What, if we lose the GSP Plus?

  Well known economist Dr. Saman Kelegama looks at the issue                                                        

Such “end of the industry” fears were expressed in the past: (i) when an embargo on certain categories of our apparel exports  and countervailing duty were imposed by US in 1993 (it was a temporary imposition), (ii) before NAFTA came into operation in 1994, (iii) when AGOA ( African Growth and Opportunity Act) of the US Congress gave preferential access to apparel exports from Sub-Saharan African countries, (iv) before MFA came to an end at a time of increase competition from China, and so on; but we did not witness such “ end of the industry”. The industry will survive but the industry will have to work harder/smarter and the government will have to remove existing impediments to the industry

By Indika Sakalasooriya
The issue of whether Sri Lanka will lose the GSP -Plus (Generalized System of Preference) facility which particularly has helped the garment exports to the European Union markets ever since the end of the quota system has created a certain amount of fear in the industry. At the bottom of this issue has been the allegation that human rights situation has been deteriorating with the resumption of the war in the north and the east. This has also led to much debate and discussion in the political circles.

In this back drop The Nation Economist spoke to Dr. Saman Kelegama, an eminent economist who also heads the Institute of Policy Studies which is an independent think tank. Dr. Kelegama is of the view that governance issues in developing countries cannot be addressed by trade penalties. He says that there are enough examples around the world to show that trade sanctions and embargoes cannot be used to solve non-trade issues.

He says that such measures will in fact aggravate the situation with regard to the rights of the people who are employed in the apparel industry. It would adversely affect approximately 1.2 million livelihoods that are dependent on the apparel industry. According to him such measures would keep Sri Lanka off track from achieving its Millennium Development Goals by 2015.

Following are the excerpts of the interview.

Q: In the case of a worst scenario where Sri Lanka ends up losing GSP +, what would be the alternatives available apparel sector will have?
A :
If Sri Lanka does not get the extension to the GSP plus scheme, we would be still entitled to benefit from tariff concessions under the EU General Scheme - so we would still have access to the EU market at preferential terms but not on duty free terms. It is also important to note that the US still continues to be the major export market for Sri Lankan apparel exporters and account for some half of Sri Lanka apparel exports though its share has declined since 2005 while EU has managed to increase its share over time.

Sri Lanka will have to hold on to its share in the EU market by becoming more competitive. This is by no means an easy task when cost of production is going up due to both domestic and international factors. But firm levels of innovative methods will have to be found to cut cost by reducing overheads and wastage, using energy saving methods, etc. Given that the apparel sector is a key employment generator in the country, the government should also consider a relief package to assist the sector to hold on to the existing markets in the EU.

Q: Many say that loosing of GSP+ will be the end of the thriving Sri Lankan apparel sector. What is your opinion?
Obviously the loss of duty free access to the EU would have adverse implications on the industry, as Sri Lanka exports would not be as competitive as before but to state that it would be the end of the thriving apparel sector would be to overstate the problem. It is important to also bear in mind when one looks at the implications of the withdrawal of the concession, it is also important to examine to what extent Sri Lanka has been able to make use of the concessions to date. In this regard, it’s important to look at the utilisation rate. The utilisation rate of concessions under the GSP plus scheme for textiles and garments stands at about 60 per cent in 2006, meaning that Sri Lanka has not been able to make 40 percent of the concessions extended due to various reasons such as inability to meet the stipulated Rules of Origin for example. While Sri Lanka increasingly benefited from GSP plus scheme, Sri Lanka has not made the full potential of the agreement.

Such “end of the industry” fears were expressed in the past: (i) when an embargo on certain categories of our apparel exports  and countervailing duty were imposed by US in 1993 (it was a temporary imposition), (ii) before NAFTA came into operation in 1994, (iii) when AGOA ( African Growth and Opportunity Act) of the US Congress gave preferential access to apparel exports from Sub-Saharan African countries, (iv) before MFA came to an end at a time of increase competition from China, and so on; but we did not witness such “ end of the industry”. The industry will survive but the industry will have to work harder/smarter and the government will have to remove existing impediments to the industry.

But let me say this. The Minister of Export Development and International Trade together with the Ministry of Foreign Affairs and the Ministry of Enterprise Development and Investment Promotion have been working very hard to ensure that Sri Lanka will continue to benefit from the GSP-plus scheme. They are at it and will be putting all efforts to ensure that the scheme continues.

Q: What are the other markets apart from US and EU that Sri Lankan garments presently have a significant presence?
The US accounts for about 50 percent of garment exports while the EU has a share of 45 percent. The rest is accounted for by Canada and others, which is negligible.

Q: During the quota regime we thought loosing of quota will be the end of SL apparel industry. But as we all know GSP + came and proved itself better than quota. Don’t you think that losing of GSP+ will pave the way for something better as the history has a tendency to repeat?
First, I think it’s misleading to think that GSP-plus scheme helped to shore up the industry after the phase-out of quotas. Obviously getting such concessions helped the industry to some extent at a time when quotas were withdrawn but one must also acknowledge the various activities undertaken by industry in preparation for the phase out and for coming up with innovative solutions to better cater to their customers and thereby keep Sri Lanka’s competitive edge.

Secondly, the silver lining in the phase-out of the MFA and the impending possibility of Sri Lanka losing the GSP plus scheme (if there is any) is that Sri Lanka industry needs to be competitive and should be able to stand on its own ground and not rely on quotas or non-reciprocal tariff concessions which can be withdrawn at the whims and fancies of the grantor countries. The GSP scheme is a voluntary scheme and grantor countries such as the EU have no obligation to provide such concessions to Sri Lanka or to the other beneficiary countries. Even if we get an extension this time around, it would be up for renewal in a couple of more years and so there is to some extent uncertainty associated with non-reciprocal trade agreements. The lesson which we could take from the GSP plus incident is that country should strive to be competitive as much as possible which obviously would mean that we have to improve the supply side capacities in the country. 

Q: Having the GSP + crisis in the backdrop, recently we have been able to witness several apparel giants in the county namely Brandix, MAS and Hirdramani are going for many new investments of large scale. Can you please explain the rationale behind it?
This is not a recent phenomenon. Even before the end of the quotas, Sri Lankan manufacturers set up factories abroad in places like Bangladesh, Jordan, the Maldives to name a few to make use of the quotas of these countries. But the reasons for the large scale manufacturers such as MAS and Brandix to venture abroad in recent times namely to India is due to many reasons; 1) increasingly customers are looking at India as their main sourcing destination with companies such as Nike, and M&S which are also customers of Brandix and MAS sourcing their needs from India. Moreover, they are not only attracted by the huge and growing retail market in India but its vertical production structure, which is weak in Sri Lanka. India also happens to be the world’s second largest producer and consumer of cotton and has the largest spinning capacity in the world. In view of capturing opportunities at its doorstep, both Brandix and MAS have ventured into India and have set up textile and apparel parks offering one-stop-shop solutions to its customers.


Dankotuwa breaks into German market

Dankotuwa Porcelain which already supplies many European markets, finally succeeded in entering the German market as well. “We have been trying the German market for sometime, because it is the most sophisticated for porcelain, with a history of 250 years of using porcelain, and are delighted that we finally succeeded,” said, Chairman, Dankotuwa Porcelain, Sunil Wijesinghe. Manager, International Market, Poorna Pemasena, says that Germany has the greatest potential, with a population of 85 million. He adds that, supplying to the German market is not easy because every German knows how to identify good porcelain and can differentiate between genuinely good quality and what appears to be good quality at first glance. Bernd Hofmann, whose company is the Dankotuwa agent in many European countries and who has helped Dankotuwa over the last 20 years, to reach higher standards of quality, says, “Germany had about 64 factories producing porcelain, but they are almost all closed down and production shifted to the East and Asia. However, the German people understand porcelain and would never compromise on quality. It is for this reason that Dankotuwa was able to interest German suppliers, because of its very high quality”.

Dankotuwa will shortly make its first shipment through Michael Fischer oHG, one of the largest distributors in Germany. Edmund Staniewski of the Company, was here recently to check out the factory and complete the deal. Negotiations with them commenced during the Ambiente Trade Fair in Frankfurt, Germany, last February. Ambiente is the most popular fair for many household products, including tableware and gift items and Dankotuwa participates in this every year. Eighty-four countries participated at this fair and included over one thousand exhibitor stalls relating to tableware, kitchen and household. “The initial discussions with Michael Fischer, during the fair, was the starting point and they were very impressed with the quality of the samples we showed,” explained the Chief Operating Officer, Dankotuwa, Sarath Mallawa Arachchi, adding that the Company has also obtained the services of a specialist German designer and an expert modeller to assist the Company in serving this new customer.

Michael Fischer supplies to Department stores, Supermarkets, Discount stores, Furniture stores, retailers and also sells its products by mail order. Dankotuwa products will be mainly at the upper end and will include well-known German Department stores such as Karstadt, which has about 90 stores, and Kaufhof Galleria, which has about 120 stores. Staniewski explained that the new trend is to display porcelain in furniture shops with its huge space advantage. On average, the German furniture stores have about 60,000 square metres of space and they are able to provide adequate space to display porcelain well. Furniture stores have many events during weekends and attract around 25,000 visitors, with bus services to bring in customers from afar as 250 km. They have good restaurants and have become a full day shopping experience for customers, especially during weekends. This is the new trend he said.

Staniewski says he was astonished by the number of manual quality checks in the factory and was impressed with the manner in which the production process takes place and the cleanliness of the factory and premises. He has already ordered two 20 foot containers per month, for the next several months. He warned, however, that future orders will depend on punctual delivery. He will start with white-ware and migrate to more value added decorated-ware later. “This would be our challenge” said Mallawa Arachchi, adding that “Dankotuwa is structured to produce high quality porcelain with difficult shapes and surface designs and this means that, our production cost is high, and therefore, we need customers who value our quality”.

Talking about his first impression of Sri Lanka, Staniewski says that people are very friendly, it is a beautiful country. The only negatives are the hot climate and the presence of the military. “If not for the war, this would be paradise” he added.
Chairman Wijesinghe says that the approach of the Company is to have good business partners with long term benefits to both parties, and this is one more partner under this strategy.


Developing eco-tourism: Need of the hour

By Quintus Perera
Although the government charges fees in dollars from foreign tourists in places such as the national wildlife conservation parks, it does not pass on any of the benefits of those dollar earnings to the local community living around those areas, said the President of the Sri Lanka Eco-tourism Foundation, F.De S Palitha Gurusinghe at a function to meet Marion Hammerl, President, Global Nature Fund – an award winning Eco-tourism promoter, at the Mount Lavinia Hotel, last week. The meeting was organised by EMACE (E-Environmental Science, M- Manpower and skills, A-Adult and Parenthood Assistance, C-Child care and Womanhood and E-Education and Culture).

Gurusinghe observed that Eco-tourism which the tourists are now very keen to enjoy, could be sustained with the help of the local community living around those eco- tourist attractions. He also pointed out that the government by establishing these national parks which were encroaching into large extents of crown land, was depriving the local community of land for their cattle graze.

He said that in places like Kerala, in India, some people had two to three houses in various eco- tourist destinations which they rented out to tourists, and were able to earn as much as 200 U.S. dollars per day. On the other hand, in Sri Lanka if people bordering jungle area were lucky to own additional houses, they would use these houses to hide from the marauding elephants which posed a threat to their lives .

He reiterated that Sri Lanka should adopt Eco-tourism quickly since competitors like India, Malaysia, and Indonesia were fast developing this aspect of tourism.. The best way to preserve the environment around these tourist areas, was to offer part of the benefits derived from tourist activities in such areas to the indigenous people, and encourage them to preserve nature and help sustain it by not cutting down dwindling forest cover etc.

He said that they have identified several community based tourism activities. Some of them were already in operation. The potential for such community based Eco-tourism activities is high, he stressed, and it was thus important to drive the concept of community based tourism forward. Gurusinghe further added that last month they had finalised the report on Community based Tourism, and the Ministry has agreed to support this project by way of funding assistance, and had pledged to assist the project from other different sources too.

He said that retaining the earnings from tourism in the country was essential. Although tourism has been identified as the fourth largest foreign exchange earner for Sri Lanka, he noted that around 60 to 70 percent of these earnings are drained back to the originating countries, like Western Europe.

He pointed out that there were so many areas where tourism could be further developed such as the cultural triangle, plantation sector, coastal belt, national parks etc. He warned that if Sri Lanka’s wealth of natural assets such as its forest cover and bio-diversity diminished , tourist arrivals to the country would also decline.

When a forest is destroyed, it also destroys the flora, fauna and wildlife which we can offer as Eco-tourism. This can be prevented only through eco-tourism because Eco-tourism focuses attention on all these natural tourism attractions. We have to work with the community. Unless the community gets something back, you cannot have community centered tourism, he pointed out.


M&S sets up first logistic hub in Seeduwa

By Thulasi Muthulingam
The largest clothing retailer of the UK, Marks & Spencer, with over 760 stores spanning 30 countries worldwide, opened its first International logistics hub the world over, in Seeduwa last week.

This is a BOI project, which has been developed with the hopeful expectation of attracting further Foreign Direct Investment (FDI). The BOI hopes to develop the country’s logistics and infrastructure, in order to make Sri Lanka a business hub in South Asia. Last week, Dr. Sarath Amunugama, Minister of Enterprise Development and Investment Promotion, announced that Sri Lanka had attracted US$ 734 million in FDI, which is the highest level ever achieved in the country and the BOI is hopeful of continuing the trend.

Sir Stuart Rose, the CEO of Marks and Spencer, who was in the country recently to open two eco friendly factories that will manufacture garments for M&S without harm being caused to the environment, assured Dr. Amunagama on his request, that he would be extending his support to the GSP + facility granted by the EU to Sri Lanka.

RJV International will be the logistical partner for M&S International stores and Global Park of Global Transportation and Logistics (Pvt) Ltd is the nominated warehouse provider handling all warehousing and value addition activities in Sri Lanka from its 400,000 sq ft state-of-the-art warehouse complex.

Garments belonging to M&S will be imported and delivered to Global Park by RJV international and subsequently these goods will be divided into smaller lots for onward export to other M&S International entities around the world.

The new venture has the potential to create at least 1000 more jobs at Global Park which currently operates with a factory staff of approximately 600. Some of the value added services that Global Park will be providing Marks & Spencer apart from warehousing are finishing, repairing, trimming, checking, button attaching, pressing, folding, packing and needle detecting, said Business Development and Infrastructure Manager, Priyanka Dissanayake, “when garments are sent damaged from local factories, we used to send them back for repair. Now with our partner, RJV International buying from India and Bangladesh outright and bringing them here, we can’t do that so we set up a repairs section.”

As pointed out by GTL in a statement, the considerable benefits of moving production offshore have already been exhausted by most multinationals. The industry must now find different ways of minimising cost, and streamlining the supply chain, which is one such alternative. GTL and Global Park offer M&S a channel to minimise handling and transport procedures to provide a cost efficient supply chain.

Present at the opening ceremony, were Simon Doyle, the Head of International Operations of Marks & Spencer, Kieran Donovan, the Project’s Manager of Marks & Spencer, Dhammika Perera, Chairman of the BOI, Priyanka Dissanayake, Business Development Manager of Global Transportation and Logistics (Pvt) Ltd and Chandana Punchihewa, Director of RJV International.