Prospects for lasting peace
Foreign investment key to growth
With the attainment of a lasting peace there will be much better prospects to significantly improve the economic and social welfare of the people than has been the case for a generation, says the Poverty Reduction Strategy Paper, a government blueprint for economic development in the years ahead that was discussed at last week's Development Forum.

However, it warns that the amount of funds and other resources available for poverty reduction efforts and economic growth will depend on a durable peace and the willingness of investors to put their money into the country. Excerpts of the strategy paper:

Yearning for peace: mother and child in Madhu. An end to the war and a determined effort to reduce poverty are the keys to economic success.

An average of 4 - 5 percent Gross Domestic Product growth since independence has not been sufficient to provide full employment at acceptable incomes for our people. It is clear that much higher rates of economic growth will be needed to bring about the required improvements in opportunity and living standards.

The government has set a target growth rate of 10 percent. This will be necessary not only to substantially reduce poverty, but also to carry out the necessary reconstruction and rehabilitation to ensure a permanent end to the conflict in the North and East.

A Poverty Profile - between 25 and 39 percent of the population can be classified as poor, depending on whether or not poverty is measured with a low or 20 percent higher poverty line. Poverty is predominately a rural phenomenon with nearly 90 percent of the poor residing in rural areas. Farmers cultivating small plots of land, with few off-farm sources of family income, and casual workers account for a large share of the poor.

Globalisation
The vast benefits of globalisation and increased opportunities for trade and investment have been captured largely by the Western Province, which accounts for only about one-tenth of the population. In the figurative sense, Sri Lanka could be viewed in terms of three islands-the Western Province, the rural hinterland, and the North and East-which are disconnected due to the lack of adequate economic and social infrastructure facilities. Connecting to growth means linking the isolated areas to growing domestic and international markets through far-reaching structural reforms combined with broad-based infrastructure development. There is an urgent need to redefine strategies for reducing poverty in all its many dimensions. The Poverty Reduction Strategy (PRS), prepared by the government in consultation with a wide range of stakeholders, including donors, NGOs, the private sector, and civil society, is based on an assessment of the extent, causes and consequences of poverty in Sri Lanka. In addition to defining the main pathways for a broad-based poverty reduction effort, it also provides a detailed set of policy and programmatic interventions designed to connect the poor to economic growth.

It should be emphasised that the development and implementation of the PRS is an ongoing process, building upon extensive consultation with stakeholders and interested groups, including multilateral and bilateral donors. At this time, it reflects the integration of two closely related activities-the government's development of its economic reform programme during its first six months in office, and the PRS that has been developed during the last four years and which incorporates many of the elements of the reform programme. The central focus of this programme is to encourage and facilitate the more productive use of all resources, necessary in an internationally competitive economy.

Foundation
Six major pillars constitute the strategic foundation for future poverty reduction efforts:

* Building a supportive macroeconomic environment.
* Reducing conflict-related poverty.
* Creating opportunities for the poor to participate in economic growth.
* Investing in people.
* Empowering the poor and strengthening governance.
* Implementing an effective monitoring and evaluation system.

The government is fully committed to a set of market-oriented trade, sectoral and structural policies to support private-sector led economic growth and poverty reduction. Structural policy reforms have been designed in full consultation with stakeholders to promote ownership and social cohesion.

Trade reform
The government is committed to reducing trade protection and establishing a two-band tariff system. Tariff surcharges, established in response to the 2001 petroleum shock, will be phased-out. Import monopolies on petroleum products will be eliminated and greater stability and predictability restored to the trade regime for foodstuffs.

Government will modernise the regulatory environment to facilitate both the entry and exit of businesses and introduce appropriate bankruptcy legislation that will protect creditor interests and facilitate and orderly exit of failed firms. It will also amend the Companies Act to facilitate the creation and registration of new businesses.

Labour market reform
One of the main challenges in the process of labour market reform is to balance the urgent need for increased flexibility with the need for protection of the workforce. Government will pass an Employment and Industrial Relations Act with a view to enhancing the flexibility of the labour market, promoting the upward mobility of labour and increasing labour productivity. The Termination of Employment of Workmen's Act will be revised, particularly with respect to the compensation formula for involuntary termination of labour. Social dialogue between government, worker and employer organisations will continue to ensure harmonious implementation of labour market reforms and to seek further improvements in labour relations, laws and regulations.

Financial sector reform
In spite of some improvement, the soundness of the banking system remains a cause for concern because of the weakness of the two state commercial banks. To establish a sound and efficient private banking system, the state banks will be restructured.

To foster competitive financial sector development, opportunities for foreign investment and ownership in the insurance and brokerage sectors will be enhanced. A pension reform programme will be mounted, which liberalises investments that can be held by private pensions and the provident funds. Improved management of the state-operated pension schemes (EPF and ETF) will be encouraged through mergers, private fund management, some foreign portfolio investments, improved collection and management reforms to reduce evasion.

Power sector reform
The main objective of the government's energy sector reforms is to restructure the industry into a number of commercially managed entities that are well-governed and managed and mandated to focus on the delivery of higher standards of service to customers at least cost. A new Electricity Act is to be promulgated in 2002, which will unbundle the power sector in the areas of generation, transmission and distribution, allow for the creation of an independent regulator, and provide a transparent solution to power purchasing and selling problems. The Regulatory Commission is to be operational by 2003. This Commission will develop procedures for independent tariff setting and licensing rules for generating companies, transmission companies, power purchase and sales functions and distribution companies.

A co-ordinated effort will be launched to overcome the power crisis. This will include the establishment of an Energy Supply Committee as well as a legal framework for overriding the Electricity Act; the CPC Act and other acts that concern power, with a view to ensuring a stable and reliable power supply in the future. More private sector participation in the power sector, a rational tariff structure and greater competition are needed to put an end to power crises once and for all.

Sri Lanka's protracted conflict has caused a humanitarian problem of significant proportions. Since the inception of the conflict at least 60,000 people have lost their lives, around 600,000 have been internally displaced and an estimated 172,000 persons are living in welfare centres with minimum access to basic services. Among the more severely affected groups are the displaced, who have lost productive assets and land, as well as social capital. The impact of the war goes beyond the war-torn areas to affect the rural poor in particular. Poor rural youth on both sides of the conflict are faced with fewer opportunities to better their lives; they make up a substantial share of the soldiers fighting the war.

The government initiated a wide-ranging process of stakeholder and community consultation to identify strategies for improving the effectiveness of relief, rehabilitation and reconciliation efforts in 1999. The government has maintained and will continue to maintain the RRR dialogue process in the search for more effective partnerships for peace. The recommendations generated by this process will be implemented with the support of the donor community and civil society.

Creating opportunities
One of the government's main challenges is to effectively connect poor regions to rapidly growing domestic and international markets. This will be accomplished by a spatial and information integration strategy that focuses on seven main pro-poor transport and communication initiatives:

• Upgrading the port network.
• Building a modern road network.
• Enhancing performance of the bus system.
• Modernising the railways.
• Improving access to telecommunications facilities.
• Transforming the postal system into a modern IT-financial network.
• Bringing Internet into the countryside.

Future public investments will be aimed at a selection of strategic infrastructure initiatives coupled with, wherever possible, private sector participation. In the past, infrastructure development has been financed primarily by public investment. By introducing public-private partnerships, the scope for investment can be expanded and a wider range of services provided to the public, in such areas as energy, ports, water supply and transportation. Competitiveness will also be improved as private sector management experience is brought into the public domain.

Structural change, or the gradual shift from an economy based on low-productivity subsistence-orientated agriculture to higher-productivity services and industrialisation, is the primary means by which economic development contributes to poverty reduction. To revitalise rural development, the government will encourage rural-to-urban migration in areas of low agricultural potential. To raise investment and returns in agriculture, the government will establish a more stable and market-based trade and price policy; focus research and extension on competitiveness and productivity improvement; introduce more private land ownership through divestiture of surplus state-owned lands and acceleration of free-hold titling procedures; provide support to industry groups for improved plantation operations; and foster off-farm employment and rural electrification.

Small and medium-scale enterprises (SMEs) are an important source of employment for low-income rural and urban households. The government is supporting the development of a vibrant market for SME business services. It will augment financing available for SME investment and undertake an ambitious deregulation and tax reform programme aimed at widening investment space for the SMEs.

Investing in people
A larger role for the private sector in the provision of both health and education services is envisioned, enabling the government to focus its resources on improving access and service quality in poor communities. An effort will be made to redress regional inequities in the provision of basic education facilities and instructors. At the secondary school level, new curricula will be introduced and more emphasis will be given to English, mathematics, science and computer science. To mobilise resources for quality improvement, education outlays will need to be rationalised. Vocational training will be shifted to competency-based education and private sector involvement will be significantly boosted. Access to higher education will also be increased, and higher education institutes will boost management, enjoy a greater degree of managerial and financial autonomy, and introduce rigorous quality certification to promote human resource development and foster social harmony.
In the health care sector, priority will be accorded to preventive programmes. A selective number of district-level hospitals will be upgraded and efforts will be made to overcome chronic nutritional deficiencies. To meet the challenges posed by the demographic transition and the changing morbidity profile, the government will continue to encourage the private sector to develop secondary and tertiary care private hospitals.

The provision of safe drinking water and adequate sewage and sanitation systems is frequently cited as the single, highest social-service priority by poor households. The government's objective is to ensure safe water to the entire population by 2010 and to at least 79 percent of the population by 2005 from the present 70 percent. In the rural areas, community-based organisations will provide safe drinking water systems in response to local demand. The costs of maintaining and operating these systems will be borne by the community. In the towns and urban areas, the private sector will be encouraged to invest and operate clean drinking water systems. A suitable regulatory framework and tariff setting mechanisms will be established to facilitate private sector involvement in delivery of clean urban drinking water.

Special attention needs to be paid to the Samurdhi programme. While some two million households benefit from this programme, recent research finds that the programme does not assist some 40 percent of the poorest income quintile. A new Social Welfare Benefit Law will be passed to establish the legislative base to target social assistance to eligible persons without politicisation. Clear eligibility and exit criteria will be established to limit the programme to the truly needy.

Improved accountability, transparency, predictability and popular participation in public affairs will guide efforts to improve governance. New approaches to developing human capital in government will guide the business-change process in the major ministries and departments. All government bodies will be encouraged to prepare business plans, hold stakeholder consultations and regularly report to the public on progress made. More open recruitment procedures will be used to attract better-qualified personnel, from within government and from the private sector, to serve in the government.

The press will play a vital role as a neutral watchdog, reporting on the way in which Sri Lanka's scarce public funds are utilised. There are several laws in place that hinder the freedom of the media. The government will rescind most of these laws this year including the Criminal Defamation Law. The right to information will be secured by law through an Act of Parliament. Government policy is to ensure that the state media acts impartially and enlightens the public about how government finances are used.

To ensure that women's concerns are better reflected in the political system, the government will enact regulations reserving a minimum of 50 percent of all seats in local and national government elections for women.

Monitoring and evaluation
An effective monitoring and evaluation system is critical for tracking the implementation of the PRS. The Monitoring Team will meet regularly to assess progress in implementing the PRS and report regularly to the Secretary of Policy Development. A poverty reduction progress report will be prepared on an annual basis.

The actual resource envelope available for poverty reduction efforts will depend on a number of variables that are difficult to predict, such as the realisation of a lasting peace, the willingness of the private sector to support infrastructure investment and the international economic environment.

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