Abolishing PERC and challenge of reforming the state sector

The govt. has decided to abolish the Public Enterprises Reforms Commission (PERC) as it finds the outfit redundant with their declared policy of non- privatization of the state controlled enterprises.
We have no issue with that as in many countries essential public utilities are run by the state and in some countries they are run as efficiently as the private sector entities.

Therefore at least in theory there is no reason why we in Sri Lanka cannot do the same thing. However, the looking back at our history it is clear that the facts have been different throughout our post independence era.
All state entities – the service oriented government departments as well as the government owned enterprises are infested with chronic politicization resulting from the government ownership. This has led to all sorts of political interference in day-to-day management of these institutions.

The commonest maladies in these institutions are over staffing and lack of right person for the right job because of politically motivated recruitment; promotions based on political affiliations rather than efficiency or good performance; financial mismanagement and the dominance of politically affiliated trade unions.
This is one of the reasons why multi lateral funding agencies such as the World Bank and the Asian Development Bank have often insisted on privatization as a means of reforming the state-run sectors of the economy whose inefficiency has been hindering the progress of the economy.

In the developed West, in Singapore and Dubai and even in our neighbouring India we find some efficiently run state owned enterprises. However, we are yet to see anything of that sort in Sri Lanka. On the contrary we have witnessed unprecedented vast improvements in sectors like telecom and insurance after liberalization and privatization.

In a situation like this, the biggest challenge is how to increase the efficiency in the state sector entities especially in areas such as electricity, railway, and water services which are vital for the efficient running of the entire economy.

Despite many efforts to improve them without privatizing we have not seen any progress in the past. The kind of infrastructure support provided by these entities for the entire economy is so vital that the postponement of the resolution of these issues can be detrimental to the future of the entire economy.
Therefore it is essential to look for avenues of reforming these sectors and to introduce private sector norms of work, if we are to achieve economic development without privatizing these entities. It seems to be a monumental task.


A practical approach to inflation in SL

If an economy identifies what type of inflation is occurring (cost-push or demand-pull), then the economy may be better able to rectify. Though the reasons are obvious for the inflationary trend in our country for many years, have the authorities managed to arrest the main cause irrespective of the unpopular measures they have to undertake. Has the real cause being understood and addressed and right measures being taken to rectify it or have we tried to justify the figures for political gain and prove to the public using same figures that there was no inflation or it had been well controlled?

By Haris Salpitikorala
Inflation is defined as the rate (%) at which the general price level of goods and services is rising, causing purchasing power to fall. In a market economy rise and fall of prices due to supply and demand for some items are common and that is not inflation. Inflation occurs when most prices are rising by some degree across the whole economy. Inflation is not simply a matter of rising prices. There are endemic and perhaps diverse reasons at the root of inflation.

Two main inflationary trends are
Cost-push inflation-

This is a result of decreased aggregate supply as well as increased costs of production, itself a result of different factors. The rising cost of running a business such as import tax, communication cost, energy, labour and material etc. will directly affect the cost of the goods. In Sri Lanka this is more than true when we look at how the cost of different taxes, duties and essential services had gone up during the last 10 years.

Demand Pull Inflation-

This is a result of increased demand for limited supply of goods. It could be the result of many factors, including increases in government spending, providing jobs in the government sector etc. If government decides to fuel the economy’s engine by decreasing taxation, giving consumers more spending money while increasing government spending in the form of buying services from the market (such as building roads or schools) this creates more money supply in the market. By paying for such services, the government creates jobs and wages that are in turn pumped into the economy. Pumping money into the economy is also known as “pump priming”. If unchecked, this may create demand pull inflation.

Identification of the main cause for inflation
If an economy identifies what type of inflation is occurring (cost-push or demand-pull), then the economy may be better able to rectify.
Though the reasons are obvious for the inflationary trend in our country for many years, have the authorities managed to arrest the main cause irrespective of the unpopular measures they have to undertake. Has the real cause being understood and addressed and right measures being taken to rectify it or have we tried to justify the figures for political gain and prove to the public using same figures that there was no inflation or it had been well controlled?

In Sri Lanka we need to look beyond the text book theory to rectify this situation, accept and admit the real cause irrespective of the political unpopularity or otherwise. This need practical people and not the text book experts.
Have the prices in all sectors in Sri Lanka, gone up well beyond the limit of an average man during last 10 years? The answer is, yes. Then whoever tries to justify the low inflation using statistics is not going to paint the real picture in the mind of an ordinary man who experiences the price increases in his weekly trip to the market to buy his provisions.

The fact that our prices have gone up tremendously shows that we have inflation in Sri Lanka. Is it Cost –push or Demand- pull inflation? If we do not identify the right cause, the measures that are taken to rectify it, could work on the opposite direction creating spiral effect on the inflationary trend. So the first is to identify the right cause for the inflation and then take appropriate and practical steps to control it once and for all.

In a Demand pull inflation the demand goes up because people have extra money. The government taxes and duties are generally low so people have more disposable income... In such a situation the controlling measures are very obvious and simple. It could be taken straight from the text book. That is to make sure the money supply is curtailed by various methods including increase in interest rates. As the interest rates have gone up considerably high in Sri Lanka during the last two years, we can presume knowingly or unknowingly that we have taken the approach assuming our inflation is demand Pull. Assumption here is that people have more money so they spend more; therefore the demand is more. Thus by increasing the interest rates and curtailing the money supply there will be less money for people to spend which means people are encouraged to save more in fixed deposits and cut down their purchasing power and the desire for investment. These are called non productive investment but the objective to control the demand pull inflation could be achieved by curtailing the money supply in the market...
What is happening in Sri Lanka? Do we have demand pull inflation? Do people spend more and buy more and more daily? Are the corrective measures taken appropriate?

In an economy where people are struggling to have their three meals a day and half of their earning is spent on their transport cost to report to work, where do they get extra money to push the demand in order to increase the prices of essential items and create a huge difference in the demand curve? In actual fact, they are buying less.
The simple example can be seen in the fish market. Those who bought one kilo of fish few years back had gone down to buy ½ kilo. In fact last month I saw people buying 250grammes.Talk to a person who sells fish and you get the truth. It is same with every essential item in the menu for an ordinary person. In fact the quantity of buying has gone down and that means proportionately the demand has gone down too.

This is the reality and it is not shown in the text book. This proves that our inflation is not demand Pull Inflation though it appears to be. So we need to identify the cause first before taking action to rectify it. If it is not demand pull inflation, the increase in interest rates is not the right way to control it.
It is my view that our inflation is cost push inflation and it had been true during the last 10 years or so. It is obvious when we look at the elements of cost of production and how fast those elements have been changed in the past. The increase in essential ingredients for production such as fuel, communication, electricity, import duties and various other types of taxes have pushed every thing to an extreme, making the production cost and import cost high above an ordinary person. It has been happening every six months for the last few years.

The guaranteed way for the government to make money to balance the budget is to increase the cost of essential goods and services. But the cost of the above ingredients is directly related to the production cost or all the essential items used by the common man, may it be transport, food items or stationery.
Therefore, one simple factor here is very clear; the inflation of ours is cost push not demand pull. Then why we have increased the interest rate which is done in the demand pull inflationary trend. It confuses me. I feel high interest rates work in the opposite direction in practice making prices to go up further; When the interest rate is high (as it is above 20%) no small and medium term enterprises could generate profit or even make enough money to pay such interest rates. All Small and Medium Term Enterprises are run partly by bank loan or overdraft.

How is it possible for them to absorb more than 20% interest as cost factor and yet make money? So the best is not to invest or those who have invested will have to close shops making a further shrinkage in supply of goods and services. If you do a proper survey, there are enough examples to show that many SMEs are closed down due to the reasons mentioned above.

Whether it is closure or non investment, both these amount to cutting down the supply lines. The end result will be prices going up further as demand remain the same in essential goods but the supply has become short due to lack of investment in SMEs and closing down of existing SMEs due to non profitability or cash flow problems.
To aggravate the situation money supply has also gone up as the jobs are given in non productive sectors to please the graduates and unemployed youths. Having them placed in government departments with no extra productivity will create more inflationary trend in the economy as the cost of the above recruits need to be absorbed by increase in taxes or printing paper money.

What we need to do is to bite the bullet and get some concrete steps worked out to rectify the situation once and for all. Some of the ideas in this line of thinking are
• A must factor is the overall productivity has to go up. More jobs need to be created as a priority in productive sectors and minimal in non productive sectors. The government has to discuss with the private sector to do so by giving them incentives or special tariff rates for energy and other elements needed in production lines, so they could create extra employment and those employees could contribute substantial productivity for their wages.

• Bring down the interest rates and import duties to make sure that those who run SMEs could make money and expand their businesses so they are able to recruit more people for productive engagement. Also, this could encourage new investors to jump into the investment vehicle.

• New ventures should be encouraged on the basis of using local raw materials to make sure the raw material producers would also earn a reasonable income so the overall productivity in the country would go up and the production cost too will eventually come down when the volume increases. Whatever the products, we are unable to produce at a competitive price, need to be imported as to provide people with essential goods at a reasonable price. The incentives by BOI should not only be based on export but also take into account usage of local raw material though the product is not sold in the local market. What we need to encourage is the total productivity in the sectors that we could excel.

• Production cost should not be pushed up by increase in energy cost, fuel and import duties. Adopt special rates for electricity and import duties for business ventures and make sure all the businesses are not only sustainable but also make enough money to expand. This would undoubtedly attract more investors.

• All incentives should be given to increase the productivity. There is no way a country could prosper by making the business demoralized by government departments dealing specially with duties and taxes. It is the business men who create jobs. So they need to be protected to make sure the productivity goes up and when the productivity goes up the inflation would automatically come down with little intervention from the Central Bank.

• Create a steering committee to look into all the factories that were closed down and assist them to re open. Those owners who dumped millions of capital want to reopen, so little help from the government to address their problems would create over night extra production for the economy and productive employments. This is much easier than inviting new investors by giving them extra incentives.

This is of course a long process but it is a sure way to cut down inflation and bring some light into this gloomy economy. The figures are irrelevant but practically these steps would work as business needs to be flourished in order to increase the productivity.


Provincial Councils retard private sector development

By Quintus Perera
A consensus appeared to have emerged at a recent discussion that Provincial Council System is a failure at least in the context of Provincial Development
At the National Conference on Policy Constraints, Regulatory Barriers and Regional Economic Development held at Galadari Hotel, last week, the three leading speakers, Dr Sarath Amunugama Minister of Enterprise Development and Investment Promotion; Dr. Saman Kelegama, Executive Director, Institute of Policy Studies and Dr. Wilbert Gunaratne, Director, Centre for Development Research, Royal Institute were all critical of the provincial governance that gravely impeded the provincial development.
Inaugurating the conference Macky Hasshim, Immediate Past President, FCCISL and former President, SAARC Chamber of Commerce said that the local private sector development can be influenced at three levels – national, regional and micro, while globalization gives rise to opportunities for local private sector development. It could also create new threats and challenges to local private sector development.
He said that liberalization and international trade agreements can generate both positive and negative impact on private sector development. Satisfactory macroeconomic framework and conditions are essential to sustain the local private sector development. He said that however, no proper policy measures have been taken to develop such macroeconomic framework and conditions to direct private sector development in the country.
Dr Saman Kelegama, Executive Director, Institute of Policy Studies speaking on ‘The Role of Private Sector/ Chambers in Stimulating Regional Economic Growth’ said that since independence, in the sphere of regional development the government and the people had a major role to play. In early days there were major industries set up in the provinces like Kankesanturai Cement factory, Paranthan Chemical Factory, Valachchenai Paper Factory. But when these industries were brought under provincial administration, the regional comparative advantages were never taken into consideration.
The failure in the regional development, he attributed to the cutting of capital expenditure to balance the budget deficit and said that various institutions like BOI, Industrial Estates and Industrial Parks do the same thing and people get confused as to where to seek assistance.
He said that if one looks at the provinces in our county they are demarcated according to administrative convenience and not on the basis of economic development.
He said that the Provincial Councils are not geared to promote economic activities. The reason trotted out being inadequacy of decentralization. Due to these factors revenue mobilizing in the PCs is limited. He said that there is redundancy in existing systems - there is the Provincial Council, the Government Agent and the Kachcheri system. These are the bottlenecks to mobilize funds. He said that most of the institutions under them are a failure, including the Southern Development Authority. The only one that could be named as successful is the Mahaweli Authority.
He said that these institutions were set up mainly to provide employment and regional development. Since 1977 both private and public sectors were involved in the regional development activities. Private sector was supposed to open up industries or agricultural activities using the incentives granted but they were found to be inadequate.
Institutions like the BOI were set up for regional development. Especially after the liberalisation of the economy, donors also played an important role. In the context of regional development donors mobilized funds for mega infrastructural projects.
He said that the role of the donors gathered momentum after the economy was opened up and they not only involved in Mega projects but also in small projects and that is how most of these regional development activities have taken place over the years in the country.
He said that since 1980s the country is facing huge budget deficits and when doing the balancing act, cutting capital expenditure was seen to be easier than cutting current expenditure, like salaries, pensions etc. These cuts affect the regional development. He emphasized that capital expenditure is investment for the future.
Dr Wilbert Gooneratne, Director, CDR, speaking on “Policy and Regulatory Issues Faced by the Regional Private Sector”, said that private sector is confronted with problems created by the prevalent legal and regulatory systems.
Dr Gooneratne said that the country’s legal and regulatory framework is outdated and despite over two decades of an increasingly liberal market economy, the bureaucratic system has remained rigid and control oriented, still glued to FR and AR and by and large not so business friendly.









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