technology. Therefore, I propose several measures. First, the Government will commit its own resources through the Ministry of Youth Affairs and Skills Development to train 300,000 youths in a wide range of new skills. Out of a three year commitment of Rs.16 billion, an allocation of Rs.5 billion is provided in this Budgetfor investment in skills development. Second, all SMEs and underperforming business activities, will be assisted to restructure to optimize their businesses. The Government has mobilized Rs.5,000 million from the World Bank for this. Third, I propose to write off unpaid tax liabilities up to March 2009 of all enterprises with a turnover below Rs.100 million since our SMEs have functioned under high interest rates and a very unfavourable conflict environment during the past 26 years. Fourth, as most SMEs operate on sub contracting arrangements, I propose to exempt them from the Economic Service Charge from January 1, 2011. Fifth, I propose to offer a concessionary income tax rate of 10 percent for SMEs. Domestic economy particularly the SME sector can get a meaningful stimulus from Government programs such as Thriposha, surgical gauze, selected pharmaceutical products, school text books, uniforms and furniture which are produced locally. The Government procurement expenditure on account of these items exceeds Rs.10 billion annually. Therefore, the relevant line ministries and Provincial Councils must promote local suppliers to ensure the timely availability of such products in the domestic economy. In our effort to push the economy towards high value activities, our enterprises must re-engineer their work processes and invest in new skills and innovations. Towards this, I propose to encourage enterprises to undertake Research and Development, registration of patent, trademarks and designs, automation through technology and training of their work force. Such enterprises are encouraged to get assistance from universities, research and technology institutions and skills development agencies. Therefore, I propose to give a 200 percent deduction of expenditure incurred on such activities to enterprises.


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The productivity of our workforce is adversely weakened by alcoholism. We must ensure that our society will not be a victim of crimes, drugs, illicit activities, money laundering, and financial frauds. Our academia, clergy, civil society and above all, teachers and parents must participate in family and community based activities to rescue our younger generation from this menace. Therefore, I propose to allocate a sum of Rs.200 million to implement Mathata Thitha initiative aggressively in every single village and township as a national priority. The Government will also use taxation measures and other regulatory arrangements to discourage the consumption of liquor and cigarettes. Therefore, excise tax on cigarettes and liquor has been already increased. I also propose to increase tax on profits of businesses engaged in the manufacture and distribution of liquor, cigarettes, and casinos from 35 percent to 40 percent. Our national research and development expenditure by both the public and private sectors must increase to at least two percent of GDP during this decade. In this Budget, the total funds allocated to public sector research institutions for mission oriented researches, amount to about 0.5 percent of GDP. Further, the double deduction for a wide range of R&D and related expenditure is expected to raise private sector R&D expenditure also to 0.5 percent of GDP. As the public sector commands a good resources pool and the private sector commands the capacity of commercial applications, I encourage partnerships between Government and private sector research centres and universities to undertake joint R&D initiatives for high productive economic activities. I propose to relax administrative procedures obstructing the two sectors to work together. I also propose to allocate Rs.1,000 million to set up an Innovation and Technology Development Fund to finance high quality research and innovations.

Human Resources Capital expenditure of Rs.54 billion is provided for education and health. This is in addition to Rs.152 billion of recurrent expenditure on these two services. Therefore, the total expenditure on human resource development is in excess of Rs.200 billion. This reflects our commitment to position our motherland as a knowledge economy and a healthy society. The inequitable distribution of the school network has resulted in the closure of certain rural schools while creating overcrowded urban schools. Therefore, I propose to develop 1,000 well equipped secondary schools throughout the island over a period of five years. Each secondary school will be linked to a number of primary schools. Required funding of Rs.15 billion has been mobilized from the World Bank and the Asian Development Bank. “English as a Life Skill” initiative that was commenced in 2009 will be formally expanded in 2011 by the Ministry of Education. For this, I propose an allocation of Rs.750 million in 2011. I propose to launch a “Trilingual Sri Lanka” initiative in 2011 under a ten year action plan. This plan is designed to ensure the rights of every citizen to liaise with any Government institution in Sinhala, Tamil or English. It will evolve an integrated society with a skilled workforce that is capable of employment of any part of Sri Lanka. This plan will be implemented together with Ministries of National Languages and Social Integration, Education, Higher Education, Public Administration and Provincial Councils. I propose to allocate Rs.100 million in 2011 to support programs under the relevant line Ministries for this “Trilingual Sri Lanka” initiative. Our 17 universities are at various stages of development. While many of our State universities have acceptable facilities, the recently established universities need considerable investments to be upgraded. Therefore, I propose a three year development initiative with Rs.3,000 million from 2011 for all those State universities to project with a unique core identity for each university.


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This accelerated development program will also aim at developing university townships with required facilities such as transportation, accommodation and recreation. I also propose to grant a further Rs.600 million to transform Peradeniya, Moratuwa, Colombo, Sri Jayawardanapura, Kelaniya and Ruhuna universities to become world class universities in their chosen fields. I also propose to introduce a Presidential Awards System to our national universities to be assessed based on their academic and research performances. Our university intake is only 22,000 out of about 50,000 eligible for higher education. That is also after the Government having spent about Rs.20 billion in higher education annually. This is why we need more investments in higher education. Therefore, universities and higher education institutions must be regulated within a sound legal framework and under a strict supervisory mechanism. We cannot permit - ‘educational shops’ to operate under the guise of educational institutions and universities. We need quality education. Our objective is to move away from profit orientation and maintain high standards for higher education. We all must guarantee that no one is left out when it comes to education. Let us not forget that education is the future of our children. Demographic transitions with the increased share of elderly population and the surge in non communicable diseases have brought up new challenges to our health system. A three year action plan targeting the control of non communicable diseases will be implemented from 2011 through improvements in the primary healthcare system. I propose an additional allocation of Rs.900 million for this proposal. I propose to exempt the import of pharmaceutical products from Port and Airport Levy to reduce the cost of medicine. I also propose to exempt high tech medical and laboratory equipment from import duties and VAT to promote investments in health services.

Port and Aviation Hub We propose to transform Sri Lanka as a strategically important economic centre in the world. As our port sector is emerging with large international port facilities investment in industrial zones and port related services will be encouraged. A port city development initiative in Magam Ruhunupura will be implemented under strategic investment. In the aviation sector, we encourage Maintenance, Repairs and Overhauling (MRO) businesses and cargo operations for joint ventures. A Graduates School of Aviation will be promoted to train pilots and other aviation professionals. Increased frequencies will be granted to international airlines to promote Sri Lanka as a popular destination. New regulatory arrangements have placed us high in international regulatory standards. SriLankan Airline and Mihin Lanka will be expanded with new aircraft to increase the fleet to 30 by 2012. I propose to exempt SriLankan and Mihin Lanka from all taxes for a period of 10 years to strengthen the two enterprises.

Investment Climate We need to reformulate our strategies and the institutional mechanism to improve our investment climate. In the past, all what successive Governments have done in this regard, is offering costly tax concessions, cheap labour and our valuable assets free of charge. A skilled labour force, political stability, a low tax regime and efficient government institutions to facilitate investment must be the basis of our investment promotion strategy. Therefore, the Board of Investment (BOI) will be required to focus on three core activities. First, is to manage Export Processing Zones efficiently. Investment will be attracted to fill vacant positions in all 12 zones. Second, to concentrate on promoting quality investment from abroad. Such investment must add value to our economy. They must be environment friendly and socially responsible. Large investment will be promoted under the strategic investment law and income tax laws. I propose to revise BOI Regulations to offer its incentives to carefully targeted priority sectors. Third, is to devote time for monitoring and follow-up.


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Further, despite having been approved, since many BOI investments are non-performing, I propose to cancel forthwith, all BOI approvals granted before June 30, 2010, if such investment has not commenced or has remained closed as of today. Those who have not commenced work but wish to proceed must obtain fresh approvals. The BOI law will be amended to create a position for a Director General to ensure continuity in executive responsibilities. The separation of the former Sri Lanka Tourist Board into four agencies has not served the intended purpose. I propose to merge all agencies except the Hotel School as a single agency capable of effectively promoting tourism. New legislation will be introduced to enable this in the first 100 days of 2011. Approval procedure of Urban Development Authority with regard to housing and property development is very complex and time consuming. The operation of multiple administrative systems by local authorities, provincial councils, line ministries and such other agencies have caused further complexities. I propose to appoint a full time Cabinet Sub Committee to review all such administrative procedures and regulations and to simplify them within six months. I have also directed the Treasury to review all fees and levies being charged by various agencies and to simplify them within the first 100 days of 2011. Information and Communication Technology Agency of Sri Lanka (ICTA) has initiated several electronic processing systems. Several departments have already adopted such systems. All Government agencies will adopt an electronic approval procedure in 2011. The E-governance project will enable all regulatory agencies to link with each other to share information. The Financial Regulations have also been amended to authorize all Government agencies to accept credit cards, to pay for Government services. The Department of Immigration and Emigration will use an electronic approval system to grant visas and monitor visa regulations. Government has already initiated action to transform the Department of Customs and the Board of Investments to provide required facilities in trade documentation through an electronic data processing documentation procedure. A three year Fiscal Efficiency Management Program has been undertaken to introduce a technology based tax administration within the next three years. Foreign offices maintained by the Foreign Employment Bureau, the Tea Board, Department of Commerce, and other agencies will be brought directly under the supervision of the Sri Lankan Embassies abroad so as to provide a one stop service. Once officials are posted, they will be required to work under the direction and supervision of the respective Ambassador. All promotional activities will be undertaken only through this coordinated strategy. The scope of the responsibilities of Ambassadors will expand beyond the traditional diplomatic functions to include responsibilities relating to investment, trade and economic affairs. Foreign exchange controls and import and export control arrangements will be simplified to facilitate foreign exchange inflows to our country. This will facilitate to operate bank accounts abroad, payment of import bills, margin requirement for advance payments, forward contact arrangements etc. The Central Bank of Sri Lanka will shortly issue new guidelines on foreign exchange transactions. The Central Bank will also publish a revised guide, showing further improvements in “Doing Business” in Sri Lanka in terms of my proposals, in the first 100 days of 2011.

A simple income tax system Our development thrust over the next decade is to become the knowledge hub in the region. The promotion of knowledge based industries requires professionals. As I intend to mobilize our professionals and build a knowledge reserve in our country, I propose to create the region’s best personal income tax regime. Therefore, I propose to reduce the current tax rates on personal income ranging from 5 to 35 percent to 4 to 24 percent. I propose to increase the tax free threshold income from Rs.300,000 to


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Rs.500,000 and the tax slabs from Rs.400,000 to Rs.500,000. I also propose to extend this to non-resident Sri Lankans. Our professionals need not worry about high taxes any more. The wage earning middle income employees who are subject to PAYE tax needs a simpler system. Therefore, I propose to exempt any employee earning Rs.600,000 per year (Rs.50,000 per month) from PAYE tax. Applicable tax rates for employees earning over Rs.600,000 will be reduced subject to a maximum rate of 24 percent. The new PAYE system will be a final tax at source. Employees will not be required to file returns unless they have other sources of income. I also propose to apply the new PAYE system to the public sector as well. This will correct the longstanding discrimination between public and private sectors. I propose to increase the tax free threshold on interest income from Rs.300,000 to Rs.500,000. The applicable tax slab will also be increased to reduce the tax burden on those who live from interest income. At present the Provident Fund income of employees are taxed three times. I consider this is not correct. Further certain employees and employers operate outside provident fund schemes to evade tax. Therefore, I propose to exempt terminal benefits from Employees’ Provident Fund from income taxation.

Social Security Our working class is our biggest asset. They sacrificed a lot during the 26 year old conflict. They stood for a united Sri Lanka and helped to defeat terrorism. We have regular consultations with them. Ever since I became the Minister of Labour in 1994, I tried to understand the prevailing dual treatment relating to pension rights. I think everybody must have an income after retirement. Therefore, I propose to set up an Employees’ Pension Fund to provide post retirement pension benefits to employees in the private and corporate sectors. Towards this, I propose a two percent contribution from employees and a two percent contribution from employers to this fund. The employers will be required to transfer the entirety of the gratuity payment to this fund. Employees too will be required to transfer two percent of their Pension Fund balance at the time they withdraw the Pension Fund, in lieu of future pension benefits from the Employees’ Pension Fund. I also propose that everybody must contribute for a minimum 10 year period to earn a pension. The Employees’ Pension Fund will be managed by the Central Bank Monetary Board. Nearly three million Sri Lankans are engaged in overseas employment. The remittance income to the country is expected to be nearly US $ 4 billion this year. However, there is no proper social security system for these people when they reach old age. Therefore, I propose to set up an Overseas Employees’ Pension Fund (OEPF). Each employee is required to contribute at least Rs.12,000 per annum to this fund. The contribution can be made in stages during the year. Each employee must contribute for a minimum period of two years. Pension will be paid after reaching the age of 65 years in the case of men and 60 years in the case of women. The Foreign Employment Bureau will transfer its unused funds to this pension fund. In appreciation of the valuable contribution made by such overseas employees, to improve country’s foreign exchange earnings, the Government will contribute Rs.1,000 million as an initial capital for this fund in 2011. I promised to introduce a pension scheme for every citizen over 65 year of age. We need to prepare for a larger elderly population by 2020. A successful pension scheme can be worked out only by making it a contributory scheme. Therefore for the unorganized sector, I propose to set up a Citizens’ Pension and Insurance Fund (CPIF). I propose to merge all existing schemes under various agencies to this new Citizens’ Pension and Insurance Fund. Every one seeking membership would have to contribute a minimum of Rs 5,000 per year as and when they have money. Pension will be available after contributing for 10 years and after reaching 65 years of age. The Government will contribute Rs.1,000 million in 2011


to form this new fund. Nearly three million persons engaged in agriculture, fisheries, transport, construction, self employment etc. will be the target groups of this fund.

Common amenities and housing In response to our invitation to the public to participate in the formation of this Budget, a number of people have expressed concerns over incomplete projects, unused public buildings, playgrounds etc. standing unattended by Government agencies. As rightly pointed out, we need to put them in to productive use. Therefore, all line agencies and Ministers must ensure that these concerns are addressed within the first 100 days of 2011. I propose to allocate Rs.1,000 million to attend to such neglected public assets for the benefit of the community.

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We have committed to develop one million housing units during the next six years. Our first priority in this initiative is to ensure that all displaced people will have access to decent housing before the end of 2012. We are grateful for the assistance extended by the Indian Prime Minister to build 50,000 houses. The Government has also mobilized funding through donor agencies, friendly countries and its own budgetary resources to rehabilitate further 80,000 houses. Our next priority is to develop 70,000 housing facilities for shanty dwellers in urban areas. The Gama Neguma initiative, Jana Sevana initiative, provincial councils and other regional development initiatives will target building 80,000 housing units for low income rural and estate households each year, over the next six years. Public and private sector employees will be supported with expanded housing loan schemes.

President Mahinda Rajapaksa arriving in the well of the House to present the Budget for 2011. Picture by Sudath Silva

There is also an urgent need to modernize housing facilities built over 40 years ago. 19,300 housing units providing shelter to about 75,000 people belong to 176 old housing schemes. As phase one, housing schemes such as Maligawatta, Serpentine etc. will be rehabilitated in 2011. I propose to allocate Rs.1,000 million for a three year rehabilitation initiative of these housing schemes requiring the relevant households to assume future responsibilities of maintenance of the respective housing units. The National Housing Development Authority (NHDA) will provide planning and technical assistance for low income households to build and improve quality housing. State banking facilities and the internally generated income of NHDA will be utilized to promote low income housing. A Construction Technology Park will be established to popularize technical skills and low cost housing technology among peoples. To further promote our construction industry, foreign contractors will be required to establish working partnerships with local construction companies. I propose to reduce income tax on the construction industry from 15 percent to 12 percent. To maintain a proper data base and to ensure that every house is added to the system, an Information Secretariat will be established. I also propose to allocate Rs.500 million for the early completion of the already initiated housing schemes. Our objective as a middle income country is not to build concrete structures all over. As such, the Government has planned its urban development strategy while ensuring the protection of public places, playgrounds, water reservoirs and green belts in townships. Certain Government premises will be relocated and old housing schemes will be redeveloped. To facilitate urban development initiatives, an Urban Development Fund will be established to meet relocation expenditure. Priority will be given to provide modern housing for shanty


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dwellers and payment hawkers within the same localities that they presently operate. In all urban development planning, dedicated common facilities will be reserved for three-wheeler and taxi parking and self-employment opportunities.

Plantation economy Plantation agriculture plays a strategic role in our economy. The export income from plantation industries can be doubled by improving cultivation, processing and promoting higher value added export products. To maintain tea production at 300 million kg per year, we need to expand the cultivation of tea. Therefore, to encourage replanting and new planting, I propose to increase the subsidy by Rs.50,000 per hectare to smallholder tea growers. I expect an extra 1,500 hectares of plantation annually under this program. A revolving fund facility will be arranged to provide related credit facilities. Re-plantation under plantation companies will be promoted through the proposed investment fund in the banking system. Since a large area of land under plantation companies remains unutilized, I propose to give a six months notice period for such companies to put unused lands in to productive use. If plantation companies do not comply with this deadline, such unutilized lands will be distributed among smallholders for re-plantation. The Tea Research Institute will promote technology and research to improve quality tea, propagate high yielding varieties and minimize post harvest losses. The tea sector must move forward with very high value added exports with Sri Lankan brands. Therefore, I propose to increase the export CESS on bulk tea to Rs.10 per kg. In the Budget estimates, Rs.500 million has been provided to give subsidies for replanting, new planting, inter cropping and productivity improvements in the coconut sector. In addition, Rs.200 million has been provided to curtail the crop diseases spreading in the Weligama area. Intermediate cropping and drip irrigation technology will be introduced for these areas to be able to adopt alternate crops. Coconut cultivation is also encouraged in the Northern and the Eastern provinces. Our intention is to raise coconut production to 3,500 million nuts per year from the current level of 2,800 million, over the medium term. Lease agreements of unutilized lands given by the Land Reform Commission and the Mahaweli Development Authority will be terminated unless such lease holders put such lands in to development work before end of June 2011. Thirty five percent of the raw rubber production is still exported as a primary commodity. As the world demand is shifting towards natural rubber, we plan to increase rubber production by almost 50 percent over the next 10 years. This requires new plantation and re-plantation. New plantation is promoted in Moneragala, Vavuniya and Mullative districts. I propose to increase the replantation and new plantation subsidy in support of this goal. In addition it is proposed to give a 50 percent subsidy to popularize the use of rain guards, to increase production from the existing plantations. Therefore, I propose to increase the budgetary allocation of the Rubber Department from Rs.500 million to 750 million. I am of the view that our rubber based industry could be made a one billion dollar export earning industry, if we increase manufacturing rubber based products in this country. The annual cost of tyres and tubes in which is US $ 50 million could also be reduced, if local raw rubber could be channeled to industrial production. Therefore to encourage value added exports, I propose to increase the CESS on the export of raw rubber from Rs.4 per kg to Rs.8 per kg.

Agrarian economy and food security Our country can reach self-sufficiency in many agricultural products. This requires an increase in the supply of high quality seeds and planting material. The research talents in the Agriculture Department and our universities must focus on high yielding, quality crops that are abundantly cultivable in Sri


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Lanka. The development of such crops will raise rural income and reduce the cost of imports by US $ 500 million. Therefore, 19 seed farms and all unutilized lands in agricultural research centres such as Mahailluppallama belonging to the Agriculture Department must be developed as a national priority. I propose a three year accelerated seed farm development initiative from 2011 at a cost of Rs.700 million. The Department will work with the private sector seed farms to expand seed development programs. As an incentive to the private sector, I propose to grant a five year tax exemption for investment in seed farming. The seed certification service of the Department Agriculture must also intensify its extension services to farmers who are keen to develop seed and planting materials. Fertilizer subsidy provides a big relief to paddy farmers. In order to increase its productivity, we encourage the use of organic fertilizer as well. Any irregularities occurring in the distribution and use of fertilizer will be curtailed and the subsidy scheme will be continued. A wide range of spices and cocoa grown in Sri Lanka has a unique advantage in earning foreign exchange. The unused land owned by the plantation companies will be required to enter into cocoa cultivation. I propose to implement a five year subsidy scheme for planting and replanting of spices. Financial assistance will be extended under the SME program for spice processing industrialists to promote value added products in this sector. The Department of Minor Export Agriculture will implement a special program to develop spice gardens and highbred planting material. The “Gama Neguma” initiative will also promote infrastructure required to support livelihood activities, based on smallholder spice cultivation. The global demand for flowers, ornamental plants and foliage is growing rapidly. This sector can be an attractive employment source for women and youth. In order to promote floriculture particularly in Awissawella, Gampaha and Kegalle areas, I propose to implement a special incentive package to establish nurseries to produce high quality flowers and ornamental plants. This will be spearheaded by the Botanical Gardens Department which will provide free training on related cultivation, give advice on how to avoid post harvest losses, packaging and the scientific know-how. I propose to allocate Rs.100 million for this venture. There are more than 25,000 minor irrigation schemes in our country. These are vital for agriculture, to preserve the environment and to meet animal and human needs. Therefore, I propose an allocation of Rs.900 million for a three year partnership initiative between the Provincial Councils and the Department of Agrarian Services to rehabilitate all minor irrigation schemes in our country. Special focus will be given to rehabilitate all minor irrigation systems in the Western Province to be able to use over 50,000 hectares of abandoned lands. We have ample opportunities to increase fish production. We propose to increase the fish production from the North and East, to get 50 percent of the total production. I propose to remove registration fees, renewal fees and operational charges on annual licences for fishery boats to give relief to smallholder fishery activities and simplify administration. I propose to grant credit facilities at a concessionary interest rate of eight percent to promote inland fishery and aquatic resources activities. I also propose to implement a long-term concessionary loan facility for deep sea fishing. In order to promote the fisheries industry, I propose to exempt the fisheries industry from income tax for period of five years. The Tourism Development Authority will allocate Rs.300 million for the development of traditional fishery villages and improve fishery industry based tourism. The livestock sector is critical in food security, income generation and foreign exchange savings. Towards improving this sector, the Ministry of Livestock and Rural Community Development will import high yielding dairy animals to supply breeding materials to dairy farmers. Investment by private sector will be


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encouraged to increase the availability of liquid milk. I propose to increase the farm gate price for liquid milk to Rs.50 per litre. Special credit facilities at eight percent interest will be extended to promote small scale livestock activities. The Department of Animal Production and Health will engage in veterinary research to provide quality services to farmers. Extension services will be expanded at each divisional secretariat with more veterinary surgeons and technical staff to promote livestock activities of small entrepreneurs.

Art, culture and mass media The National Tele-Cinama Park at Ranmihithenna for the artist to develop their creations has now become a reality. We did this from the tax on the imported tele-drams shown in our TV channels. It also helped to encourage the local tele-drama industry. As such revenue collection is inadequate to expand this facility further, I propose to allocate Rs.200 million from the budget to commence phase two of the project. I have noted that the tele-drama levy is not applicable to cable television services. Therefore, I propose to extend this levy to cover all such television services as well, and use such funds for the benefit of our artists. The 1970s was the golden era for our folk art, stage dramas and performing arts. Our internationally reputed artists enriched our art and culture. Next year will be a landmark year for performing arts as we will open a world class Performing Arts Theatre in Colombo. This celebrates the long standing China- Sri Lanka friendship which was sealed in 1952 when our two nations signed the rice-rubber pact. The Government of Korea is assisting us in the development of a new international convention centre at Magam Ruhunupura. Promoting our un-separable ties, India is assisting us to develop a cultural centre in the North. Similar facilities will also be developed in Kandy, Trincomalee, Galle and other major townships. Therefore I propose to give a special priority for our performing arts. I propose to set up a Performing Arts Trust to manage all the new facilities. The Trust will encourage our legendary artists and producers to revive performing arts. Therefore, I propose to allocate Rs.100 million as a seed capital for this initiative. Cash grants will be provided to artists towards promoting art and drama. I also invite every single bank and financial institution to sponsor staging at least one award winning old drama during 2011 and 2012. I also propose to increase the allocation for the construction of a SAARC Cultural Centre by Rs.250 million to accelerate its implementation. Let us make this decade also a golden decade for the Sri Lankan artists. I also propose to implement a ten year plan to conserve our archaeological sites throughout the country. To begin this, I propose to allocate Rs.300 million in 2011. In the 2007 Budget I gave financial assistance for Media personnel to acquire various work related equipment and computer facilities. As our nation has become an emerging economy in Asia we need to extend them further assistance to acquire modern technology and equipment. Therefore, I propose a fresh allocation of Rs.50 million to provide computer accessories, cameras and other equipments to media personnel to develop their creative skills and quality standards.

Caring society Women and children particularly among low income families must be given greater attention. Our country has a proud record of reducing maternal and infant mortality. However, we have to continue our efforts to resolve nutritional deficiencies of our mothers and children. Therefore, we need to expand the Thriposha program to the entire 1.1 million of estimated expectant mothers in our society. The government food production drive provides the major ingredients including soya beans for the Thriposha nutritional food package. Therefore, I propose to increase the present allocation for the Thriposha


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program from Rs.1,100 million to Rs.1,500 million so that it will reach all deserving mothers. We must equally concentrate on child development at pre-school age. I propose to allocate Rs.200 million to popularize pre-school nurseries particularly in rural areas. The pre-school nurseries will be assisted with classroom material and equipment. Nutritionally rich food could also be popularized through these nurseries. I expect Provincial Councils and Local Authorities to play a pivotal role in this aspect. Our development strategies promote a caring society. We have the elderly, the handicapped, the victims of terrorism and the vulnerable in our society. They need support from all of us. I propose to enhance the related budgetary allocation by Rs.1,000 million to increase the monthly allowance granted to these people. I also propose to increase the monthly allowance for disabled children, breadwinners and elderly in Samurdhi families to reduce their grief.

Self economy Three-wheeler operators, lorry and truck operators and private bus operators provide a valuable service in our economy. In order to improve their services further, I propose to remove the VAT on leasing of assets to these services. Custom duties on spare parts will also be reduced to moderate the maintenance costs. A substantial number of our people are engaged in self-employment activities. I propose to implement a daily credit scheme for self- employment activities with the assistance of the People’s Bank. Movable stalls to sell their products will be provided under this new credit scheme to improve their marketability in urban townships. A Secretariat for Self-Employment will be set up in order to facilitate urban self-employment enterprises. We have a large small enterprise economy. Over 65 percent of tea, rubber, coconut and paddy are grown by small farmers. Over 60 percent of passenger and goods transportation is provided by small entrepreneurs. Urban and semi urban trade is a small enterprise activity. What these people want from the Government is only security, simple systems and efficient services. Therefore, every government agency must have a special desk with a dedicated officer to attend problems of these small entrepreneurs. The efficient operation of a small economy needs considerable organizational improvements. I propose to implement a number of projects such as modernization of weekly fairs, organization of three-wheeler stations, mobile shops for self-employment, retail shopping facilities for handicrafts, fresh fruits, vegetables and home needs, marketing outlets for newspapers and magazines, retail shops around religious and public places, small restaurants, flower shops etc. The Gama Neguma program will work with provincial and local authorities to empower this small economy. Institutional arrangements for rural development must be simplified to empower the rural economy. Therefore, a National Secretariat for Gama Neguma will be established to bring all relevant agencies in the Economic Development Ministry under one umbrella organization. With the impending global food insecurity, it is important that the society is prepared to face this challenge. Poultry, livestock, fruits and vegetables are good sources of food supply. All these can be our “backyard economy.” Less expensive organic fertilizer can be used for such activities. Therefore, I propose to launch a National Food Production Drive through the Department of Agriculture and Samurdhi to organize one million home gardens to develop a “backyard economy.” The increased popularity of bread and other bakery products as well as fast food has influenced our consumption habits. However, as global grain prices are on the rise, it is necessary to develop appropriate technologies to reduce the reliance on imported flour. Sri Lanka is rapidly emerging as a surplus rice producer. Therefore, I propose to exempt machinery and equipment imported to processes grain mixed bakery products from Custom duties and VAT. I also propose to exempt the rice milling and bakery industry activities with a


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turnover below Rs 100 million per annum from the Economic Service Charge. Those engaged in rice based bakery products will be given special credit facilities by the State banks.

Consumer Safety Network People are not born poor. Poverty is manmade. A prolonged delay in legal disputes is one such cause for poverty. There are approximately 650,000 unsettled legal cases before our judiciary pending justice. As a result people spend valuable time and money. They cannot put lands with disputes for productive use. Therefore, I propose to implement a 3 year accelerated project to facilitate the effective administration of justice from 2011. Rs.400 million will be committed for this project with an initial provision of Rs.150 million in 2011. Low income people tend to get marginalized as market forces take over production and distribution activities. Their affordability is limited. Therefore, I propose to expand the Laksathosa and Co-op city outlets rapidly with financial assistance from banks. I also propose to continue the exemption of Laksathosa and Co-operatives from all taxes. I further propose to issue food security cards for low income households. This will guarantee a minimum quantity of rice, flour, sugar, dhal, dry fish and milk powder at affordable prices. I propose to allocate Rs.750 million to implement this food security system to the poor through the Samurdhi program.

Sports Economy We have every advantage to promote a sport economy. Sri Lanka is already in the world’s cricket map. Now we have developed tennis, rugby and other games. We must identify youth from our universities, schools, forces, workplaces and rural areas to develop their sports skills and prepare them for global events including Olympics. Therefore, the Kreeda Shakthi initiative for sportsmen with notable talents will be expanded to train our youth. New international stadium facilities are being developed in Diyagama, Sooriyawewa, Pallekele and Jaffna in addition to such other facilities already available in the country. Investments in tourism relating to sports activities including golf will be given priority. I propose to set up a National Sports Development Fund as a public-private partnership project to promote all infrastructure facilities and attract international sports events. I also propose to allocate 10 percent of income from the National Lottery and levies on tourist hotel rooms to this fund, to promote sports activities. As we have declared our candidacy to host the 2018 Common Wealth Games, I invite the private sector, particularly the tourism sector, to lead the process to promote Sri Lanka’s as a destination for global events.

Environmental Priorities Our biological resources are the key pillars of our economy. As our forefathers did, we must recognize the critical link between the country’s river system, biological wealth and socio economic development. Water reservoirs, forestry, the coastal belt, mountains, rivers and lagoons are critical factors of environment. In view of this, the Ministry of Environment will introduce necessary legislation and strategies to protect the country’s biodiversity. It is also proposed to introduce an integrated water management system based on the country’s 103 river basins. The budgetary resources that will be channelled through the Ministry of Environment will be given high priority for a rapid re-forestation program. I also propose that at least one land-filled site is identified for waste management in each Pradeshiyasabha division to improve waste management systems. I propose to allocate Rs.500 million from the regional development initiatives, to spend on this program.

Infrastructure Cost This Budget provides Rs.413 billion for public investment in roads, electricity, water, irrigation, ports and aviation activities. Capital investment in the continuing expansion of a power generation and


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distribution system is likely to exceed Rs.64 billion over the two years. We have already prevented power cuts and made electricity available almost to everybody. There is a cost to all these luxuries. Therefore I propose to make a revision to the electricity tariff structure from January 2011. I propose to reduce tariff by 25 percent to religious places, Government hospitals, schools, vocational training institutions and universities. The present tariff rate will continue for small businesses and SMEs. I propose a eight percent increase in tariff for other users except for the first 90 units. We have earmarked Rs.109 billion for the continued expansion of the road sector. Our aim is to develop national and provincial roads in the entire country before 2013. Therefore, I propose to allocate a further sum of Rs.20 billion in support of the provincial road development initiative. Registration fees on motor vehicles need revision, considering improvement in our road network. However, no revision will be made for three wheelers, agricultural and goods transportation vehicles. The proposed revision will increase revenue by Rs.1,000 million. I also request Provincial Council to increase the annual revenue licence fee for motor vehicles by 10 percent.

Streamlining of Revenue Administration The operation of the Provincial Turnover Tax and various national taxes results in tax on tax. That causes a high cost particularly to SMEs and consumers. Hence, I propose to remove the Provincial Turnover Tax. The Government will credit one third of revenue collected from the Nation Building Tax and entirety of the stamp duty collection and 70 percent of the motor vehicle registration fee, to the Provincial Council revenue account. As I propose to implement this proposal from January 2011, I request Provincial Councils to adopt applicable changes to their regulations. Revenue of local authorities has eroded as properties are not valued realistically. Therefore, I propose that the valuation of property based rent income of local authorities and other agencies must be done only by the Department of Valuation. Revenue from these arrangements is estimated over Rs.2,000 million per year. The local authorities can use such income to improve the environment, street lighting, waste disposal, sanitation etc. The Economic Service Charge will be simplified within a four band rate structure. I propose to reduce the Nation Building Tax from three percent to two percent. The applicable threshold will be fixed at Rs.500,000 to broaden its base. Manufacturing and processing industries below Rs.50 million and hotels below the three star category will be exempted. I propose to abolish the Social Responsibility Levy, Rural Infrastructure Development Levy and Debit Tax to simplify taxation. I propose to exempt government agencies from Construction Guarantee Fund Levy to reduce the cost of public investments. I propose to exempt Ceylon Electricity Board, Ceylon Petroleum Corporation, National Water Supply and Drainage Board and Sri Lanka Ports Authority from income taxes for a period of five years. They will be required to pay one fourth of their profit as deemed dividend to the Government. The VAT suspension scheme is simplified to encourage SMEs to graduate to the VAT system over 10 years. All tax refunds will be made by account payee cheques only. I propose that tax payments on VAT and NBT will be required to be made on a monthly basis while tax returns will have to be filed on a quarterly basis. I propose to increase the depreciation allowance on plant and machinery to one third and on buildings one tenth and reduce distributable profits for deemed dividend tax to 10 percent to promote investment. I propose to appoint an Independent Revenue Commission (IRC) pertaining to Customs, Excise and Inland Revenue to hear disputed tax issues for determination within 90 days. Any further actions after receiving a determination will be allowed only upon the payment of the disputed tax to a special account. The existing Board of Review will be dissolved.


Idle funds other than six months working capital requirements in the hands of Government agencies including promotional and regulatory bodies will be transferred to the Consolidated Fund on or before January 31, 2011. Thereafter, such agencies should ensure no funds will be retained with them other than the requirement for six months working capital requirements without the approval of the Treasury. I propose to further simplify the Custom duty structure as a four band rate structure. The industries with local value addition will be promoted by allowing access to raw materials and machinery at a low rate of duties to encourage advanced technology and upgrade the production processes. The Government will also introduce a new policy framework for bonded cargo to develop Sri Lanka as a trading hub. The special Commodity Levy Act will apply to selected imports to stabilize price fluctuations of sensitive products in the domestic economy. The Government will implement bilateral and multilateral Trade Agreements and the WTO Agreement having regard to environmental, health and security considerations. The new Revenue Protection Order giving effect to the proposed charges will be issued tonight. Antidumping, countervailing as well as a legislation requiring labelling in all three languages will be introduced to safeguard the national interest. The present reward scheme will be reformulated in consultation with the Salaries and Cadre Commission to design a more equitable incentive scheme to all officers in the Customs. In the process of my pre budget consultations, I realized that further jobs need to be created at managerial and technical levels, to implement development work. Therefore, I propose to recruit 10,000 graduates to the all island services in the fields of engineering, administration, planning, teaching, technical services, agricultural extension and other skills. A further 1,500 graduates will be recruited as Management Trainees to State Banks and other financial institutions in order to introduce younger staff. The Ministry of Defence has brought to my notice 1,500 nurses are needed for its hospitals. These recruitments will absorb graduates and other qualified youth who are seeking employment. I gave serious thoughts to salary related issues of public servants. An increase of Rs.100 per month for salaries and pensions will cost Rs.1.9 billion annually. As such, wage increases are not easy. However, public servants deserve some relief without compromising development priorities. We cannot forget the exemplary manner in which they managed the tsunami and liberated people from terrorists while also carrying out their routine responsibilities. We need to prompt public servants to work harder and serve the people. Their concerns must be recognized and resolved to motivate them. Many public servants have lost increments due to prevailing anomalies.

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Certain provincial teachers are yet to receive payments for a previous anomaly correction. Associated anomalies of teachers should be corrected through the new Service Minute. In this background, I propose to grant a five percent increase as a non pensionable allowance to all public servants and security forces. This will maintain the present structure of 1:4 in the public service salaries. I also propose to increase the Cost-of- Living allowance by Rs.600 per month from January 2011 to all public servants and security forces in non staff categories. I propose to increase this allowance to staff categories from July 2011. I propose to implement the recommendations of the Salaries and Cadre Commission with effect from July 2011 to correct prevailing anomalies of all non staff employees in the public service.

Speaker Chamal Rajapaksa in the Chair. Picture by Ruwan

De Silva


I further propose to implement the applicable salaries to teachers in terms of the new Service Minute with effect from January 2011. I also propose to settle salary arrears of teachers at provincial level. For all pensioners, I propose to increase their Cost-of-Living allowance by Rs.250 per month from January 2011. In order to correct anomalies in the pension structure, I propose an increase of Rs.750 per month to those who retired prior to 2003 and Rs.250 for those who retired between 2003 and 2006. This will be effective from July 2011. My proposals to increase salaries and the Cost-of-Living allowance will benefit nearly 450,000 pensioners and 1.3 million public servants. The professional categories of public servants need to be incentivized to sustain improved quality standards. Academic and research staff of our universities and research institutions, medical, engineering, legal and specific managerial categories perform distinctly different responsibilities.

As such, their services need to be valued. Therefore, I propose to increase the specific professional allowances to university academic staff, medical professionals and other specific professionals based on their professional and research specialties, to 25 percent of their salaries. I also propose to extend concessionary duty to import motor vehicles for professional and managerial categories of public servants working in the Government and public enterprises. The proposed changes of salaries and pensions as well as recruitments will cost Rs.33 billion in 2011. I wish to table relevant technical notes to my proposals. Amendments to the Appropriation Bill to incorporate borrowing limits and related revised estimates to the Draft Budget Estimates will be presented to the Parliament before the commencement of the Committee stage debate.

Concluding Thoughts Let me summarize this Budget. The total revenue in 2011 is projected at Rs.963 billion. Recurrent expenditure is likely to be Rs.1,017 billion. Therefore the basic deficit in our Budget is around Rs.54 billion. As our major investments in infrastructure, human resources, rural development and social security will be over this deficit, the Budget deficit will amount to Rs.434 billion which is 6.8 percent of GDP in 2011.

Our medium term objective is to eliminate our basic deficit and move towards a budget deficit of around of 5 percent of GDP. The Fiscal Management Report 2011 provides relevant details. Neo liberal ideologists must understand that this deficit is not to bailout failed bankrupt companies. This deficit involves provisions for free services, social security and development expenditure. My attempt in this Budget is to sustain our achievements and manage future risks in our economy. We have achieved an economic growth rate of near 8 percent. Inflation has stabilized at around 6 percent. Poverty has come down to 7.6 percent and unemployment to 5 percent. These are all achievements within 5 years. This argues well in favour of our development strategy. The Centsexternof. A l

ral Bank has built up US $7 billion reserves. Our banking ystem has a further US$ 1.5 billion. So the economy has sufficient

al assets. All these are achievements that all of us must be proud ow rate of inflation of around 5-6 percent, economic growth rate of

around 7-8 percent and a society free from poverty are our medium term

President Mahinda Rajapaksa presenting the Budget proposals for 2011 in Parliament yesterday. Picture by Ruwan De Silva

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targets. Our collective effort now onwards must be to maintain these positive trends in our economy over the medium term. Raising income beyond US$ 4,000 per capita is not the only objective in our strategy. People need equitable opportunities to enjoy such high income. They must have equal access to roads, electricity, water, communications, housing and health facilities. These infrastructures provide opportunities for a meaningful economic life for them. Farmers ask for water, seeds, credit and fertilizer. Self employed people ask for a trouble free environment to do their own businesses. Above all, everybody in the society must have equal access to education. That is the surest way of providing equality in economic growth. We must understand that we cannot let our young people to leave our country or turn to other options, because they cannot have better education, quality jobs and secured living, here. These facilities must be made available to everybody in our society, in Sri Lanka itself. It is then that such facilities currently confined only to those who can afford, can be made available even to those who cannot afford. Our Government under no circumstance will privatize or abolish free education or health services. They will not only be protected but strengthened with greater resources from the National Budget. Equally, we will introduce laws, regulations and standards to encourage all other private educational institutions to comply with our national requirements. We must guarantee meaningful educational opportunities to our children. We have to be futuristic. Our sole responsibility is to manage the present to build a better future. That should be a future with opportunities. Let us leave our differences aside and place the country first. Let us place the future of our children first. My policy strategy, commitment and leadership aims at building a prosperous future for our children. Their future lies in a knowledge economy. Let us join hands to make our country the Emerging Wonder of Asia.



Critical recommendations of the Presidential Taxation Commission ‘Govt should be careful when picking and choosing’

The much anticipated proposals to reform Sri Lanka’s archaic, complex and often ad-hoc tax system which has consistently failed to deliver on revenue targets, compiled by a Presidential Taxation Commission is expected to see fruition today when Budget 2011 is presented in parliament. But a source close the commission, following its every move since its inception, said the desired results would not be achieved if the government picks and chooses some recommendations leaving out others.

"Many of the recommendations, across the chapters, are interdependent. The commission adopted a very much integrated approach. So picking out selected bits for implementation may not be entirely desirable. Recommendations in one section has a bearing on a recommendation made in another, so the government should carefully consider this in implementing the reforms," the highly placed source said.

He said he observed that the commission had taken into consideration the overall development priorities of the government, the projected economic future and growth sectors and took pains to ensure that the new tax system proposed was "very much in line with the broader economic prospects of a post-war Sri Lanka". The commission’s report comprises several chapters and its contents are a closely guarded secret. "It is a confidential document, but officials have at times divulged some of the proposals but until the budget is presented it would be speculative at best, "the source said. Our source said he did not wish to get into specifics but offered to present The Island Financial Review a brief outline as to its critical recommendations.

Number of taxes reduced, streamlined, rates lowered... The commission has recommended lowering corporate and individual tax rates (to regionally competitive levels), but in a managed, and phased manner, bearing in mind the revenue implications in the short-run. It suggested streamlining the border tax regime, particularly in reducing the number of taxes, and integrating many of them to a single development levy at the border "There is a whole section in the commission’s report to the President on measures to widen the base, by reducing tax evasion and avoidance," our source said.

Compensation for weak ‘doing business environment’... There has been a lot of speculation with regards to the future of tax incentives and tax holidays offered to investments approved by the Board of Investments (BOI). "The commission’s recommendations focus moving towards a more accountable and holistic incentive-granting regime, focussing on vetting projects more holistically to ensure they are in line with national priorities. Also, there is a recommendation to

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ensure a level playing field between BOI and non-BOI projects. Commercial opportunity is booming in post-war Sri Lanka and many projects can be undertaken without generous incentives, which need to be rationalized. But there is a need to preserve super-incentives for landmark projects, anchor investments and strategic development projects," the source said.

FDI promotion and private sector... The Presidential Taxation commission has also proposed the need to link FDI (foreign direct investments) and incentive regimes with a broader private sector strategy or industrial development strategy. "This is crucial because it would give investors a coherent and consistent message," the source said. "The recommendations also point out the urgent need to eliminate some of the investment inconveniences because for too long we have continued granting incentives to offset, or as a compensation for, a weak ‘doing business’ environment," he said.

Administrative reforms... There are many recommendations made on comprehensive and much-needed administrative reforms in all the revenue authorities, including the use of better information technology. "But in all this, the commission bore in mind practical considerations and avoided proposals that would be politically sensitive and difficult," the source said.

"The commission has suggested that the administrative reforms in the revenue authorities must go hand in hand with the actual tax reform measures because one supports the other. Thus, bringing back public confidence in the tax system, as being revenue raising which is a crucial consideration in this report, given the weak fiscal situation for so many years, but yet tax-payer friendly and pro-growth, is a crucial factor," he said.



Budgets of the past...

Budgets of the past have been unrealistic where targets were hardly met. Revenue was overestimated and recurrent expenditure was underestimated. The result of this was that governments have had to sacrifice public investments by way of capital expenditure to ease budget deficits that otherwise would have been higher than forecast. Even so, the unrealistic assumption did lead to deficits that were higher than forecast in successive budgets.

For example, according to the Ministry of Finance, in 2007, the budgetary estimates provided revenue at Rs.621 billion, recurrent expenditure at Rs.588 billion and capital expenditure at Rs.351 billion. The deficit was estimated at Rs.654 billion. But the outcome was that recurrent expenditure expanded to Rs.615 billion which exceeded revenue which declined to Rs.584 billion. As a result, capital expenditure, or public investments, was cut to Rs.262 billion at which expense the deficit was contained at Rs.609 billion. In 2008, revenue was estimated at Rs.751 billion, recurrent expenditure Rs.708 billion, capital expenditure Rs.386 billion and the deficit Rs.736 billion. The outcome was that revenue fell to Rs.655 billion from the original estimate barely enough to cover recurrent expenditure which had increased to Rs.736 billion from the estimated figure. Capital expenditure was again cut to Rs.264 billion and the deficit expanded to Rs.756 billion.

It was the same story in 2009. Revenue was estimated at Rs.855 billion, recurrent expenditure at Rs.825 billion, capital expenditure at Rs.405 billion and the deficit Rs.849 billion. The outcome was a sharp drop in revenue to Rs.703 billion, recurrent expenditure expanded to Rs.883 billion and capital expenditure fell from the original estimate to Rs.350 billion. The deficit expanded to Rs.1,046 billion, which was 9.9 percent of GDP.

Economists have said the government would have to be more realistic in its assumption and improve its fiscal discipline as well.

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Exchange controls relaxed to promote exports, develop local capital markets

The government has proposed has proposed to relax exchange controls and allow the following transactions:

1. Permission is granted for foreigners to invest in rupee denominated debentures issued by local companies. To give effect to this, relevant Gazette notification has been issued by the Controller of Exchange.

2. Permission is granted for Sri Lankan companies to borrow from foreign sources with effect from 22.11.2010. The procedures and documents required in order to complete the process have been prepared by the Central Bank of Sri Lanka.

3. Permission is granted for foreign companies to open places of business in Sri Lanka with effect from 22.11.2010. To give effect to this, necessary gazette notification to establish the procedure to be followed for this purpose has been issued to all concerned, while the Controller of Exchange has also issued instruction to the authorized dealers covering the bank accounts to be opened for this purpose.

4. Permission is granted to foreigners on tour or businesses in Sri Lanka to open accounts in foreign currency with effect from 22.11.2010. To give effect to this, necessary instructions will be issued by Central Bank of Sri Lanka to all the banks operating in Sri Lanka.

5. Permission is granted to the staff of foreign embassies in Sri Lanka to open new foreign currency accounts with effect from 22.11.2010. To give effect to this, necessary instructions have been issued by the Controller of Exchange to all authorized dealers operating in Sri Lanka.

6. Permission is granted to increase the advanced payments for imports from US $ 10,000 to US $ 50,000 with effect from 22.11.2010. To give effect to this, necessary instructions have been issued by the Controller of Import and Export to all authorized dealers operating in Sri Lanka.

7. Permission has been granted to Sri Lankan residents to invest in equity of overseas companies and make payments in respect of setting up of places of business outside Sri Lanka. To give effect to this, relevant orders under the Exchange Control Act have been issued by the Hon Minister of Finance and

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Planning and the Controller of Exchange has issued the necessary instructions to the authorized dealers operating in Sri Lanka.

8. Permission has been granted to insurers to invest up to 20 percent of the long term fund and technical reserves aboard. To give effect to this, relevant Gazette notification has been issued under the Regulation of Insurance Industries Act and directions have been issued to authorized dealers.

9. Permission is granted to importers and indirect exports of gem and jewellery to open foreign currency accounts with effect from 22.11.2010. To give effect to this, necessary instructions will be issued by the Controller of Exchange. Already exporters of such items are enjoying this facility.



Central Bank relaxes exchange control regulations in line with Budget 2011

In the light of the Budget - 2011 announced by His Excellency the President on 22nd November 2010, the Central Bank of Sri Lanka made arrangements to simplify foreign exchange controls in order to facilitate foreign exchange transactions. Accordingly, the Central Bank of Sri Lanka has relaxed foreign exchange regulations relating to investment by Sri Lankans abroad, foreign borrowings by resident companies and investments by non-residents in the domestic market. These policies were also announced in the "Road Map: Monetary and Financial Sector Policies for 2010 and Beyond" in January 2010. Further, new foreign currency accounts have been introduced for a number of vital sectors including tourism and gem and jewellary industry. Implementation of these policies is expected in two stages; the first set of policies with effect from 22nd November 2010 and the other policies with effect from 01st January 2011.

The set of policies that will be implemented from 22ndNovember 2010 is given bellow.

1. Permitting foreigners to invest in Rupee Denominated Debentures issued by local companies The corporate bond market provides an alternative channel to raise long-term funds to support investment activities in the private sector and allows to reduce the excessive reliance on the banking sector for funding needs. Considering these advantages and with a view to broadening the investor base and improving liquidity in the secondary market, it has now been decided to allow foreigners to invest in Rupee Denominated Debentures.

The improved macroeconomic conditions, in particular, the reduction in inflation, improving fiscal performance, and decline in interest rates would enable the strengthening of the bond market. At the same time, increased participation of foreign investors in the bond market would contribute to a further reduction in interest rates and stability in the domestic market and play a more significant role in meeting the financing needs of the economy.

2. Expedition of approvals for companies to borrow from foreign sources Sri Lanka needs to enhance investments to maintain its high growth momentum in the coming years and it is therefore, necessary to create alternative avenues to meet financing needs of the entities at a relatively low cost. Accordingly, the permission will be granted to borrow from foreign sources for companies that are engaged in a variety of businesses irrespective of the fact that such business varieties are foreign exchange earners.

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This measure will ease pressure for funds in the local market and enhance the opportunities available to expand the economic activities in the country.

3. Permission for foreign companies to open places of business in Sri Lanka Many foreign companies have shown a keen interest to establish places of business in Sri Lanka. At the same time, the Companies Act requires that the establishment of a place of business in Sri Lanka by overseas companies should be in accordance with the regulations made under the Exchange Control Act. However, at present, a clear and convenient mechanism is not in place for such companies to bring in the funds necessary for the establishment and maintenance of such business as well as for the regulation of the repatriation of surplus funds and other outward payments.

Accordingly, the necessary Gazette Notification outlining the procedure to be followed by overseas companies in establishing a place of business in Sri Lanka has now been issued while the necessary instructions to the Authorized Dealers covering the bank accounts to be opened for this purpose have also been issued, so as to further facilitate foreign direct investment into the country.

4. Permission to foreigners on tour or business in Sri Lanka to open accounts in foreign currency The Tourism sector is expected to expand significantly with the increase in tourist arrivals. It is also proposed to further facilitate business activities of non-resident non-nationals who are on business visits to Sri Lanka. These foreign currency accounts would facilitate the aforesaid category of non-residents to execute their transactions smoothly and safely during their stay in Sri Lanka and help contribute to expand tourism and businesses activities in the country.

5. Permission to open Foreign Currency Accounts for Gem and Jewellary Industry. With a view to facilitating the policy objective of making Sri Lanka a center for manufacturing, trading and retailing of gem and jewellary, it has been decided to extend the foreign currency account facilities available to indirect and direct exporters of gem and/or jewellary to importers of gem and/or jewellary.

This foreign currency account would facilitate the gem and jewellary exporters to do their transactions smoothly by permitting them to retain their export earnings in designated foreign currencies and to utilize such funds for their expenditure on import of cut and polish or rough gem stones and other raw materials without exchange losses. Further, they will be allowed to withdraw funds in foreign currency form for purchasing rough gems and other raw materials abroad.

6. Permission for certain banking transactions in foreign currency and Sri Lanka rupees to Foreign Diplomatic Missions, their staff and family members. Sri Lanka has been having cordial bi-lateral and multilateral relationships with foreign nations and these relationships are expanding. At present, foreign diplomatic missions which include embassies, high commissions, consulates, permanent missions of the United Nations or EU delegations of the European Commission and their staffs are considered as Non-Residents for the purpose of Exchange Control and they require specific approvals to engage in banking transactions in foreign currency which causes considerable inconveniences for diplomatic community. These foreign currency accounts are expected to facilitate staff in diplomatic missions to engage in foreign currency transactions freely with banks.


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7. Increasing the advance payment for imports from USD 10,000 to USD 50,000 With the expansion of trade transactions and increase in value of such transactions, it is now necessary to increase the permitted amount that can be paid as an advance payment to facilitate import related payments. Accordingly, advance payment limit has been increased from USD 10,000 to USD 50,000. This relaxation would ensure smooth functioning of the external trade activities in the domestic market as well as entre port trade. A set of policies that will be implemented from 1st January 2011 are as follows.

8. Permission to Sri Lankan resident individuals, corporate and unincorporated bodies to invest in equity of overseas companies Countries with improved external reserves have gradually relaxed their exchange controls by permitting residents to operate in international capital markets to further strengthen the long-term external sector stability. It is also believed that the entry into capital markets will tend to improve governance practices and risk management capabilities of domestic entities as well. Since Sri Lanka’s foreign reserve had increased to a healthy level and is expected to increase further, it has now been decided to permit residents to invest in equity of companies incorporated outside Sri Lanka and to establish places of business outside Sri Lanka.. These measures will also help further integrate domestic investors with international capital market.

9. Permission to insurance companies to invest a part of their assets abroad The Insurance Board of Sri Lanka has issued regulations under the Regulations of Insurance Industry Act permitting insurers to invest up to 20% of the long term fund and technical reserves abroad. To facilitate the process of investing such funds abroad, permission has now been granted under the Exchange Control Act. This would facilitate opportunities for insurers to diversify their investment portfolio and contribute towards improving the long term financial stability of their companies. Accordingly, insurance companies will be permitted to invest up to a maximum of 20% of the general funds and technical reserves over a period of three years. Under this permission, their investments will require to be routed through a special account opened in a commercial bank for the purpose.

With these regulatory changes, Sri Lankan investors will be permitted to open Outward Investment Account (OIA) and foreign investors will be permitted to open Inward Investment Account (IIA) to facilitate outward and inward foreign exchange transactions with regard to investment activities.

The Central Bank is of the view that the relaxation of the above foreign exchange controls would contribute to further improve investor confidence, strengthen foreign reserves in the long term, maintain a cordial relationship with bilateral and multilateral foreign institutions and stabilize the foreign exchange market, thereby paving the way to further integrate the Sri Lankan economy with the global economy.



NSB post tax profits up 40%

State-owned National Savings Bank’s profit before tax recorded a growth of 39 percent to Rs.7.8 billion and post-tax profit increased by 40 percent to Rs.4.6 billion during the first nine months of the year over the corresponding period of 2009. Highlighting the Bank’s performance during the past nine months, Hennayake Bandara, General Manager and CEO of NSB said, "The Bank’s financial performance in the first nine months is a testament to the successful realignment of its business which has seen a broadening of retail businesses across the country. We remain optimistic about the Bank’s performance for the remainder of the year."

The focus on balance sheet management has delivered an increase in net interest income in the third quarter through growth in the lending book, albeit at a lower average yield and reduction in the average cost of funds. The Bank has successfully maintained its net interest margin at 4.4 percent for the nine months ended 30th September 2010 compared with 4.0 percent for the same period in 2009.

The Bank’s total operating expenses were up by 9 percent to Rs.4.3 billion for the nine months ended 30th September 2010 from Rs.3.9 billion in the same period in 2009. During the period staff costs increased by 4 percent, whilst premises, equipment and establishment expenses went up by 14 percent due to continued investment in expansion of delivery channels and improvement in customer service capability.

Operating income was up by Rs.2.9 billion to Rs.10.2 billion recording a growth of 39 percent for the nine months ended 30th September 2010. This was mainly due to the exceptional gains from secondary market dealings in both equity and government securities.

The Bank’s effective overall tax rate inclusive of VAT on financial services was 55 percent for the period.

Loans and advances grew by 15 percent to Rs.76 billion at 30th September 2010 compared with the end of 2009. Housing loan disbursements recorded a growth of 120 percent compared to same period of last year. During the nine month period, non-performing loans reduced by 10.0 percent. Asset quality remains strong with the non-performing loan (NPL) ratio of 2.9 percent at 30 September 2010, reducing from 3.8 percent at 31st December 2009. The decline in the NPL ratio was mainly due to increase in total loans & advances and efforts on recovery.

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The Bank’s total assets were up by 9 percent to Rs.385 billion at 30 September 2010 compared with the end of 2009 reflecting, primarily, the increase in investments in government securities and loans and advances.

During the first nine months Bank’s Savings deposits have recorded a growth of 14 percent and aggregated customer deposits were Rs.341.0 billion as at 30 September 2010, representing an increase of 9 percent from Rs.313.0 billion as at 31 December 2009.

Tier 1 and Tier 2 capital for the Bank were 17.7 percent and 14.0 percent compared with the regulatory minimum of 5 percent and10 percent respectively.

The Group’s Operating Profit from Ordinary Activities before Taxes increased to Rs.10.8 billion recording a growth of 25 percent over the same period of 2009, while Profit after Tax for the period increased to Rs.4.9 billion recording a growth of 23 percent.

Fitch Ratings Lanka for the eight consecutive year reaffirmed the AAA credit rating for the Bank in September and NSB remains the only local bank to receive AAA credit rating. Hennayake concluded "we will continue to maintain our focus on liquidity, credit quality and investments, which we believe represent the key ingredients of success in today’s volatile environment."


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Interests from deposits S R Balachandran, BSc, FCA, FCMA (Sri Lanka) Council Member The National Chamber of Commerce of Sri Lanka At present we derive interests from deposits made in (a) Government - treasury bills, treasury bonds (b) Commercial Banks - fixed deposits, fixed deposits certificates and savings account (c) Finance Companies - fixed deposits, fixed deposits certificates and saving accounts It is seen that when interest rates are quoted or advertised by finance companies two types of rates are given (a) Actual interest - simple earning rate (SER) (b) Compound interest - average earning rate (AER) This fact has to be understood before making deposits in finance companies (A) When deposits are made for a period of more than one year with interest payable on maturity, AER is computed on the assumption that the deposits are reinvested with accumulated interest (AER) annually till the period of maturity ends (B) When deposits are made for a period less than a year AER is computed on the assumption that the deposit matured are reinvested with accumulated interest earned on maturity till the period of one year ends. (C) Deposits are made for one year or more but interest is paid monthly. AER is computed assuming that the monthly interest earned is reinvested regularly till the year of maturity ends. (D) Monthly payments are made for a period even more than one year and a lump sum is paid on maturity. AER is computed on the basis of loss of interest on monthly payment till the end of maturity period. I quote below the following example. a) Say and investment of Rs.100,000 is made for two years at the rate of 20 percent per year. Therefore after two years you would be receiving Rs.140,000 (capital and accumulated income) Now, if investments are made every year with accumulated interests (AER) still we could earn Rs.140,000 at maturity. The AER Rate is Rs 18.325 percent 118.325.00 x 118.325 - 100.00 = 40.00 percent ---- 100.00 Now AER is less than SER b) Deposits of Rs 100,000 made for one month, three months, six month and one year at the rate of 12 percent. (Monthly rate 1 percent) AER would be


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SER AER 1 month 12.00% 12.68% ((1.01) 12 - 1.00) x 100 2 months 12.00% 12.55% ((1.03) 4 - 1.00) x 100 6 months 12.00% 12.36% ((1.06) 2 - 1.00) x 100 12 months 12.00% 12.00% (1.12) 1 - 1.00) x 100 It could be seen that AER is on the descending side when SER is fixed. A standard offer of rates is published below. SER AER 1 month 10.25% 10.75% 3 months 12.50% 13.10% 6 months 13.00% 13.42% 12 months 13.50% 13.50% Now AER is more than SER c) Rs.100,000 is deposited @ 12.50 percent for one year but interests are paid monthly. Annual interest 12500.00 Monthly interest 1041.67 Interest on 12 monthly deposits of 1041.67 @ 12.50% For accumulated period (0,1,2,3,4,...11 - total 66 months) Rs.716.00 Therefore the total interest is 13216.00 AER ................. 13.216% Similarly if deposit is made for two years @ 12.50% with interests payable monthly AER ................. 13.134% AER is more than SER d) Rs.15,000 monthly payment is made for 24 months and a lump sum of Rs.450,000 is payable on maturity. Total investment (15,000/-x24) 360,000 Interest earned 90,000 Therefore SER 25.00 percent (12.50 percent p.a) Now interest lost @ 24% on monthly payment of 15,000 For accumulated period (1,2,3,4,...24) = (300 months) is Rs.90,000 Therefore AER 24.00 percent (11.36 percent p.a) Now AER is less than SER In conclusion I wish to state that those who are interested to participate in the active deposit scheme should pay attention to the AER. Others should consider only SER. I hope the public will benefit from this information.



Open Budget Index 2010 Lanka 67th out of 94 countries, ‘significant’ transparency in public finances

A long way to goSri Lanka is one of 13 countries that provides its citizens significant information on public finances, and is ranked 67th, a position shared with India, according to the latest Open Budget Index published by Washington based International Budget Partnership where 94 countries were surveyed. The Open Budget Index showed that Sri Lanka’s openness regarding public finances had improved since 2006, when it ranked 47 with ‘some’ degree of transparency.

South Africa was ranked the highest (92) with extensive information disseminated to the public followed by New Zealand (90). Chad, Iraq, Equatorial Guinea, Fiji and Sao Tome e Principe were ranked 0 with scant or no information. Twenty two countries out of the 94 provided scant or no information regarding public finances and the budgetary process, 19 countries provided minimal information, 33 countries ‘some’ information, 13, including Sri Lanka, provided significant information while seven countries provided extensive information. Although Sri Lanka has made improvements in the openness of the budget and transparency in public finances, there is need for more improvement.

Why the budget is important... Ordinary citizens in this country tend to look for short term benefits each time a budget is presented and often appreciation for far-reaching fiscal policy has been lacking, forcing governments to adopt politically popular policy at the expense of economic policy that would take time to realize better results. Maintaining a political economy has a bearing on the budget; leading to ill conceived policy, poor implementation of good policy due to fiscal constraints, holding on to ‘popular’ policy although the economic costs are far greater, lead to higher budget deficits which lead to higher borrowings. Inflation and interest rates are affected by this and cost of living increases affecting the poor and ordinary citizens of the country.

How a government manages limited public resources directly affect the quality of people’s lives and therefore, in Sri Lanka people need to be aware of how the government spends its money. In the past, the government has always failed to meet budgetary targets and deficits have expanded (See Island Financial Review, Monday 22). Weak fiscal discipline has been the bane of macroeconomic stability in

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this country and has made it difficult for the Central Bank to conduct its monetary policy, which it uses to fulfil its overall mandate of maintaining price stability.

The Central Bank has warned the government against reckless spending, because it would make the people suffer when inflation rises and when interest rates rise and monetary policy is tightened to contain inflation. Treasury officials, on the other hand, have accused the Central Bank of being impractical and that it was the duty of the government to set the economic agenda of the country, which means, politically sensitive policy would have to be continued with.

Right direction... The government has proposed to contain the budget deficit at 8 percent of GDP this year, after a deficit of 9.9 percent of GDP last year. The Budget 2011 proposes the deficit would be contained at 6.8 percent. President Institute of Chartered Accountants of Sri Lanka Sujeewa Mudalige told a recent post-budget forum, that the government had addressed the main concern of the country’s professionals with Budget 2011, by attempting to contain the budget deficit at 6.8 percent. Treasury Secretary Dr. P. B. Jayasundera addressing the same forum, said it was important for the government to maintain the trend, which would lead to a deficit of 5 percent of GDP by 2012.

He also said fiscal policy and monetary policy was geared to achieve the growth objectives of the country. This was a brief but welcome statement. "The government could easily say it would spend its way towards achieving its goals which means money is printed and then monetary policy goes for a six with inflation raising its ugly head. But the Treasury Secretary’s brief comment is important because it shows discipline is necessary for the greater good," an analyst pointed out. Dr. Jayasundera himself said the government could have easily provided the salary increments as requested—Rs.10,000 for the public sector. "We could have granted it and printed the money, why should we care," he said.

The Executive as Finance Minister... Economists criticize the practice of Presidents holding the position of the country’s Finance Minister. "This seriously undermines transparency and accountability. In a company, the CEO would never the hold the position of a CFO (chief financial officer) as well," said Dr. Muttukrishna Sarvananthan, Principal Researcher, Point Pedro Institute of Development. The country’s fiscal process is governed by the Fiscal Management Responsibility Act but this piece of legislature clearly needs some teeth.

"This Act should be further strengthened with penalties for non-compliance and it should be able to limit public expenditure by introducing statutory controls," Dr. Sarvananthan said. He said a parliamentary budget committee must be set up while steps are taken to enhance the capacity of legislators to engage in effective, informed and constructive budget debate through in-house research facilities or external expertise.

He said the Committee on Public Accounts (COPA) and the Committee on Public Enterprises (COPE) should be open to the public and strengthened so as to prosecute offenders. Dr. Sarvananthan was speaking at a pre-budget seminar titled ‘How is our money spent?’ organized by Women for Good Governance.


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Sunday Island – November 28, 2010

Budget 2011- a compromise between the economically desirable and the politically feasible By R.M. B Senanayake

The global financial meltdown in 2008 (last quarter) and the first quarter of 2009 showed that roll-over of foreign debt was not always possible. The foreign lenders in the bond market and the foreign investors in our stock market sold their bonds and stocks and repatriated their foreign currency. Our Foreign Reserves fell below $ 1 billion which was inadequate to fund our net imports and repay the maturing foreign debt. To ward off the danger of debt default we sought a Standby Credit from the IMF.

The Government reached an agreement with the IMF to follow prudent fiscal policy by bringing down the budget deficit to 7% next year. The Government incurred a deficit of 9.8% of the GDP in 2009 which was excused by the IMF because the economy was recovering from the fall in its growth rate to 3.5%. in 2009. The target for 2010 seems likely to be met owing to the higher growth rate this year, the result of the fiscal expansion of 2009 and the loose monetary policy. Inflation also came down due to the decline in world oil and commodity prices after the recession of 2008/2009.

The Central Bank (CB) held the rupee as an inflation anchor. But it was held below the real effective exchange rate which was around Rs.125 to the dollar. This was done by buying up dollars against the issue of newly created rupees. The CB then sought to sterilize the consequent monetary expansion by selling its securities to the market. As the growth rate quickened in 2010 the threat of higher inflation has revived and the lenders have been asking for higher interest rates which undermine the low policy rates. So the CB has had to suspend open market operations to mop up the extra money created by it.

Some would say this is the opening to the Road to Zimbabwe where hyper inflation took hold of the economy. But the creation of new money can also feed itself to extra imports and worsen the deficit in the current account of the balance of payments. This will enable the country to absorb the extra capital inflows without putting upward pressure on the rupee. Of course Inflation has moved up in recent months. Rising inflation has always been caused by excessive monetary expansion although with a delay of nine months to a year.

All the liquidity being pumped in by the Central Banks has to flow somewhere and when it flows into goods and services their prices rise (assuming supply is unchanged). The usual sequence of events that end in high inflation runs as follows: a) aggregate demand outstrips supply. To make up the difference trade goes into deficit, the exchange rate slides (if permitted to do so), pushing up import prices and at about the same time prices & wages start to be bided up. In this background curbing the budget deficit has become necessary to prevent a revival of higher inflation. Capital inflows will not put the same upward pressure as the current account deficit worsens.

Budget Deficit The 2011 budget does provide for a lower deficit to GDP ratio of 6.8% based on the government’s estimation of GDP next year. The budget restricts the increase in expenditure to around 11% of the current year’s expenditure. Total expenditure is budgeted at Rs.1,017 billion for recurrent expenditure


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and Rs.413.7 billion for capital expenditure- a total of Rs.1,430 billion. Public spending must grow more slowly than GDP- spending as a percentage of GDP. The budget estimates an increase in total revenue of about 21% over the current year’s revenue. The likely inflation is 5-6% and the optimistic growth rate for this year is estimated at 8% so that the nominal GDP is likely to increase by about 14%.

What matters for taxation is the money GDP and the nominal demand. So the right test of macro-economic intentions is what the government is expecting for money GDP. The increase will be split between a rise in real GDP of say, 8% and 5-6% inflation. Even if the revenue estimate is fulfilled there will still be a current or revenue account deficit of Rs.53.5 billion or 2% of the GDP. The golden rule in budgeting is to balance the current or revenue account. A deficit means we are borrowing to meet day to day consumption which reduces our total national savings by 2% of the GDP.

We have been running current account deficits for the last 20 years or so. Since most of the government’s expenditure goes on consumption (in the form of subsidies or transfers including for free education and free health) a rising current account deficit fuelled by a rising budget is particularly dangerous. The growth of the state and an increase in public spending helps the politicians to obtain mileage for themselves. But it gives the wrong signal to the public who then expect the government to do more and more for them.

The criticism that the budget does not give enough benefits or concessions springs from this attitude . High expectations have been created in the people by the politicians themselves without regard to any limitations on the availability of public funds. People think that the government has all the money it wants not realizing that that it is they who provide such money either by bearing higher taxes or higher prices caused by fiscal and monetary expansion. The public must be told that the government does not have unlimited funds to provide more benefits. The government can obtain more funds only by creating new money, which is highly inflationary and reduces their real incomes..

Taxation The private sector has revived but is not growing fast enough. The budget needs to be judged by its contribution to private sector growth. It is only the private sector that can create jobs although the government can take on people to non-existent jobs and pay salaries which are really hidden doles as exemplified by the proposed recruitment of 10,000 graduates.

In the past it has been killing the private sector by raising taxes. The present budget seems to change the trend. The base for income tax has been broadened by removing the tax credit for public servants and presumably the politicians too. The narrower the base the higher the rate must be to achieve a given amount of revenue. The indirect tax reductions should reduce price distortions and help in controlling price increases.

The tax changes which will promote private sector growth are as follows: The raising of the income tax threshold, the scaling down of the tax rates and the increased Capital Allowances for investment should promote investment and greater tax compliance. The rate of capital allowance will be increased from 12.5 % to 33.33 % for any plant or machinery acquired on or after April 1, 2011. Capital allowance at 10% will be granted for commercial buildings constructed on or after this date.


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Research Expenditure: Double deduction will be granted for research expenditure incurred on any scientific, industrial, agricultural or any other research for upgrading of any trade or business. This double deduction will be available if such research is conducted within Sri Lanka through an institution established for research purposes. Listing on the Stock Exchange receives an important incentive. 1% of the value of the Initial Public Offer or the actual expenditure incurred, whichever is less, will be allowed as a deductible expense.

The expenses incurred for foreign traveling will be allowed for tax deduction if it is incurred in production of income subject to a maximum limit of 2% of the previous year’s statutory income.

Liberalization of Exchange Control The liberalization of exchange control should help in attracting more foreign investments but not from large investors who lack confidence in the government but from small foreign investors and from Lankans abroad. There are many Lankans abroad who would bring in their money to take advantage of the higher interest rates prevailing here if they were sure that they could freely repatriate their holdings. Unless the rules allow this they will not bring in their foreign exchange. If there is no discrimination between locally registered companies, be they foreign owned or locally owned, there will be many foreign investors who will bring in their money. Several laws have to be amended and not only the Exchange Control Act for there are restrictions in the Company Law, the Banking Act and the BOI Law. Lankans abroad should be treated in the same way as locally resident Lankans.

The concessions given to the SME sector are a very important feature of this budget. The SME sector represents over 70% of the economy and it is preposterous to talk of growth while ignoring this sector. There is much entrepreneurial talent displayed by this sector which can be harnessed if funded.

Control Inflation The budget deficit can be funded from domestic or foreign borrowings. What is harmful and causes inflation is the creating of new money through borrowings from the banking system. The budget hopes to limit such bank borrowings to Rs.42 billion. But this doesn’t take into account the new money created by the CB to maintain the overvalued rupee. Inflation is the public enemy number one.


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Sunday Times – November 28, 2010

Budget 2011- Export-oriented economic growth perspective By Professor Sirimevan Colombage, Open University of Sri Lanka A major hindrance to economic growth in Sri Lanka is the lack of dynamism in the export sector, in contrast to the fast growing East Asian economies. The country’s export growth fell from 11 % in 2007 to 6 % in 2008 and to a negative 13 % in 2009. Although export earnings rose by 10 % in the first eight months of this year, the export sector is yet to recover from the downfall. Apart from the adverse effects of the global recession, there are many reasons that originated from the local conditions for the export setback. Global Competitiveness The failure of domestic industry to meet global competition is a major counteracting factor. According to the latest Global Competitiveness Report published by the World Economic Forum, Sri Lanka is ranked in the 67th position in 2010 reflecting an improvement from the 79th position in 2009. Although this is a noteworthy achievement, it needs to be recognized that several countries in the South and East Asian regions are ranked ahead of Sri Lanka. Malaysia (26), Thailand (43), India (56) and Vietnam (64) are a few examples. A country’s competitiveness depends on a multitude of factors including robustness of institutions, infrastructure, macroeconomic environment, health and education, market efficiency, financial market development, technological readiness and market size. These factors are critical in competing with the rest of the world, and boosting exports. For a country like Sri Lanka, stronger global competitiveness is more important, as it is mainly through export growth that the country could achieve a higher economic growth path. It is in this context that I would like to review the Budget 2011 in this column. Tax concessions for industries and exports It is encouraging to note that the Budget has recognized the need to be more productive and competitive in export and import activities. For this purpose, the Budget has offered a few tax and import duty concessions for value-added export ventures. This includes exemption of value added exports from a proposed CESS imposed on all raw and semi processed exports. Import duties and taxes on machinery, equipment and raw material are to be reduced. Several income tax reductions have been proposed for manufacturing and export enterprises. Machinery and equipment to manufacture textile, leather, footwear and bags are to be exempted from import duties and VAT. Improvement of productivity by 5-6 % in the ‘development decade’ is recognized as a key goal of the government in the Budget. Provision of training of selected youth and assistance to the SMEs are two major steps. It is also proposed to encourage enterprises to undertake Research and Development, registration of patent, trademarks and designs, automation through technology and training of workers. R&D is expected to be improved through certain incentives offered. It is also proposed to relax administrative procedures to encourage partnerships between Government and private sector research centres to undertake R&D initiatives. Certain proposals are laid down to strengthen the secondary and tertiary education sector so as to uplift the country’s human resources capabilities. The budget proposals


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pertaining to the investment climate include restructuring of BOI investments and simplification of foreign exchange and trade control arrangements. Outward-oriented approach lacking in Budget Speech Although the above proposals would have a positive impact on the country’s production capacity and competitiveness, the big question is whether they are sufficient to effectively address the problems in an ailing economy. As claimed in the Budget Speech, we may remain complacent about doubling of our per capita income during the past five years or so to the present level of around $ 2,000. But the picture is not that rosy if we compare ours with the per capita income levels of South East Asian countries such as Singapore (over $40,000), Malaysia (over $13,000) or Thailand (over $4,000). Given the low capital-output ratio and the resource constraints, Sri Lanka will find it extremely difficult to attain such high income levels in the coming years. Drastic policy reforms are needed to accelerate economic growth so as to uplift the per capita income level. The country’s economic growth heavily relies on the performance of the export sector. Having liberalized the economy three decades ago, we have failed to effectively face global competitiveness, and to boost our exports. In the context of the extremely competitive global market, Sri Lanka needs a quantum leap to transform the export sector. The current Budget lacks a coherent policy to make such a radical trasnformation. The tax concessions proposed in the Budget to promote value-added exports are not sufficient to diversify the export sector, which still depends on the manufacturing of garments and a few other primary products. No policy strategy is articulated in the Budget Speech to promote high-tech manufactured exports, which are essential to make a meaningful positive impact on the export sector and GDP growth. Specifically, there should have been a special effort to attract Foreign Direct Investment (FDI) which amounts to less than 2 % of GDP at present. Drastic improvements in the climate investment are needed to attract FDIs. Apart from a few marginal proposals with regard to BOI investment pledges, there is no systematic strategy in the Budget Speech to improve the investment climate so as to foster FDIs. Another vital factor that is neglected in the current policy stance is exchange rate flexibility. The exchange rate has not depreciated enough to compensate for domestic inflation in recent years. According to the Central Bank, the Real Effective Exchang Rate (REER), which is the exchange rate adjusted for the differential of domestic and foreign inflation rates, rose from 100 in the base year 2006 to 122 by August this year. This means that the rupee is overvalued by about 22 % reflecting an erosion of export competitiveness. Thus, the export sector, which is already suffering from low productivity and inadequate FDIs, is further hit by the exchange rate overvaluation. There is no mention in the Budget Speech of how this problem is going to be addressed. A visible improvement is needed not only in economic dimensions such as macroeconomic stability, infrastructure, financial facilities and exchange rate flexibility but also in the spheres of good governance, transparency and institutions. Foreign investors would continue to shy away if such improvements do not take place in the foreseeable future. Domestic investors are also discouraged. Therefore, drastic and consistent policy reforms, rather than the ad hoc tax and duty concessions proposed in the Budget Speech, are imperative to revitalize the export sector and to accelerate economic growth.


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Tourism



Tourism industry confident of targets Set to become a three billion dollar industry: Charumini de Silva The Tourist Hotels Association of Sri Lanka, the apex body of the Sri Lankan hotel Industry has extended its heartiest and warmest congratulations to President Mahinda Rajapaksa on the occasion of the swearing-in for a second term of Presidency.

The country is in a strategic position to capitalize on peace dividends and could experience a golden era with the expected boom in tourism, Tourist Hotels Association of Sri Lanka (THASL) President Anura Lokuhetti said. Sri Lanka's tourism industry is moving in the right direction sustaining the growth momentum.

Anura Lokuhetti

The industry which did not have long spells of growth due to terrorism is recording an increased number of tourist arrivals at present. This signifies the importance of stabilize country and conducive environment, Lokuhetti who is a veteran in the hotel industry for the last three decades said.

The tourism industry was considered as one of the most lucrative businesses prior to 1983 and became an ailing industry due to terrorist activities, which shocked the whole nation and created a major impact to the development of tourism in Sri Lanka. However, irrespective of this adverse situation the industry captains, without getting discouraged, continued to invest in tourism industry. "We are grateful to President Mahinda Rajapaksa for achieving peace and taking the country forward with the development drive. The industrialists hope that the tourism industry will be the major foreign exchange earner in the country. We are extremely grateful for those unsung heroes. The resilient attitude of those who were involved in the industry helped to sustain this industry for us to be happy today and to dream about a great future in tourism of Sri Lanka," he said. The industry is confident that the target of 2.5 million tourist arrivals could be achieved by 2016 and tourism industry will become a three billion dollar industry. The industry expects to generate 200,000 direct employments while creating 600,000 indirect employments. Sri Lanka is blessed with all the necessary ingredients to attract tourists and the peaceful environment is a plus point. We in the tourism industry are glad that the Government has identified tourism as a thrust industry and this will favourably impact the growth. Compared to the tourist arrivals of last year, this years tourist arrivals has already shown a growth of more than 40 percent and is expected to record over 50 percent growth by end of this year, he said.

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Looking at the responses received from participants at the recently concluded World Travel Market (WTM) it is encouraging and we are confident that the country's tourism industry will continue its growth in a significant manner. We could expect more than 700,000 tourists in the next calendar year.

Tourists in Sigiriya

The expected influx could be accommodated with the current room capacity. However, we need to increase room capacity targeting the 2.5 million tourist arrivals by the year 2016. The country needs 15,000 additional room capacities to cater to the increasing number of visitors. It is important to refurbish the existing hotels and modernize them to be competitive with the regional markets such as Thailand and Malaysia.

The industry is confident that the target of 2.5 million tourist arrivals could be achieved by 2016.

Lokuhetti said people who are involved in the tourism industry are waiting to have a good year to make some profit so that they can re-invest the money by refurbishing the hotels to be competitive in the industry. More investors are needed to invest in this sector to meet up with the room demand in keeping with the required number of rooms. "I am confident that all the industry leaders are very enthusiastic and are very capable of building the required number of rooms with the necessary support and guidance from the current Government. We are very happy after long years we have got a good team including a very efficient Minister supported by an efficient group of people to achieve the President's target of receiving 2.5 million tourists by 2016," he said. To fast track the development of tourism industry, the easier approach would be to attract international brands to come and invest in Sri Lanka in strategic locations. We are very pleased to note that Shangri La Group had already agreed to set up an up-market hotel in Colombo. I am certain with such brands coming to Sri Lanka will help to improve the image of the country and I strongly suggest when developing new hotels, it is crucial that new tourism zones should be declared. In view of the strategic importance of the locations, it is important to decide on the quality of the hotels to be built on such locations. When building hotels, I recommend that only five star hotels, four star hotels and three star hotels should be built within those identified new tourism zones to maintain the quality and standards. All other developments in such areas must be done in relation to the tourism. Any haphazard developments could have long lasting adverse effects, which could be detrimental to the growth of tourism in Sri Lanka. With the increased interest in the tourism industry, one of the major problems that would be faced is to find the required trained employees for the industry. Considering the expected arrivals by 2016, we can project a requirement of a minimum of additional 200,000 trained employees. This will become a major task unless we take adequate measures without any further delays. However, when we look back on the achievements of the Government in eradicating terrorism, achieving the President's vision of receiving 2.5 million tourist arrivals by 2016 will not be a difficult task," Lokuhetti said.

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Exports & Imports



Pakistan mulls export credit line Sanjeevi Jayasuriya *Pakistan - Sri Lanka Investment Bank mooted *Joint venture agreements during President’s visit Sri Lanka and Pakistan have strong ties in trade and investment. The two countries have benefited from the close economic relationship and will be entering into a new phase in development, Pakistan State Minister and Board of Investment Chairman Saleem Mandviwala told Daily News Business. Trade volumes between Sri Lanka and Pakistan have been growing continuously and this year trade reached around US $ 300 to 400 million in terms of value. However, the entire Free Trade Agreement (FTA) between Sri Lanka and Pakistan is not implemented, Mandviwala said. “We expect that the FTA between the two countries will be promoted and approved with the Budget presented today. The ratification of the FTA will further increase trade volumes and this will be of mutual benefit”.

Saleem Mandviwala

Picture by Saliya Rupasinghe

Pakistan is looking at cement plants, sugar, textile, banking and dairy as possible investment options in Sri Lanka. The investment value will be vary from sector to sector. However, investors still have not quantified the potential investment flow to the country,” he said. There is the possibility of signing joint venture agreements with the scheduled visit of the Pakistan President Asif Ali Zardari later this month. Pakistan is looking at the possibility of extending an export credit line to Sri Lanka to import the necessary plants. There has been a dialogue with the Board of Investment and more delegation and interaction is needed both from Sri Lanka and Pakistan, he said. “We are keen to do business in Sri Lanka. We extend support in the country’s economic development and defence. This would be a win-win situation for both of us,” he said. We are also exploring opportunities to set up a Sri Lanka Pakistan Investment Bank. We will be reaching a comprehensive economic agreement in the near future, Mandviwala said. The FTA between Sri Lanka and Pakistan was signed in 2002 and became operational in 2005. Pakistan held a single country exhibition in 2008 showcasing textile, leather products, surgical and hospital equipment, chemicals and cosmetics and the next exhibition will be conducted shortly.

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Sri Lankan gems glitter at Beijing Show The Sri Lanka Embassy in Beijing together with the National Gem and Jewellery Authority and the Gem and Jewellery Association organized a Sri Lanka Pavilion at the 11th International Gem and Jewellery Fair 2010 from November 11 to 15 at the China International Exhibition Centre in Beijing. With the participation of 34 exhibitors, Sri Lanka made its biggest presence ever in China showcasing an array of gems and jewellery in an attractive 'Sri Lanka Pavilion'. The organizers accorded a special recognition to Sri Lanka participation by inviting Ambassador Karunathilaka Amunugama as a special guest at the Opening Ceremony. With 42,000 square meters of floor space, 2,100 booths, with 961 enterprises participating, the 2010 fair became the largest and highest-level fair hosted in Beijing. During the past ten years, the jewellery fair has grown from a domestic jewellery exhibition of up to 100 booths to today's large scale expo, becoming the best platform for brand promotion, information exchange, commerce negotiation, new product releases and cultural communication in the jewellery industry in China. In this truly international fair countries including Sri Lanka, Belgium, Thailand,, Germany, Brazil, India, France, Switzerland, the International Coloured Gemstone Association (ICA) group and others showcased the best collection in the international section of the fair.

Domestic demands The steady growing domestic demands and prosperity of international trade market bring along the fast development of China gem and jewellery industry. China, at the same time of keeping its position as a large manufacturer and exporter of gem and jewellery products, is gradually growing to be a major consumption market of gem and jewellery products. Despite the economic challenges last year, China's jewellery consumer market performed well. Analysts estimate that China's domestic jewellery consumption this year will grow by 16 percent, making China an oasis of global jewellery sales. In recent years, China's economy has been growing at a high speed, the improvement of per capita consumption level brings along the production and consumption of luxuries including gem and jewellery which is becoming the third consumption commodity just following housing and automobiles. Judging from the consumption demands, it can be seen that gem and jewellery products rely mainly on the three sources of demands to pull the consumption increase, which include wedding celebration, daily consumption and inbound foreign tourists. From the viewpoint of industrial development environment, the Chinese Government has continually perfected the industrial development environment to encourage and expand the domestic gem and jewellery industry. Judged from the saturation of market, the rural regions of China have a great potential for gem and jewellery consumption besides the enormous growth space on the consumption level retained by urban residents.

Factoring reasons In naming a few reasons factoring in for Chinese gems and jewellery industry to maintain its growth: firstly, jewellery is traditionally a luxury item of consumption and demand for jewellery is highly elastic to income. As China's per capita disposable income rises, jewellery has emerged as a highly sought after item of consumption. Secondly, the appeal for jewellery is the highest among younger consumer sections. China's young working age population is quite high. There is also a large demand from the matrimonial market. Every year, about 18 - 22 million people in China get married. Total annual wedding expenses in


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China are estimated at RMB 300 billion. Even if one-tenth of that is used for jewellery consumption, the figure is an enormous RMB 30 billion (about US $ 3.1 billion). The younger consumer section is also fashion-conscious, and the rate of design obsolescence is fast, thereby helping innovation and sales. The high growth of diamond and platinum jewellery witnessed in the Chinese market after the initial rush for gold in the 1980s can be attributed to the desire for new and trendy ornaments among the younger consumers. According to consumer research of Diamond Trading Company (DTC), three out of four brides in Beijing and Shanghai expect their husbands to buy them diamond wedding rings. Wedding rings account for one-third of all diamond sales in China.

Embassy goal The Embassy goal is to divert this demand to coloured stones so that in future the matrimonial market will mainly focus on coloured stones especially the Sapphires coming from the Sapphire Capital of the world, Sri Lanka. Then the foreign tourist arrivals in China are also one of the major categories adding to the ever increasing jewellery demand. Every year over 30 million travellers from all around the world visit China, and it has been estimated that their annual spending on Chinese jewellery is over RMB 15 billion. Due to a combination of all these factors, it is predicted by industry sources that by 2010, China's jewellery consumption at the existing rate of growth, will exceed US $ 35 billion, making China the second largest consumer nation in the world. Considering all these factors the Embassy embarked on a prolific and rewarding expedition by bringing in the gem and jewellery trade authorities of China to have a closer cooperation with the Sri Lanka Embassy, and the counterpart Sri Lankan Associations and the National Gem and Jewellery Association (NGJA). During the visit to Sri Lanka, in 2008 the Gem and Jewellery Association of Sri Lanka signed a MoU with the Gem and Jewellery Trade Association of China (GAC), the national association for the industry, approved by the People's Republic of China the Civil Affairs Ministry for increased cooperation towards mutual growth and for the promotion of gem and jewellery trade between the two countries.

Concessions The Embassy was able to make use of its good relations with GAC to obtain concessions to a greater extent for Sri Lanka participation at Gem and Jewellery Fairs organized by the Gem and Jewellery Trade Association of China (GAC), firstly at the Shanghai Jewellery Fair 2010 then at Shenyang Jewellery Show and the latest at the China International Jewellery Fair in Beijing thus providing greater opportunities for the industry to join under one Sri Lanka Pavilion. During the Beijing show, the Sri Lanka gemstones, Cats Eye Ruby and Sapphire showcased by Sri Lanka became a main attraction and this trend was well noticeable at almost every fair Sri Lanka participated bringing in results beyond expectations. It had thus created a positive attitude about the Chinese market among the Sri Lankan gem and jewellery entrepreneurs. Further to the Beijing Show in November 2010 Sri Lanka will be showcasing its gems and Jewellery at the Shanghai International Gem and Jewellery Fair from today to November 28 with 30 exhibitors, Shanghai Holiday Luxury Fair from November 19-22 with 10 Exhibitors and also at the Yiwu Gem fair. The participation at these fairs are organized by the Embassy, together with the National Gem and jewellery Authority and with the support of the Shanghai Sri Lanka Consulate. During 2010 to date the Sri Lankan Embassy organized Sri Lanka participation at more than 15 Fairs across China including Beijing, Shanghai, Dalian, Shenzhen, Chongchin, Hangzhou, Tianjin, Nanning, Chengdu and Kunming


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capturing the attentiveness and the interest of the Chinese Luxury Consumers to the best coloured stones of the world.

Joint effort The joint effort of the Beijing Embassy, Shanghai and Chengdu Sri Lanka Consulates, the NGJA and the Gem and Jewellery Association of Sri Lanka to reach out to the Chinese consumers on gem and jewellery products of Sri Lanka through media events, trade fairs and through chain stores, is gradually paying off as Chinese consumers, especially the ones in large cities have come to know and even have fallen totally for the coloured stones (gems) for its delicate style and quality and the consumption is now undergoing a healthy development in China. During the Beijing show, the Embassy arranged a series of discussions with the organizers for the officials of National Gem and Jewellery Authority and the Gem and Jewellery Association who visited China along with the exhibitors and they met officials of the Gem and Jewellery Trade Association of China to create new avenues to exchange market expertise in jewellery design, and training.


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Stock Market



Market awaits direction The market gained 92.58 points at the closing of the three days week. However, southwards dip persisted during the week and the market witnessed lowest levels since September ‘10. ASPI was down by 0.53 percent over last week to end at 6565 while Milanka declined by 42.52 points to close at 7115.43.

The cumulative market turnover for the three day week was at Rs.5.46 billion with an improved average of Rs.1.82 billion over the preceding week’s average of Rs.0.87 billion. Turnover rise was due to strategic acquisition of 3 percent stake in Aitkens by Distilleries. Market Capitalization was recorded at Rs 2172.92 billion as against Rs.2,184.50 billion of the earlier week.

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Diversified sector dominated the market turnover with nearly 50 percent share and a gain of 10.61 points with the sector index closing at 2259.9. Aitken Spence, JKH and Hemas Holdings were the counters that added to the diversified

sector, Banking, Finance and Insurance followed the turnover statistics at 16.47 percent and Hotels and Travels at 14.16 percent. Sampath and HNB added to the Banking sector while Hotels and Travels were supported by Hotel Services and Keells Hotels.

The Colombo stock exchange

Aitken Spence contributed nearly 40 percent to the market turnover with Rs.2.15 billion and 11.96 million shares. Hotel Services was another major that added 11 percent amounting to Rs.601.88 million to the turnover with share volumes of 23.6 million. Sampath and JKH contributed Rs.327.75 million and Rs.299.6 million respectively to the turnover.

Point of view

The activity levels though suppressed during the week were strengthened towards the closing with investor interest in selected stocks. The market is waiting for directions with the policy reforms to be tabled through the budget at the beginning of the ensuing week.

The most traded scrip during the week was Hotel Services with 23.6 million shares to close at Rs.26. SMB Leasing, Piramal Glass and Spence were other heavily traded stocks with volumes of 22.89 million, 14.6 million and 11.96 million shares. There was heavy selling by foreign investors during the week with aggregate purchases of Rs.615 million as against sales of Rs.2.62 billion. SMB Leasing (non voting) was the week’s top gainer with 12.5 percent price rise and the counter closed at Rs.0.90. Mercantile Shipping and Hapugastenne were other major gainers that closed at Rs.212.50 and Rs.57 with the gain of 12.32 percent and 11.55 percent respectively. E B Creasy at Rs.931.30 was the major loser for the week which was down by 15.34 percent. The other major losers were Vidullanka, Blue Diamonds (NV) and Huejay losing value by 10.45 percent and 10 percent each.


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Bourse gains slightly, turnover improves The Colombo bourse closed marginally up yesterday on a turnover of Rs.2.45 billion, up from the previous day’s Rs.1.2 billion, with JKH, Cargills, Commercial Bank and Dockyard contributing the bulk of business volumes.

The All Share Price Index was up 7.93 points (0.12%) while the Milanka gained 18.79 points (0.27%) with 74 gainers ahead of 67 losers.

"Volumes were very much better than what we had seen earlier this week," Prashan Fernando of Acuity Stockbrokers said. "The All Share Price Index was up about 40 points in the morning but came down at the close of business with a little bit of institutional selling, both foreign and local, seen."

JKH was the day’s biggest turnover generator with a little over 2 million shares done between Rs.295.10 and Rs.299 losing 30 cents to close at Rs.295.10 generating a turnover of Rs.672.1 million.

Cargills also saw over 2 million shares done between Rs.193 and Rs.197 gaining 50 cents to close at Rs.195 while Commercial Bank was up Rs.4 on over 1.1 million shares done between Rs.270 and Rs.275 gaining Rs.4 to close at Rs.273.50.

Most of the JKH shares traded were done at Rs.300 with a big parcel of 2 million shares and a smaller one of 0.2 million shares concluded at that price, brokers said.

Cargills too saw a one million share done at Rs.195 while the larger quantities of Commercial Bank were done at Rs.274.

Dockyard saw a million shares crossed at Rs.492 with Sampath Bank and HNB also showing volume and slight price gains – Sampath up 20 cents to close at Rs.265 on nearly 0.3 million shares and HNB up 10 cents to close at Rs.400 on nearly 0.2 million sharks.

Retail interest was focused on Seylan Merchant Bank, both voting and non-voting, with 35 million voting shares done between Rs.1.20 and Rs.1.50 gaining 20 cents to close at Rs.1.40 while 43.1 million non-voting shares were also done gaining 10 cents to close at 90 cents trading between 80 cents and a rupee.

CIC also generated some interest seeing nearly 0.3 million shares traded between Rs.135 and Rs.136.10 gaining a rupee to close at Rs.135.

Overseas Realty saw nearly 281.2 million new shares issued through a one for two rights issue listed yesterday while Bukit Darah and Carsons announced that new shares issued by capitalization of reserves in the proportion of one for fifty will be allotted on December 23.

Bukit Darah and Carsons will also have EGMs on December 17 to obtain shareholder approval for sub-division of their shares with the new shares commencing trading on December 24.



Turnover Rs.1.4 bn., indices down Hydro Power Free Lanka up 50% on opening day

The Colombo bourse was unable to sustain Wednesday’s gains and declined sharply despite a turnover of Rs.1.44 billion, down from the previous day’s Rs.2.45 billion, thanks partly to Hydro Power Free Lanka (HPFL) shares beginning to trade.

The All Share Price Index was down 48.80 points (0.76%) while the Milanka lost 54.13 points (77%) with 33 gainers trailing 116 losers.

The market, however, was up in early trading with the ASPI up about 40 points over the previous close but began to slide thereafter with brokers saying that credit given to market players required to liquid debt granted by broking houses by year-end was part of the issue.

HPFL saw as many as 22.2 million shares traded, up Rs.5.70 from the issue price of Rs.10, generating the day’s top turnover of Rs.343.3 million with the counter trading between Rs.15 and Rs.16 and closing at Rs.15.70.

Brokers said that the bulk of the shares issued on the IPO had been traded yesterday. Several stock market punters applied for all the shares on offer on the basis of bank guarantees costing them Rs.350,000 rather than cash upfront.

"Given that the share moved up more than 50 per cent from the issue price, they covered their investment," a broker said.

There was heavy trading in Royal Ceramics which was up Rs.15.90 to close at Rs.304.90 on 0.7 million shares done between Rs.290 and Rs.319.

Brokers said that the surge in the price of the share was on rumours of a bonus issue which was announced during the day – one for one by way of capitalization of reserves subject to shareholder and regulatory approval.

"The share surged from the previous day’s closing price of Rs.290 to Rs.319 and then came down to around Rs.305 after the formal announcement by the company," a broker said.

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There was interest in Commercial Bank too with over 0.5 million shares done between Rs.270 and Rs.275 with the counter losing Rs.3 to close at Rs.272.90 generating a turnover of Rs.143.5 million behind HPFL and Royal Ceramics which saw a turnover of Rs.214.6 million.

Interest in Seylan Merchant Bank (now SMB Leasing) continued with nearly 53.4 million shares traded between Rs.1.30 and Rs.1.50 gaining 20 cents to close at Rs.1.50.

JKH was down 50 cents to Rs.194 on over 0.1 million shares while Dialog (nearly 2 million shares) and Seylan Merchant Bank X (over 24.6 million shares) closed flat at Rs.11.90 and 90 cents respectively.

CIC held its Rs.136.10 price on nearly 0.2 million shares traded between Rs.136 and Rs.136.10 while Sampath, LOLC, Browns, Asian Hotels and DFCC were among the blue chip losers.

On’ally Holdings announced an interim dividend of Rs.1.10 per share for 2010/11 XD from December 6 and payment on December 13.

The Royal Ceramics announcement said that it would capitalize its revaluation and revenue reserves for the one for one bonus issue valued at Rs.10 per share.


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Business



President to present relief and development oriented Budget: Chambers seek simple tax formula From the Business Desk President Mahinda Rajapaksa who is also the Finance Minister will present a relief and development oriented budget today. The Daily News Business spoke to several Chamber leaders representing different industries to find out what they expect from the budget. The National Chamber of Commerce President Lal de Alwis said they have proposed to take into consideration the significance of agriculture in the country's economy and to make agriculture undertakings free of income tax for a further period of a minimum of five years.

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The Chamber also proposes to remove import duty of hybrid maize seeds, soya bean seeds, sunflower seeds and palm oil seeds used as planting material when such planting materials are not locally available in sufficient quantities. "We request the Government to provide low interest loans through the Central Bank to manufacture specific packing material locally for fruits and vegetables to minimize losses," he said.

Lal de Alwis

The Chamber proposes to simplify the tax system by reducing the number of taxes and adopting simple calculation methods that could be understood by the average citizen.

National Chamber of Exporters of Sri Lanka President Sarath de Silva said the Government needs to extend the fertilizer subsidy to vegetable, fruits and other crop cultivations. "We request the authorities to remove existing barriers to use these lands for cultivation purposes. We need to remove all barriers that hamper the potential of local investors while giving them due recognition and prioritizing local investments in the future," he said. "We have also requested from the authorities to remove the high electricity tariffs,

which is an impediment for the local exporters when they compete with international players engaged in manufacturing rubber, tyre, ceramic and other products," he said. "Public banks need to take high equity in local agro products, as the country needs to become an agro economic country to get the fullest advantages in the agricultural industry".

Sarath de Silva

Ceylon National Chamber of Industries CNCI Chairman Sunil Liyanage said they expect mainly macro economic and fiscal policies for economic development from this budget. He expects new policies will be introduced towards this end and make them consistent for the next five years. "Then only long-term investors specially industrialists will be able to get their return on investment," he said. He said CNCI likes to see policies and tariff taxation remaining for five years and not for one year. Multiplicity of taxation was also expected as the present tax system is highly complicated. He hoped proposals made by the CNCI will be implemented. Sectorial development with technology, R and D was another expectation of the CNCI.

Sunil Liyanage


Joint Apparel Association Forum Secretary General Rohan Masakorala said measures that would eliminate delays and unwanted systems was needed. The laws should be supportive and need to increase efficiency. The laws should encourage Sri Lanka to achieve as a hub in the region. The implementation of e- commerce, a better tax structure and the five-year comprehensive plan are important in this regard. Proper reforms and modernizations are necessary if the country to become a high-end apparel destination. The shipping sector in the country is progressing well. However, the sector too needs reforms in Customs and port procedures. The Government needs to focus on human capital investment. More attention is needed on training and developing a human resource pool to deliver results, he said.

Chamber of Construction Industry Sri Lanka President Surath Wickramasinghe said the construction industry should have accessibility to funds. There is a need for an infrastructure fund. The industrialists need to be given BOI concessions. These concessions should be given to both local and foreign investors who are willing to invest around US $ 10 million. Measures should be taken to stimulate the stalled property development projects and special incentives to facilitate the disposal of apartments. "The payment of single service levy by the investor needs be considered. Research and development should be made an allowable expense. The tax incentives should not be withdrawn until a mega project is completed, he said.

Madu Ratnayake

SLASSCOM General Secretary Madu Ratnayake said the Government needs to pay more attention on brand building in the IT and BPO industry to reap economic benefits whilst achieving due recognition for the industry. Priority should be given to expand the capacity building in the IT and BPO industry giving concessions, financial assistance and expertise to universities and relevant educational institutions to initiate relevant programs and projects to make this objective a success. "An appropriate tax regime should also be introduced for the IT and BPO industry to be more competitive in the international IT and BPO industry," Ratanayake said.

Vidyani

Hettigoda Women's Chamber of Industries and Commerce (WCIC) Chairperson Vidyani Hettigoda said that they expect the budget would be encouraging and supportive especially to develop business and promote industries where women entrepreneurs are involved. "We hope this year's budget would create more business leading women in Sri Lanka. Women entrepreneurs play a key role in contributing immensely to the country's economy," she said. At present the majority of the population in Sri Lanka are women. Therefore, we believe and trust that this budget will support and encourage women starting business from micro level. Tourist Hotels Association of Sri Lanka (THASL) President Anura Lokuhetti said President Mahinda Rajapaksa has identified tourism industry as a major thrust industry for the development of economic activities of Sri Lanka. "We are optimistic that the Government will introduce uniform track systems for the betterment of the industry.

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The hoteliers expect this budget will at least introduce some major tax incentives to attract more investments to build 15,000 additional rooms to achieve 2.5 million tourist arrivals by 2016," he said. In achieving 2.5 million tourist arrivals, foreign exchange revenue will accomplish around US $ three billion while creating 200,000 direct employment. "The World Travel Mart in London was a clear indication for a major growth in tourist arrivals in the current winter period", Lokuhetti said.

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The Leather Advisory Council will be looking forward in further reduction of taxes

and the results of the taxation commission after the budget, Leather Footwear Advisory Council Chairman Rangith Hettiarachchysaid. "The industry should improve in terms of competitiveness to meet the standards of the export market.

Anura Lokuhetti

There should be an improvement in the technical knowledge, product development and creation of various avenues for the private sector to deliver a higher productivity," Hettiarachchy said. The Gem and Jewellery industry is anticipating duty waivers or reduction for importation of tools, machinery and equipments for the lapidary and manufacturing industry, Sri Lanka Gem and Jewellery Association Secretary Ziqufi Ismail said. He said several proposals have been submitted to the Government for consideration which he hoped will be considered favourably at the budget. “We have proposed to consider the renewal of NBT while liberalizing trade on import and export of gem trade. We have also requested the Government to liberalize the foreign exchange policy for the import of raw materials to cut and polish gemstones and rough gems,” Ismail said. Spices and Allied Products Producers’ and Traders’ Association Chairman Christopher Fernando said the action need to be taken to stop pilfering of agriculture products and for a subsidy scheme for re-planting and new plantings.

Rangith

Hettiarachchy

It is important to provide financial assistance for the producers and exporters to encourage them to perform well. “The industry needs longer tax holidays, investment relief and an attractive subsidy scheme to ensure low cost of production. They request to re-activate the export rewards scheme for the benefit for the industrialists,” he said. “The cess imposed on importation of export oriented raw material, machinery and equipment should be withdrawn. These will help the spice industry to be a major contributor in foreign exchange generation,” he said.

Ziqufi Ismail



Adding colour to brand Sri Lanka Rohantha N.A. Athukorala If one googled brand Sri Lanka, the reports one sees is not that encouraging. The googled information that surfaced in March 2009 were the bombings in the Vanni and the alleged civilian casualties, the human shields that were been used by the LTTE, political instability in the country, the downturn of business in the private sector, the continuous fall of the stock market, the ballooning budget deficit that was at double digit and the fear psychosis that was gripping the city that resulted in the low tourist arrival into the country. Things were pretty negative at that time. Today in November 2010, if one googled Sri Lanka, the data we see on our computer screen is different. The ratification of the Free Trade Agreement with Asia Pacific, a bid to host the 2018 Commonwealth Games, Indian star Vivek Oberoi doing a film in Sri Lanka, The stock market ranked as the best in the world, American business delegation discussing business, weekly conferences by almost all Chartered Associations attracting the cream of talent like the great Sally Darwie of the British Olympic bid team, Over subscribed bond issue of the Central Bank, Many companies wanting to launch IPOs and to cap it private sector profits growing by 284 percent whilst tourism arrivals booming to an all time high.

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While these can be the positive reports emanating just like any country in the world be it China, India, Thailand, South Africa, Vietnam or Russia there is bound to be some negative reports. In case of Sri Lanka the googled information pieces are agitation by University students, opposition crying out on the emerging dictatorial rule, the fall in trade pacts such as GSP+ due to human rights issues. In my view this is what adds colour to brand Sri Lanka even though it can be unpleasant in reality. On the other hand if one were to google Sri Lanka on December 31, 2011 (end of next year) what will we like to see. The following can be some of that data that should be showcased.

The Google map of Sri

Lanka

Doing business - top 50 country

We must see reports where Sri Lanka is ranked as a top 50 country on the ‘Doing Business Index’ from the current 105th position. We must get strong ranking on attributes like Paying Taxes from the current 62 payments per year to just one payment just like Malaysia. The total tax as a percentage of the revenue from the current staggering 64 percent to a equtable level that is acceptable to an investor. The ranking on enforcing of contracts from the current 1,318 days to around 321 as it is in Luxemburg, Time taken to register a property from 83 days to two days like in Saudi Arabia. Getting construction permits from the current 214 days to 67 days that is taken in China. If these strategic reforms are not done and announced to the world we will not be able to attract the global companies to invest in Sri Lanka even after the hard won war from the LTTE is my view.

Lending rates - hotels biase The cost of finance must be at a competitive rate to the Hospitality industry so that even with a Average Room Rate (ARR) at 150 dollars from the current 82, so that a typical investment can be financially


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attractive. As at now constructing a five star room ranges around 18 to 20 million rupees and unless the ARR are at around two hundred and fifty dollars the return will not be attractive on a time scale of 8 to 10 years. The logic being by 2015 we must target fifteen percent of the countries employment levels to be consumed by this industry. This will enable the country to achieve a zero poverty level. This is the kind of data that I would like to see by end December 2011 when I google Sri Lanka. There must be a report that Sri Lanka’s Exports industry has crossed a ten billion dollar barrier. The focused industries that may be featured might be the software sector, tea, apparel and rubber just to name a few. Whilst focusing on the SME sector, for a quick win large organizations will have to be targeted for support so that we cross the magical mark. Which means that the googled data will have interviews of the industry captains to give credibility to brand Sri Lanka.

Atchuveli - a reality By end of December 2011 there has to be something very significant from an economic sense in Jaffna. The Atchuweli Industrial Zone being featured will propel the overall attitude to business in the conflict driven marginalized business sector of Jaffna for a typical viewer. This must not be confined to the four Apparel companies but also targeting the 43 SMEs who want to enter the main stream business of Sri Lanka. This will give a positive rub off to the diaspora that keeps attacking Sri Lanka.

PPP - infrastructure It will do a world of good if we can have some large conglomerates being featured on the news reports on a successful partnership with the government on infrastructure development. This could be the Kalpitya tourism development project on Waste management, Kuchchaveli or the Pasikudah hotel development projects where water systems are required to just name a few.

People ownership We have to accept that governments around the world have not been successful in driving business. We must ensure that at least the key industries such as LPG gas, Sri Lankan Airlines are up and running by end December 2011 so that we give the correct vibes globally when Sri Lanka is googled.

Tea - lease The first privatization asset of the country was the Plantations sector. A colossal Rs.1.5 billion loss making industry has been made viable by the strong leadership of the private sector. One of the key recommendations of the ten man committee appointed by the President in 2008 was to increase the lease period to cover two cycles of bush life and hence to 66 years. By 2011 December this recommendation must have hit the market place and it must be on all web sites around the world so that Sri Lanka is featured as a country that is serious on developing the agricultural sector which is linked to lower earning households of Sri Lanka.

SME’s - new policy Let’s accept that the backbone of Sri Lanka’s economy is the Small and Medium Enterprises (SMEs). It is paramount that we have the new SME policy activated by end 2011 so that we can unleash the true potential of the country. The good news is that the white paper is ready and if this can be firmed up and linked to the developmental agenda of the Industrial Estates so that Sri Lanka will be seen as a model country in the development drive of the SME sector. This will further strengthen the Mahinda Chintanaya Ediri Dekma is my view. In the recent past, many of us have been involved on forums in sketching out the ‘Hub status’ on different sectors.


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At least by end of next year it’s important that one of them takes shape in form or structure so that we visually demonstrate a key identity for a Sri Lanka. May be it can be the Naval hub with the development of the Hambanthota harbour.

APTA - link to the world Operationalizing the Asia Pacific Trade Agreement(APTA) by end of next year must be a high priority task so that it becomes the vehicle that tells the world that Sri Lanka is seen to bridging the linkages to the rest of the world. This can be a demonstratable action so that the rest such as EU can follow suit which will hit the global websites of the world. The above are only some of the initiatives that I am personally aware of that I believe must be on the computer screen when Sri Lanka is googled but in a macro sense. There can be many more relevant than the above. The idea is that we need to see real actions hitting the global market place than just press releases so that googling Sri Lanka becomes an experience. From the vibes I got from a cross section of countries at the ‘Dubai Conference’ it was very clear that Sri Lanka is taken seriously now. In fact I was proud to be Sri Lankan. Now the challenge is how we make this benefit the common man on the streets of Sri Lanka. (The thoughts expressed by the author are purely his own views and is not reflective of the office he holds in the public, private or the international civil service.)


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Agriculture



Helping farming communities to be sustainable

"I earned about Rs.503,200/- last year and this enabled me to open a fixed deposit at a bank, which is a huge strength to me and my family," says K.G. Douglas, a Vanilla farmer from Watekedeniya, Nawalapitya. "I have even donated a computer to a school in the area," he adds proudly, proving that the standard of living of vanilla farmers has improved tremendously as a result of John Keells’ ongoing sourcing initiative in the village.

Vanilla is just one of the many ongoing sustainable sourcing initiatives undertaken by the John Keells Group, the initiative has been recognized as a mechanism that not only helps develop a company’s supply chain and increase productivity, but also enhances customer-supplier relations and enables mutual growth.

The initiative consists of many projects such as Ceylon Cold Stores PLC’s ginger and vanilla out-grower programmes, dairy production and treacle project, Keells Foods Products PLC’s purchase guarantees of pork, chicken and assistance in the expansion of local, mechanized, de-boned meat, and JayKay Marketing Services (Pvt) Ltd’s sourcing of a variety of high and low country vegetables from farming families in Thambuttegama (North Central Province) and Nuwara Eliya (Central Province). With the farmers being the pivotal factor in these initiatives, the initiative not only increases their income but also facilitates technical assistance and vital access to markets.

The sustainable sourcing of ginger from local farmers was initiated by Ceylon Cold Stores PLC (CCS) about 8 years ago to facilitate the guaranteed purchase of ginger locally, while enabling the company to get better quality raw material. The initiative also helped to progressively eliminate the importing of ginger. Commencing in Hatharaliyadde and Poojapitiya, this initiative was later extended to areas such as Dawulugala, Danture and Ankumbura in the Kandy and Kurunegala Districts, based on its success. While 80 farmers were involved initially, the total farming community involved in the initiative at present amounts to around 250. While the company has about 80% of the market share in the country’s

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ginger beer market, entire ginger requirement for products such as Elephant House Ginger Beer and sliced dried ginger rhizome is now obtained from these farmers.

"I have earned Rs.612,541/- during the last year and also purchased a tractor which is immensely helpful to my work," says Susantha Premathilake, a successful ginger farmer from Poojapitiya, demonstrating the success of the initiative.

Vanilla is yet another sustainable sourcing product for CCS and the raw vanilla pods used for Elephant House vanilla ice creams are sourced entirely from local farmers. With CCS owning around 65% of the vanilla ice cream market at present, the project was primarily initiated to eliminate the need to import vanilla oleo resin which is used to manufacture the vanilla flavour, used in almost all CCS’s popular ice creams such as Vanilla, Fruit and Nut and Pani Cadju. Around 2500 farmers are involved in the project.

V. K.D.U. Kapurukotuwa, from Baddegama, is one of the many successful Vanilla farmers. "Not only did I earn an impressive amount during the last year, I have also bought 1 acre of land and planted cinnamon," he says – illustrating the success of the project.

Keells Foods Products PLC (KFP), which has about 60% of the market share for processed meat, and has been involved in successful sustainable sourcing initiatives for products such as pork and chicken, has introduced yet another initiative in September 2010. The project involves the sourcing of selected vegetables and the entire requirement of spices needed for products in the Krest range which is done through sustainable integrated farmer communities. Close to 142 farmers from several districts such as Matale, Kandy, Nuwara Eliya, Kurunegala and Kegalle are dedicated to supplying their produce to KFP, with the entire initiative being coordinated by a society set up under the Kandy Vanilla Growers Association.

KFP also continues its successful sustainable sourcing initiative of chicken. While the product is supplied by four main suppliers, 3500 farmer families are involved directly in the initiative while yet another 3000 families are involved indirectly. Having been involved in the pork industry for many years, KFP has also helped around 30 farmers develop better levels of farming, while the initiative has also improved the standard of living of the farmers tremendously. A stable purchase price for the produce is ensured despite the frequent market fluctuations, while the farmers are supported technically and financially to improve production.

JayKay Marketing Services (Pvt) Ltd’s (JMSL) sourcing of vegetables for Keells Supermarkets takes place solely through local farmers. The initiative began in August 2005, with the collection of vegetables taking place through a collection centre at Thambuttegama, with the assistance of the Mahaweli Authority, with a view of procuring products direct from the farmers. Over 35 farming families are involved in the initiative of cultivating a variety of low country vegetables. In order to handle the demand for upcountry and exotic vegetables and fruits, a second collection centre in Nuwara Eliya was also opened about 2 and half years ago.


Sunday Island – November 28, 2010

Vanilla and ginger growers earn big bucks

"I earned about Rs.503,200/- last year and this enabled me to open a fixed deposit at a bank, which is a huge strength to me and my family," says K.G. Douglas, a Vanilla farmer from Watekedeniya, Nawalapitya. "I have even donated a computer to a school in the area," he adds proudly, proving that the standard of living of vanilla farmers has improved tremendously as a result of John Keells' ongoing sourcing initiative in the village.

Vanilla is just one of the many ongoing sustainable sourcing initiatives undertaken by the John Keells Group, the initiative has been recognized as a mechanism that not only helps develop a company's supply chain and increase productivity, but also enhances customer-supplier relations and enables mutual growth.

The initiative consists of many projects such as Ceylon Cold Stores PLC's ginger and vanilla out-grower programmes, dairy production and treacle project, Keells Foods Products PLC's purchase guarantees of pork, chicken and assistance in the expansion of local, mechanized, de-boned meat, and JayKay Marketing Services (Pvt) Ltd's sourcing of a variety of high and low country vegetables from farming families in Thambuttegama (North Central Province) and Nuwara Eliya (Central Province). With the farmers being the pivotal factor in these initiatives, the initiative not only increases their income but also facilitates technical assistance and vital access to markets.

The sustainable sourcing of ginger from local farmers was initiated by Ceylon Cold Stores PLC (CCS) about 8 years ago to facilitate the guaranteed purchase of ginger locally, while enabling the company to get better quality raw material. The initiative also helped to progressively eliminate the importing of ginger. Commencing in Hatharaliyadde and Poojapitiya, this initiative was later extended to areas such as Dawulugala, Danture and Ankumbura in the Kandy and Kurunegala Districts, based on its success. While 80 farmers were involved initially, the total farming community involved in the initiative at present amounts to around 250. While the company has about 80% of the market share in the country's ginger beer market, entire ginger requirement for products such as Elephant House Ginger Beer and sliced dried ginger rhizome is now obtained from these farmers.

"I have earned Rs.612,541/- during the last year and also purchased a tractor which is immensely helpful to my work," says Susantha Premathilake, a successful ginger farmer from Poojapitiya, demonstrating the success of the initiative.

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Vanilla is yet another sustainable sourcing product for CCS and the raw vanilla pods used for Elephant House vanilla ice creams are sourced entirely from local farmers. With CCS owning around 65% of the vanilla ice cream market at present, the project was primarily initiated to eliminate the need to import vanilla oleo resin which is used to manufacture the vanilla flavour, used in almost all CCS's popular ice creams such as Vanilla, Fruit and Nut and Pani Cadju. Around 2500 farmers are involved in the project.

V. K.D.U. Kapurukotuwa, from Baddegama, is one of the many successful Vanilla farmers. "Not only did I earn an impressive amount during the last year, I have also bought 1 acre of land and planted cinnamon," he says - illustrating the success of the project.

Keells Foods Products PLC (KFP), which has about 60% of the market share for processed meat, and has been involved in successful sustainable sourcing initiatives for products such as pork and chicken, has introduced yet another initiative in September 2010. The project involves the sourcing of selected vegetables and the entire requirement of spices needed for products in the Krest range which is done through sustainable integrated farmer communities. Close to 142 farmers from several districts such as Matale, Kandy, Nuwara Eliya, Kurunegala and Kegalle are dedicated to supplying their produce to KFP, with the entire initiative being coordinated by a society set up under the Kandy Vanilla Growers Association.

KFP also continues its successful sustainable sourcing initiative of chicken. While the product is supplied by four main suppliers, 3500 farmer families are involved directly in the initiative while yet another 3000 families are involved indirectly. Having been involved in the pork industry for many years, KFP has also helped around 30 farmers develop better levels of farming, while the initiative has also improved the standard of living of the farmers tremendously. A stable purchase price for the produce is ensured despite the frequent market fluctuations, while the farmers are supported technically and financially to improve production.

JayKay Marketing Services (Pvt) Ltd's (JMSL) sourcing of vegetables for Keells Supermarkets takes place solely through local farmers. The initiative began in August 2005, with the collection of vegetables taking place through a collection centre at Thambuttegama, with the assistance of the Mahaweli Authority, with a view of procuring products direct from the farmers. Over 35 farming families are involved in the initiative of cultivating a variety of low country vegetables. In order to handle the demand for upcountry and exotic vegetables and fruits, a second collection centre in Nuwara Eliya was also opened about 2 and half years ago.

Aligned with the Millennium Development Goal of Poverty Alleviation and multiple principles of United Nations Global Compact - both global initiatives supported by the John Keells Group - these Sustainable Sourcing initiatives of the Group are also in line with its vision of strategic CSR which facilitates a win-win situation for all stakeholders that are impacted. While these initiatives continue to boost agricultural activity in numerous villages and raise the standard of living in diverse communities, they undoubtedly facilitate business opportunities to increase quality, reduce costs while giving products the all-important edge in an increasingly competitive market.


Sunday Observer – November 28, 2010

Managing harvest is next challenge : Agriculture, a lucrative business By Gamini Warushamana Agriculture has become a profitable business today and new opportunities are emerging in the sector, said Dean, Dr. K. Samarasinghe and Professor Buddhi Marambe of the Department of Crop Science Faculty of Agriculture, University of Peradeniya. Following are the excerpts from an interview with them on a wide range of issues related to the agriculture sector. Dr. Samarasinghe is a specialist in animal nutrition and Professor Marambe is a weed scientist. Almost all developed countries in the world achieved their success giving prominence to the agriculture sector and even today agriculture is an important contributor to their national economies.

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Agriculture helps the economy in many ways; import substitution, food security, employment generation and foreign exchange generation. Sri Lanka has a long established agro culture and its contribution to the national economy cannot be measured only by rupees and cents. Although the percentage contribution of the agriculture sector to the GDP has been declining over time with the transformation of the economy, its true contribution to the economy is massive.

Prof. Buddhi

Marambe

Dr. K. Samarasingh

e

The Importance of the agriculture sector has been recognized by all governments. Ancient kings and warriors thought that food security is national security. Since independence all governments supported the development of the agriculture sector. However, there was an imbalance and only the crop sector got the main focus while the livestock sector was neglected. This is a major mistake. Both sectors should go together as they are inter dependent.

Poultry industry New agro industries have been emerging and developing rapidly. For instance the poultry industry in the country has now reached a level that we will be able to export poultry products. Especially this industry rapidly grew in 2008-2009. Production in this sector has reached more than local demand and the standard of the poultry products are very high and meet the European standard. The most important factor is that this industry grew without direct government support. The private sector is playing the main role in this success story. Producers know that local demand is limited. However, this does not mean that local consumption is sufficient for nutrition. Although our poultry industry grew rapidly after the 1980s it was solely dependant on imported poultry feed, mainly maize. There were no plans to increase local maize production or develop the poultry feed industry simultaneously. We imported 80 percent our maize requirement to poultry feed. During 2006 with the food crisis and oil crisis the price of maize increased significantly and our poultry industry suffered.


Then we realized the importance of cultivating maize and the government put a lot of effort to increase maize production. Today the situation is reversed. We now import 20 percent and produce 80 percent of maize required by our poultry industry. This is also an important recent achievement in agriculture.

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Livestock sector

The government has given prominence to dairy production but achievements are insignificant. We had a minister for livestock development for over three decades but still the main issues obstructing the development of this sector remain unchanged. Lack of high quality animals, lack of knowledge in feeding management are main issues that still hinder livestock development. We can

increase dairy production manyfold only by introducing a better feeding process and improving nutrition of the animals.

Dairy production can be increased through better feeding

Contradictory policies

This is a proven fact and after the privatisation of Ambewela Farm, the average milk production from a cow increased from 12-18 litres to 30 litres. The yield was doubled only by improving nutrition of the animals. Some government policies are contradictory and hindering the growth of the agriculture sector. For instance the government is promoting organic fertiliser usage while providing a huge subsidy for chemical fertiliser. The fertiliser subsidy should be well focused. Again, the banning of killing animals contradicts with the government's livestock development policies. This affects meat production as well as animal welfare. The cruelty of animal slaughter, low quality meat, unproductive animals becoming a burden to the farmer are results of contradictory policies. The achievements in rice production is also impressive. Productivity in rice production in Sri Lanka has increased and academia, researchers and the farmers in the country contributed to this achievement. We have developed high yield rice varieties. The most recent achievement is BG 260 or Kiri Samba a rice variety that was developed at the Bathalegoda Rice Research Institute. The average yield of BG 260 is around 4.3 Mt/ he. BG 404 H is another remarkable achievement and it is the first hybrid rice variety developed in Sri Lanka. Our scientists worked hard since the 1990s to develop this hybrid rice. Overall, the government's agricultural sector development programs have achieved success and we could face the food crisis in 2008-2009 due to this reason. The Api Wawamu - Rata Nagamu campaign came at the right time. The Agriculture sector is growing with the new generations also attracted to it. The popular view then younger generation is reluctant to engage in agriculture is a myth as there are young agro entrepreneurs who engage in profitable agro businesses. They may be different to the traditional farmers we have in mind. Large agro companies have also changed perceptions to make the sector a lucrative business that attracts young people. With the liberation of the North and the East, the contribution of the agriculture sector is increasing. We expect paddy production to double and our next challenge will be to manage the harvest.

Land reforms Land reforms proposed by the World Bank for land consolidation is a major political issue. Policies like that are not essential and urgent, because there are new developments in agriculture.


There is land consolidation to some extent and mechanisation and introduction of technology is now taking place. New equipment such as combined harvester that suits medium scale and small scale farmlands have increased the productivity in paddy farming. Solutions cannot be imposed on people and the government should only facilitate them.

Extension service Agriculture extension services mainly in crop sectors have collapsed. The system collapsed in the 1990s and this is the most important area that policymakers should focus their attention on.

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There are over 9,000 agriculture, research and development assistants attached to field offices but they are totally unproductive and engage in other activities.

The recruits did not have even basic qualifications for the job. Though decades have passed they have not been trained for the job. This is a huge workforce and if we build their capacity they will contribute to improve the extension service.

Mechanisation and introduction of technology is now taking place.

We have to study the success of agriculture in other countries and develop our own model. In Japan, the government supports agriculture and especially protects rice farmers. In Germany local milk production is protected by the government. Most of the developed countries follow protectionist policies to develop their agriculture. However, the government should not do the business, but only be a facilitator.



Agriculture and economic development: A response

By Usvatte-aratchi

I took time to write these notes in order to give Mr. Sumanasiri Liyanage of Peradeniya a chance to respond to Dr. Karunanayke (The Island, 27 October 2010). As a decent stretch of time has passed, I hope neither of them will take objection that I barged in. The questions that Dr. Karunanayake raises are interesting and I have heard them from others. Some questions are fundamental to economics, others to economic development and still others are questions of policy. I will try to answer them.

Yes, value is exchange value because we live in an exchange or a commodity economy. Exchange value rests on the usefulness to the user and the supply of that commodity, including substitutes. Yes, a stream in the jungle is of no value when a user cannot have access to it. Indeed, one does not know that it exists until someone finds it! When it is carried over a pipe or in bottles, it has value. It may also have value if people will pay simply to see a ‘babbling brook’ with plenty of froth on it, as the Colombo stock market.

Yes, when a stream runs dry for whatever reason, ‘the boy is left without his marbles’. This is a standard problem. When the world runs its last oil well dry, Arabs will ‘lose their marbles’. When fresh water runs short, we will lose more than our marbles. This is not new to economics. It earned the sobriquet ‘ the dismal science’ because until mid-19th century, the predominant view of economists from Smith to Ricardo was that the economy will reach a limit to growth because there will be a scarcity of land and therefore food which would limit population growth and the supply of labour. Recall Malthus’ two progressions and Ricardo’s iron law of wages. Later on in the century, came Marx who saw the demise of capitalist economies because the distribution of income between capital and labour would not permit profits to rise and the economy to continue to grow. (Pessimism is now on the rise again in much of the West: ‘our children will not have a better life than we had’. Not so in China and India, where there is a marked spring in the step of even the poor. ) It was only later in the nineteenth century that the idea of ‘continued progress’ became the creed in capitalist societies. That was shattered when in 1971(?) the Club of Rome warned the world of Limits to Growth and that the world economy would cease to grow because continued growth would exhaust resources, especially raw materials. The first ‘oil shock’ followed immediately thereafter and there was the fear of massive famines in many parts of the world including India. There then followed the UN Rio Meeting on the Environment and a whole host of reactions to meet the challenge of growth in the face of a relative decline in the availability of resources. Economics has become ‘the dismal science’ again, foreboding doom. And Dr. Karunayake has joined that group. In the last 200 hundred years, scientific discoveries and connected advances in

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technology have brought solutions whenever natural forces tended set limits to growth. The world looks in that horn of plenty again.

The whole process of economic growth has been the result of two forces at work. The use of energy from sources other than animal (including humans) was central to the growth process. For example, in Japan, consumption of energy increased 17 times from 22 million tons of oil equivalent in 1913 to 378 million tons in 1987. It made feasible rising output per person, when population itself was rising. The growing population itself was the other force. Those processes resulted in the exhaustion of resources and crowding. The planet has some 7 billion people now compared to 2.5 million in 1950. All this growth in population was made possible by the rise in agricultural output to which Dr. Karuannayke draws attention by showing up the importance of the application of scientific knowledge and engineering skills, both developed in the Agricultural and Machinery universities in US. The world with a population of 1.0 billion which was on the verge of starvation in 1800, feeds better a population of 7 billion in 2000. During the 300 years from 1700, world population grew ten times. For every one person in 1700, there are 10 people now and for every one person in 1950, there are almost 3 people now. The proportion of people employed in agriculture has fallen in every country and in many countries the absolute number employed in agriculture too. In 16 developed countries, the proportion of the labour force employed in agriculture has fallen from about 68 percent in 1820 to less than 5 percent in 2000.Yet that lower proportion feeds a population six times larger today than in 1820, at a much higher level of nutrition. In US the relevant proportions were 50 percent in 1870 and 3.0 percent n 2000. Yet in 2000 US agriculture not only fed its much larger population but was also the leading exporter of cereals.

The most recent example of that order of change has been in Brazil. Embrapa was set up in 1973 as an agricultural research institute and their research and extension work has made Brazil now a leading exporter of food and other agricultural material. For the first time in modern history, a country outside the temperate zones has become an exporter of large quantities of grain. Brazil now is the world’s leading exporter of beef, poultry, sugar cane and ethanol. All this in the cerrado without destroying the Amazon, which has enough enemies. ‘Over the last 30 years only 20 percent more land has come into agricultural use but productivity has risen by 150 percent..’( Director, Embrapa). Brazil is working towards displacing US as the world’s leading exporter of food by 2025.

So the proportion of the labour force and the number of people working in agriculture have fallen while rising agricultural output has been able to feed a growing population at higher levels of well being. That some of this massive output of food has gone to ‘titillate the obese’ while there is hunger elsewhere is a policy failure of governments. Notice that, in contrast, there has been no major famine in India since 1944 and in China since the great Leap Forward disaster in 1958, growing populations notwithstanding. A magnificent food distribution system in Sri Lanka ensured that there was no widespread starvation in that country, much admired by Indian economists like Ashok Rudra, K.N.Raj, Amartya Sen and Amiya Bagchi, although some have begun to sneer at it now. Much of Africa has been smitten by chronic hunger during the last 40 years or so more because of warfare and the callousness of rulers than because of a scarcity of output or bad distribution of the available food. Your best evidence today is from Sudan. A good working market is likely to be well regulated. That is why the American markets are probably the most heavily regulated in the world. To run economies there is no alternative to markets although many brilliant minds in the 1930s had looked upon the planned economies of communist countries as heralding ‘a new civilization’. We have lived to learn.


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There is no objection to the general ways in which Dr. Karunnayake demands that agricultural development in our country should take place. However, agriculture in this country including the plantations, is a large sack where poverty is preserved. This is clear in even the most rudimentary statistics about the economy. In the once poor countries which are rich now, growth in agricultural output ensured that those in agriculture did not remain poor. Widespread subsidies to agriculture in US and Western Europe today are because agriculture compared to other sectors of the economy is a low productivity enterprise. In our country that change requires massive changes in agrarian relations that atavistic attitudes among our intellectuals and more among policy makers makes it impossible to bring about. You cannot effect those changes without losing ‘the old world’. If one is seeking rising output and standards of living, there is no alternative to this path, as we know. There are people who would decry this as progress and want to live in an environment, where little use is made of non-animal energy, making light claims on the planet’s resources. Theirs is a blessed life but most people’s idea of a good life is one filled with goods. Economic development is crucial to their lives. Who are we to pontificate that their idea of a good life is ignoble?

Dr. Karunanayake also questions ‘the economic model pursued by economists’. That question is a bit confusing. A model of an economy is an attempt to understand it, much like a model of the structure of an atom. It is often written in a set of mathematical equations, forbidding but not so fearsome as if you tried to understand quantum physics. Economic models are much less good at writing out the structure of economies than theoretical physicists are at writing out the structure of the atom. That is because the variables in economic models are so much irregular in behaviour than sub-atomic particles and the mathematics in use cannot handle them. We must understand those variables better or develop a mathematics that can handle them. So their description of economies in their models is much poorer than matter in physics and their predictive powers much less. However, models of economies that economists work with now are far superior to what economists worked with before 1930. There is relentless search to understand the nature of economies and economists are an optimistic lot.

Dr. Karuannayake’s target , perhaps, are economists who wish a particular model of the economy, however ill it describes the working of a live economy, in particular what is termed the free market economy model. This is a policy preference for an economy in which the state intervenes minimally. One understands the preference of these people. Some of the people who strenuously promoted these ideas after 1945 had suffered at the hands of authoritarian and dictatorial governments which had used their monopoly power over the economy to deny people their freedom. If you are a molecular-biologist doing good research in a government laboratory and you are dismissed from your job because you called the President of the Republic ‘Stupid’, then your life is ruined because all labs and universities that undertake any good science are owned by the State. If there were competing labs or universities not under government, he would be a free man to offend an errant President. The scientists, their parents or their siblings all had suffered under moronic governments in Europe. (Our academics would do well to keep that history in mind in these troubled times.) In Latin America prior to 1990, the situation had been the same. In Africa young scientists fled violence coming from various sources, including the state. All such people feared the state more than they feared market failures. US, in particular, started as a political entity with people who had left their homeland,


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England, in the seventeenth century to escape the tyranny of the established church and Charles I who was executed in 1649 and James II (1865-88) who was forced to abdicate. (The Royal Society which began in 1663 banished two subjects from its discussions: religion and politics) Their attitude to government is evident in that marvellous document ‘The Constitution of the Unites States of America’. In addition to the masses of poor who left all parts of Europe over the centuries, hordes of dissenters and rebels found haven in US and do so to date. Their distaste for big government and free markets cannot be understood without that historical background.

Many economists were so prejudiced that they wrote out models of markets that worked perfectly and corrected their own mistakes. There are no such markets. A market is an institution set up by people and like all human constructs, it is fallible, liable to error. When a new problem is come across, there are regulations, usually set up by government to take care of the problem. Sometimes, professional bodies may be set up to address questions of this nature. A good working market is likely to be well regulated. That is why the American markets are probably the most heavily regulated in the world. To run economies there is no alternative to markets although many brilliant minds in the 1930s had looked upon the planned economies of communist countries as heralding ‘a new civilization’. We have lived to learn.


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ICT


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Why ICT is important to the BPO sector The ICT and BPO Era of Sri Lanka Welcome to the fourteenth column! We are on a journey to increase the awareness on Information and Communications Technology (ICT) and Business Process Outsourcing (BPO) sectors among Sri Lankans. Thanks for following us and for providing feedback.

Last week we saw the grand opening of the new Hambanthota port. I felt that the opening of the new port is a symbol of the new economic development era. The country struggled for years with a war and political instability. As a young person, I belong to the generation that grew up with the unfortunate war, and as was never expected now we have a country that is free to perform to its fullest potential. So, I believe this is the best period to give all we have to this country to move it forward.

Even for ICT/BPO sector, it is an exciting time. Many are talking about it and realizing the potential. This sector has been identified as a key area that can bring a significant amount of foreign revenue, investments and jobs. In that process, it will stimulate the economy.

I was interviewed by Anne Perera of ArtTV last week for the weekend business program and when asked about the potential of ICT/BPO sector, something I mentioned is that all we have achieved so far in this sector have been while battling the challenges of war and instability. Sri Lanka is ranked among the Top 50 Global Outsourcing destinations by AT Kearney. In fact we were in 16th position in 2009 on this list and we have improved from 2007 where we stood at 29th position. The 1st in the list is obviously India. However, there are no other South Asian countries ahead of us except India. In addition Colombo is ranked among the Top 20 Emerging Cities by the Global Services Magazine. With a completely changed environment after the end of war, today, the investors are interested, overseas clients can come down to Sri Lanka to engage in projects without any fear and the economy is moving forward while the infrastructure is being improved in many areas. So, the sky is the limit for Sri Lanka ICT/BPO sector now! Yes we can!

Last two weeks we discussed about the Indian and Philippines BPO industries to understand their success and some of the learnings for us from those case studies. Today, I thought of discussing something different but important to understand. It’s about relationship between ICT and BPO. How is ICT used in BPO?

Why ICT and BPO go hand in hand? Let’s remind ourselves a bit. ICT stands for Information and Communications Technology. Few years ago, we used to use the acronym IT, however almost universally we have started to move towards ICT. The "C" in ICT represents Communications.

Outsourcing is to contract out an organization’s operations and responsibilities to a third party through an agreement. If Business Processes are to be outsourced, they have to be easily transferable between different locations. You should note that we are talking about business processes here and not outsourcing of manufacturing or product development. In today’s world, most of these "Business" work


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actually happens in "Soft" forms, in other words they are done using Computers and ICT. Therefore, generally the vast majority of the BPO industry can be recognized as a user of ICT. For this very reason this area is also called Information Technology Enabled Services (ITES).

So, the very existence of the BPO industry is dependent on ICT and hence the close relationship between the two areas. In countries like India, Philippines and Sri Lanka, where we want to excel as outsourcing destinations, talking of ICT industry together with BPO really makes sense because that kind of application of ICT really contributes to the economy in terms of bringing in more overseas work, foreign exchange and jobs for young people.

ICT Outsourcing It is also a good time to introduce ITO. ITO stands for IT Outsourcing. Unfortunately, there is a lack of consistency as ‘C’ for Communications is missing in that acronym. ITO is to outsource ICT and software development related work to third parties. It is very important to distinguish between using ICT as an enabled service to outsource business processes Vs. Outsourcing ICT work itself. Let’s take a few examples to understand this better.

Scenario 1 - Company A gets Company B to develop its Payroll system from scratch.

Scenario 2 – Company C has developed a new stock management system. They get Company D to test the system and assure quality of the system by fixing any errors.

Scenario 3 – Company E gets Company F to use its ICT system for human resources and enter details into the system reading from hard copy employment letters/CVs.

Scenario 4 – Company G is a bank and it gets Company H to assist Company G customers with their online internet banking queries over the phone.

What do you think? Let’s start analyzing. Scenario 1 is where a company gets another company to develop an ICT system for them. That’s clearly ITO. Scenario 2 is a bit tricky than Scenario 1. The entire system is not developed by the outsourcing services provider. However, they do provide some ICT services such as testing, quality assurance, error fixing and maintenance. All these are ICT services. So, this again is an ITO example.

In Scenario 3, the outsourcing provider only ‘uses’ the existing ICT system. Effectively they are doing a data entry job for the other company. This is BPO. However, it uses ICT systems. It’s actually harder to outsource this type of work to far away locations if not for ICT. Hence a significant part of BPO if not all is IT Enabled Services (ITES). Also, this example can be identified as a non-voice BPO service as there are no telephone calls involved with the primary task of the outsourced work

Scenario 4 is similar to Scenario 3. It uses an existing ICT system, and there are no ICT services provided as part of the outsourcing arrangement. It is using ICT to provide another sort of support. So, this is BPO. However, it involves explaining an ICT system over the phone to customers. Hence, this is a voice related BPO (i.e.: Call Centre).


ICT Skills for the BPO Sector As we saw just now, ICT systems play a key role in BPOs. Therefore ICT skills play a pivotal role as well. ITO area needs fairly advanced ICT skills such as programming, web development, quality assurance, business analysis and project management. In other BPO areas where IT Enabled Services are involved, more basic ICT skills such as fast typing, accurate data entry (key board skills), the use of basic ICT applications, and the ability to become familiar with an ICT application as a user quickly are important.

Until Next Week At the end of the day, all these are different types of outsourcing arrangements. So, all of these sometimes are broadly termed BPO as well. Anyway, now you know the detail behind all this. It is important to understand this especially for students and young people, so that you know the career options available in this exciting sector.

I hope this column gave you an idea on how ICT is applied in the BPO sector. We tend to discuss ICT/BPO together from an industry perspective especially in economies like Sri Lanka where there is a high potential as an outsourcing destination. ICT is already popular among youth in our country and today’s discussion on how ICT relates to BPO would have enlightened you on new career options in the BPO sector with ICT expertise.

I encourage you to read further. This is a knowledge era; there is no limitation to information. With internet and other ICT capabilities, knowledge is so accessible. If you have any questions, you can contact me as well. I am more than happy to discuss topics and questions you may have, so please feel free to drop an email to [email protected] .

The Columnist

The columnist Yasas Vishuddhi Abeywickrama is a professional with significant experiences in the BPO activities mainly in the ICT sector both in onshore and offshore roles. He was recognized in 2003 by CIMA (UK) as an up and coming business leader for the future. In 2009 he was named the Young Professional of the Year by Professions Australia. He has worked in the USA, UK, Sri Lanka & Australia, being trained in the USA & Malaysia and worked with clients such as British Telecom, Telstra & Siemens. He has worked for companies that are significant players in the ICT/BPO industry such as Accenture and Virtusa. He is the Director, Young IT Professionals Board of the Australian Computer Society and also works on a BPO human resource capacity building venture for Sri Lanka titled The Lanka BPO Academy (www.lankabpoacademy.lk ). Yasas is happy to

answer your career related questions via this column – email him at [email protected] .

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mailto:[email protected]

http://www.lankabpoacademy.lk/

mailto:[email protected]


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FCCISL News in Print Media


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FCCISL welcomes ‘development oriented’ budget 2011 Federation of Chambers of Commerce and Industry Sri Lanka (FCCISL) issued the following statement welcoming budget 2011, calling in a development oriented budget: "The chamber recognizes and acknowledges that it is extremely a difficult public finance management exercise and a task to prepare the Annual Appropriation Bill and Budget Proposals to meet competing priorities of consumer welfare and long-term economic developments through enhanced investment by both the public and private sector and setting conducive and enabling business environment to resurge the economy.

This has become even more difficult task under the prevailing difficult world economic scenario and limited space available for enhancing domestic revenue and the challenges of effectively meeting the unavoidable recurrent expenditure. It is in this context, the FCCISL being the apex body of regional chambers and trade associations welcomes and appreciates development friendly fiscal policy measures and reforms presented by the government.

The Budget 2011 envisages a total revenue of Rs.986 Billion (15.2% of GDP) and Rs.1419 Billions of total expenditure (22.4% of GDP) resulting a budget deficit of Rs.433 Billions (6.8% of GDP). Maintaining relatively a low budget deficit would certainly send a positive statement of commitments and resolutions of the government for targeting strong fiscal discipline which is considered as a sine-quo-non for stable and sustainable development strategy. While appreciating this achievement, the FCCISL looks forward for maintaining and achieving the fiscal targets through efficient administrative mechanism. In this regard, private sector business entities and individual citizenry also have a responsibility by enhancing private sector investments on the priority areas recognized by the government and generating savings for further investments.

It is also noteworthy to recognize that the budget was careful not to resort excessively inflationary financing instruments to bridge the budget deficit. While foreign financing has been kept at a lower level, domestic non-banking borrowing has been increased for financing the deficit. The FCCISL particularly welcomes relief measures provided to SME sector which was adversely affected in the recent past. The proposal on mobilization of Rs.5000 Million from the World Bank to restructure to optimize SME businesses, proposal to write off unpaid tax liabilities up to March 2009 of all enterprises with the turn over below Rs.100 Million, exemption of SME operation from the Economic Services Charge, and offering of concessionary income tax rate of 10% are certainly correct policy prescription for the embittered SME sector in the country. The proposal to procure domestically produced products such as thriposha, surgical gauze, selected pharmaceutical products, school text books, uniforms and furniture on priority basis are also welcome. However, we would also urge the policy makers to include SME services sector such as construction and engineering services to be given priority in the government procurement process.

The reforms proposed in the tax system are another salutary development. Corporate income tax and tax rates on personal income have been reduced with a view to generate more investments and savings. Lower income tax of 10% is proposed for industries with domestic value addition in excess of 65% and Sri Lankan brand names with patent rights reserved in Sri Lanka. Income tax for all export companies has been reduced from 15% to 12% to encourage general exports.


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The income tax on profit has been reduced from peak level of 35% to 28%. Reduced duties are proposed for import of machinery and equipment. Tariff and other taxes on passenger transport have been reduced by 25% to encourage the tourism sector. It is particularly pleased to observe that the government has decided to abolish bank debit tax completely which was one of the areas where the Federation has advocated. The Federation hopes that the benefit of reduction of VAT (from 20% to 12%) on financial services and reduction of tax (from 35% to 28%) on profit on banking sector will be transferred on to customers, particularly to SMEs to enable them to raise low cost capital for investment.

The removal of provincial turn over tax is particularly beneficial for the SME sector and the consumers as they were subjected to the multiple of similar taxes hitherto. The exemption of processing industries below Rs. 50 Million and hotels below three-star category from NBT auger well for SMEs. In the sphere of consumer welfare and social security, the budget has made certain proposals to provide relief measures to the general public despite the limited resources available at its disposal. The Federation has been advocating for sometime for the implementation of anti-dumping, counter-veiling and safeguard legislation to protect domestic industry from import surge, subsidized imports and dumping. It is certainly encouraging to see that the budget proposals have recognized the necessity for introducing such legislation to safeguard the national economic interest.

The Federation recognizes that providing enabling macro-economic policy environment and legislation is the responsibility of policy formulators. However, it is even more important to maintain the positive momentum created in the policy statement with regular consultations with the private sector apex bodies with a view to insuring effective implementation of these proposals to the benefit of national economy and to sharing of the economic benefit by the society at large.

The Federation intends to study the proposal in-depth in consultation with all stakeholders, and make further proposals to the policy makers for effective implementation of the proposal and make improvement where necessary in due course," the chamber said........... Etisalat Lanka (Pvt) will give away free mobile phones to its customers along with its "Post-pay" connections. This unique offer for every "Discover" Post-pay package is aligned with Etisalat’s drive to grow the Post-pay market. It becomes the first such offer of its kind in Sri Lanka by any mobile network targeting the country’s entire mobile market, it announced recently.

Customers have the pleasure of selecting from a wide range of trendy and advanced handset models such as the Blackberry Curve 8520, the NOKIA 2690, 5130, C3, E5, the SAMSUNG C5212i, Marvel, Corby Pro or the ALCATEL OT-606, OT-565 and HTC Smart. Remarkably an overwhelming number of calls have been received, much more than expected with a multitude of post-pay customers having already shown interest in this offer since its recent launch. The promotion is aimed at the customer who intends on acquiring a new phone or an upgrade, giving a choice to select an appropriate option to suit your needs.

Notably, the famed Blackberries and HTC smart phones have seen a rise in popularity due to its superior technology, style and functionalities. In fact, Etisalat was a potent part of revolutionizing Sri Lanka’s blackberry market with their "Blackberry for everyone" campaign, which changed the customer perception of the product making it accessible to the average Sri Lankan. While the Blackberry was initially perceived as a business and upmarket product at a premium price, Etisalat revolutionised the market by enabling access, availability and affordability to everyone.



FCCISL seminar The Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) organized a seminar on How will personal branding help improve you and your business for its members and other relevant officers at the FCCISL on November 22.

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The speaker was USA's Dr Hubert Rampersad, who is a leading authority on authentic personal branding - performance management, bestselling author, and keynote speaker. Dr Rampersad is the founder at TPS International Inc. and Personal Branding University in Miami Beach and the author of the best selling books Total Performance Scorecard Personal Balanced Scorecard, TPS - Lean Six Sigma Authentic Personal Branding, and BE the CEO of your Life, which have been published in many languages.

The Federation of Chambers of Commerce and Industry of Sri Lanka President Tissa Jayaweera welcoming Dr Rampersad and the other delegates from the USA and the Netherlands

Following the presentation of Dr Rampersad, the Netherlands Strategy and Innovation Telepresence Exchange Director Danny Frietman, also made a presentation. The FCCISL organized this seminar at the invitation extended by JAVA World Congress Secretariat.

22nd – 28th November 2010 - fccisl.lk alerts/en/2010/November 28, 2010.pdf · ¾ Need to...

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Transcript of 22nd – 28th November 2010 - fccisl.lk alerts/en/2010/November 28, 2010.pdf · ¾ Need to...