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Only blue chip with
extensive manufacturing, agriculture and exports interests tells
what is wrong and how to fix it
Inflation Vs Exchange Rate
I cannot help being repetitive because many of the issues
addressed in past statements and lobbied for since have not been
resolved. I have referred earlier to the anomaly in exchange
rates and inflation. Inflation MUST be contained below the rate
of depreciation of the Rupee. This affects not only those who
add value locally to local or imported raw materials, whether
for export or import substitution, but even expatriates overseas
who remit part of their earnings to their families in Sri Lanka.
Successive governments in recent times have been saying they
encourage industry with high domestic value addition and
employment creation. Paradoxically, the more value one adds the
worse off he is. Incentives by way of tax holidays mean little
if no profits can be made.
FDI? Yes but what?
At a time when the 5 local Activated Carbon producers have
production capacity and sales prospects for using 60,000 tonnes
charcoal (and the country has never produced more than 45-50,000
tonnes/year), the BOI grants approval with its usual incentives,
to another 100% foreign owned entity to set up an activated
carbon factory here. Haycarb’s needs at full capacity is 36,000
tonnes. Foreign direct investment in these instances comes in
the way of machinery and buildings of questionable value, some
low waged employment creation as a result (whilst elsewhere
termination of better paid employees is imminent), lower export
income for the same volume sent out of the country, and
repatriation of profits if any. What purpose does such FDI serve
? BOI approvals are confidential and neither the public nor
other stakeholders are consulted. Why should this be so ? Sri
Lanka could even be used to reactivate and export spent carbon
containing toxics; or repack Chinese carbons which face
anti-dumping penal duties in the West!
Where there is adequate capacity for value addition and there is
an inadequacy of raw material in the country, export of it in
raw form should be banned so as not to disadvantage local
producers from foreign ones which have protected domestic
markets.
Labour and wages
We must strongly object to Government’s involvement in mandating
salary increases for the private sector, especially when there
are Wages Board mechanisms for determining minimum salaries for
different industries. In many cases, we have been paying market
rate wages much above other labour intensive enterprises and,
therefore, the mandatory increase was unwarranted.
Companies in our Group where the annual revision of salaries or
collective agreements did not coincide with the Government’s
directive, had to pay the Rs. 1000/= salary increase as
mandated. This cost the Group Rs. 26 mn more than anticipated
and created some anomalies. The consequent impact on gross
salary, overtime and the contingent liability on gratuity, has
not been included in this estimate. We must strongly object to
Government’s involvement in mandating salary increases for the
private sector, especially when there are Wages Board mechanisms
for determining minimum salaries for different industries. In
many cases, we have been paying market rate wages much above
other labour intensive enterprises and, therefore, the mandatory
increase was unwarranted.
The formula for determining terminal compensation for employees
and the process and time taken to effect closure of loss making
operations, especially if these are caused by fiscal policies
rather than the commercial environment, is untenable from an
international business standpoint. It will surely be a
disincentive for employment creation because of the magnitude of
the potential liability.
Taxation and Growth
“ The encouragement for the private sector to be so involved in
agriculture was included in the Government’s manifesto but we
have lost confidence”..
”...Subsidizing Government economic policy by withstanding the
effects of exchange rate issues is one thing. Directly
subsidizing the Treasury by having to wait “forever” for refunds
legitimately due to us on VAT, etc., as referred to earlier, is
beyond the abilities of exporters operating in competitive world
markets. ..”
Subsidizing Government economic policy by withstanding the
effects of exchange rate issues is one thing. Directly
subsidizing the Treasury by having to wait “forever” for refunds
legitimately due to us on VAT, etc., as referred to earlier, is
beyond the abilities of exporters operating in competitive world
markets. The VAT scam or poor tax collection is no excuse. Our
shareholders don’t accept this as an explanation for low
returns, nor our employees for no bonuses. It is
incomprehensible to the average citizen that the Government has
no funds to pay us our dues. The barrage of complex new taxes
and duties that are being inflicted on us from time to time is
irksome. Consistency and predictability of fiscal policies are a
sine-qua-non for any investor and potential employer.
As I mentioned in my last statement, relatively high duty on
import of consumer durables has caused this sub-sector of our
business to operate at a loss for another year due to its
inability to compete with duty exempt goods allowed under the
expatriate returnee allowances scheme.
We have committed the Group to serious involvement in the
agricultural sector both by providing inputs such as seeds,
fertilizer, equipment, chemicals and technical knowhow to
farmers as well as producing vegetables and flower seeds for
export. The encouragement for the private sector to be so
involved in agriculture was included in the Government’s
manifesto but we have lost confidence in this with the recent
decision by Government to confine imports of urea fertilizer to
the State sector. Our investment in fertilizer warehousing and
preparation with employment creation and establishment of
distribution systems, now poses a problem. We have hired a large
number of agricultural graduates and chemists to pursue our
programme of uplifting agriculture and our plans are now called
into question in the wake of what appears to be a shift of
government policy.
Cesses and tax imposed on the plantation sector also do not find
their way into development activity as envisaged. Government and
political intervention during wage negotiations, as also the
haphazard acquisition of land, belonging to plantations creates
a very unstable platform upon which management of these entities
must make long term decisions on investments. The removal of the
subsidy on Fertilizer is another blow.One of the positive
developments in the energy sector was the decision to pay a
tariff of Rs. 8/50 per KWH for bio-mass power generation,
Unfortunately, Rs. 3/50 of this is disbursed from a special fund
and confidence that this rate will apply as a minimum in future
can only be established if the methodology for the replenishment
of the fund is made law.
Globalization and Exchange Control
As the theme of this report suggests, the future of the
organization is to further globalise our business activity
taking with us the technical skills of our employees and
bringing back returns on our investments.
Unfortunately, obtaining exchange control approvals for making
investments overseas in production or marketing ventures in a
very transparent manner, is onerous and slow. A percentage of
the past few years export earnings is used in a formula to
determine approval limits. If indeed the Government wishes to
have stability in our local industries, it must permit them to
become multinational to gain economies of scale. We do believe
there are loopholes in the existing laws which permit exporters
to retain export proceeds overseas indefinitely, enabling
enterprises to set up manufacturing operations overseas perhaps
even without exchange control approval. It would therefore seem
iniquitous for those that are guided by the more formal approach
to be handicapped for doing so.
“Unfortunately, obtaining exchange control approvals for making
investments overseas in production or marketing ventures in a
very transparent manner, is onerous and slow.”
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