Private sector still lacks confidence
Despite the promising start to the peace process and economic reforms made by the government, the private sector apparently remains unconvinced. Except in a few cases private investors have yet to put in big money into the island.

There are still deep misgivings about the ultimate success of the peace effort, the government's ability to push through unpalatable economic reforms, the stability of the ruling coalition itself, rumblings of discontent among labour unions, and the possibility of a People's Alliance-Janatha Vimukthi Peramuna combine replacing the United National Front.

The uncertainty about the ultimate success of the peace talks was always a factor that made private investors hesitant about committing large sums of money for long-term investments. They would naturally want to wait until a final deal is signed to make sure the last shot has been fired in the Eelam war. True, the stock market appears to be zooming but funds invested in stocks can be pulled out quickly, unlike in the case of project investments. The LTTE's partial pullout of the peace talks has struck a further blow to investor confidence, making them even more reluctant to put money in.

Repeated talk of plans by President Chandrika Kumaratunga to topple the UNP government through a PA-JVP alliance is also troubling for the private sector, which would naturally be wary of any government with left wing tendencies. That would surely affect the confidence of foreign investors.

The private sector has always been worried about a JVP influence in any future government as this could dilute reforms and introduce an unhealthy bias towards labour and prevent badly needed improvements in productivity.

The UNP government is hoping that the big sums of aid already pledged by donor agencies like the IMF, World Bank and ADB would be seen by investors as a sign of confidence which in turn would give them the confidence to invest.

But there is another issue that is affecting investor sentiment. That is the enormous amount of red tape and delays still encountered by businessmen in getting approvals for their projects and the problems caused by having too many ministries with overlapping functions. This is one area where the government can clean up its act if it really wants to. But it apparently lacks the will to do so.

Under the circumstances the least the government can do is to make it easier for investors by cutting red tape and making government machinery function more efficiently as it keeps promising to do. But there are growing complaints that this government lacks direction and is too lethargic.

As Dr. Dushni Weerakoon from the Institute of Policy Studies pointed out recently red tape and the presence of too many ministries has been cited as one of the factors discouraging investment. Apart from political uncertainty, the private sector has not taken advantage of the peace process to invest heavily in the economy largely due to administrative problems.

Even the latest economic statistics put out by the government, while pointing to a healthy recovery, apparently has not done much to inspire confidence in the corporate sector.

But it is also the responsibility of the business community to bolster what is "their" government - to make it work better and ensure it does not fall in any future election because voters are dissatisfied with the government's efficiency and its inability to curtail abuse of power and corruption. Some of the private sector people who have come into government appear to be doing a solid job and have made an impression, turning around and giving a new look to the organisations that are in charge of. It is up to others to do the same.

Fiscal devolution: Key issues of concern
By Professor Willie Mendis, Senior Professor, University of Moratuwa
The `Peace Process' is now at the threshold of the core issues of conflict resolution through dialogue. It began with the inclusion in the Agenda of Talks between the Government and the LTTE, the aspect of `Fiscal Devolution'. The parallel initiative was to establish the Sub-Committee on Immediate Humanitarian and Rehabilitation Needs (SIHRN). The latter being to undertake the Needs Assessment which would enable the provision of national and international resources as are adequate for the purpose of meeting the immediate needs of reconstruction and rehabilitation in the conflict-affected areas. It was the correct decision taken by the parties involved in the `Peace Talks', as there was no tangible development work associated with the same.

The developing scenario described above therefore seems to co-terminously manifest the evolution and change of the administrative system in the conflict areas. Certain functions continue to be performed with the government's mainstream administration alongside newly emerging policy and developmental functions under SIHRN. These unorthodox Institutional Systems to undertake orthodox functions have raised concerns in the minds of the general public and even others, about its implications for the reform agenda for public management in the country as a whole. It is therefore opportune to review the orthodox Institutional System which had evolved in the democratic process to meet the challenges of sub-national development, and to source its salient features that are universally relevant in whatever form of governance that will arise through Constitutional Reform when the peace process moves forward transiting the current unorthodox institutional arrangements.

In the above context, it is most relevant for everyone to be reminded that Sri Lanka always had a system of governance at the local level. Until 1987, the two-tier system of government in Sri Lanka comprised a partnership at two levels, namely the national and the local. Its inadequacies arose primarily out of the massive dominance of the national government over local government. The latter was aptly set out as follows by the then Commissioner of Local Government, the late Mr. Shirley de Alwis, in the foreword of the pioneer publication in 1975 on Local Government in Sri Lanka which was authored by the writer of the current article:

"The limited range of functions assigned to local authorities, the encroachments on the sphere of local authorities by statutory boards and corporations, the failure to reform the local government structure, inadequate financial resources and the ill-defined nature of the relationship with the Central Government have contributed to the ineffectiveness of local government in this country. The crisis in local government needs no further elaboration. It is a crisis that is found in many countries of the developing world."

The modern system of Local Government (commencing from 1865) as against what existed in the early times, have thus always received the `back-office treatment'. Its continuous inadequacy was attributed to the lack of capacity to satisfactorily undertake the mandated functions assigned to it by the respective statutes which created them. On the other hand, what was done to facilitate `capacity building' of the local authorities, were hugely under-resourced. Its most significant lapse was the absence of `professional help' for them to frame specific By-Laws that would have not only helped better local governance but also improved revenue generation to undertake its mandated function of "regulation, control, and administration of all matters relating to the public health, public utility services and public thoroughfares, and generally with the protection and promotion of the comfort, convenience and welfare of the people and the amenities in the area".

The assigned functions and the array of opportunities afforded statutorily to raise revenue, other than by taxation, thus went into decay and retreated to the backwoods in every Local Authority. The latter compelled the Centre to acknowledge the importance of professional help in framing By-Laws as a fundamental feature of democratic local governance. Therefore, it determined that it will facilitate the same by the framing of `model By-Laws'. The experience of the latter has nevertheless been that it did not catalyze the members, officers and servants of local authorities to begin taking it seriously in its usage to frame custom-designed by-laws for its respective areas.

The by-laws alone would not have been effective tools for local development. It may help to bolster revenue, but its sustenance requires trained professional staff for the proper management of the assigned functions related to the same. The inability by the local authorities to afford such recruitment to the Local Government Service, prompted some Central Government agencies to annex its professional staff in promoting local development. In this connection, a key agency which was mandated to complement the assigned functions of local government, comprised the Department of Town and Country Planning established under the Town and Country Planning Ordinance No. 13 of 1946. It began to assist those local authorities which requested its assistance to prepare Land-Use Plans and its accompanying Planning and Building Regulations. However, such `external assistance' made it being literally regarded as Technical Assistance for the specific functions of regulating `building construction' and `land-sub division'. On the other hand, it was not incorporated as an important tool for corporate management, inclusive of its leverage on revenue generation for budgetary purposes. Consequently, only a few local authorities made use of this `free' external assistance.

It is in the above environment that two phenomena in mainstream social and economic change began to impact upon the orthodox institutions. One was increased urbanisation accompanied by the emergence of the `Information Revolution'. The other was the social demand for participation in the development process. The former resulted in the compulsory annexation by the Urban Development Authority (UDA) of all Urban Local Authorities and of several non-urban ones, in the integrated planning and implementation of development activity under the Urban Development Authority Act No: 41 of 1978 and its subsequent Amendment Acts. While, the latter transformed some of these authorities, especially in the Western Province, the majority became even more marginalized by being centrally driven. This prompted the UDA to subsequently exercise the power vested by its Act to decentralise UDA Planning and Development Control functions to the Local Authorities by Circular instruction issued on 27 March 1985 to "All Mayors of Municipal Councils, All Chairmen of Urban Councils, and District Secretaries of the then Development Councils in respect of areas within their jurisdiction declared under the UDA Law". It came too late as the duties cast under its own laws together with the delegated powers under the UDA law, overwhelmed the local authorities. Consequently, while the profile of the UDA itself hit the high-point, the local authorities were only able to clothe themselves under powers of the UDA without necessarily undertaking development activity of their own in their respective areas.

Meanwhile, under the second of the aforesaid phenomena, social tensions developed unabated. The consequence of same was the enactment in November 1987 of the 13th Amendment to the Constitution. It created another tier of government called the Provincial Councils which were established under its Act No: 42 of 1987. Accordingly, by the Constitutional Amendment, Sri Lanka now has a three-tier system of Government - namely National, Provincial, and Local. While, they are independent horizontally, they inter-lock vertically with Centre - Periphery dependence between National and Provincial Governments, and between Provincial and Local Governments. The significance of the 13th Amendment was the designation of the unit of the 2nd - tier of government to be co-terminus with the conventional administrative provinces. It also had exclusive lists of functions assigned to the National and Provincial levels of Government. However, for whatever the wisdom of the legislature, it retained a third list of functions called the "Concurrent List", within the prerogative of the Centre.

The 13th Amendment further introduced the concept of `Fiscal Devolution' affirming that the country had embarked on the process of devolution in governance. The latter could have only been effective to the extent it had access to adequate resources to meet the needs of each devolved unit. The latter therefore became central to the harmonisation of the Constitution - crafting with fiscal devolution. However, the enabling institution for the latter, namely, the Finance Commission, provided under Article 154 of the 13th Amendment, was unable to meet the aspirations of the devolved Governments for several reasons beyond its control. Consequently, the issue of `Fiscal Devolution' has re-emerged as the centrepiece of negotiations at the on-going Peace Talks.

The most controversial aspect is the interpretation of Article 154R(3) of the 13th Amendment, which stipulated as follows:

"The Government shall, on the recommendation of, and in consultation with, the (Finance) Commission, allocate from the Annual Budget, such funds as are adequate for the purpose of meeting the needs of the provinces".

Underlying the above, the Finance Commission remains obligated under Article 154R(4) and (5) of the 13th Amendment to recommend the allocation of funds to the provinces based on certain principles with the objective of achieving balanced regional development in the country, taking into account:

* the population of each province;
* the per capita income of each province;
* the need progressively to reduce social and economic disparities; and
* the need, progressively, to reduce the difference between the per capita income of each province and the highest per capita income among the provinces.

In the interpretation of the aforesaid Article 154R(3) lies the origins of the concerns on Fiscal Devolution which need to be resolved through dialogue at the Peace Talks. Its agreement will be the beacon for its next stage which are then likely to focus on Functions, and thereafter on the Unit of Governance, and finally on Governance itself.

It is thus pertinent to note that as far back as June 1989, the Finance Commission sought clarifications from the Attorney General on the terms, "needs of the provinces", and of "adequate funds". The reply as follows to this gives useful guidance to those interested in Fiscal Devolution during the on-going Peace Talks:

Needs of the Province
Sub-Article 3 states that the Government shall on the recommendation of the Commission "allocate from the Annual Budget such funds as are adequate for the purpose of meeting the needs of the provinces."

The use of the plural form "provinces" would emphasise that the "needs" contemplated are those of all the provinces taken as a whole, in respect of meeting the expenditure necessary for effectively implementing the devolved (List 1) or the concurrent (List III) functions on the provinces by the Amendment. In other words, regard should be had to the ascertainment of what amount of monies out of the annual budget will be sufficient to meet the fiscal needs of all the provinces to implement the devolved and concurrent functions. The Commission will have to take into consideration, among other things, the willingness and the capability of Provincial Councils to exercise their functions, the need for the Government to maintain the services in respect of devolved and concurrent subjects until the Provincial Councils are geared to perform such services, and the financial resources which are actually available to Provincial Councils utilising their fiscal powers in List 1 and their borrowing powers implied in the Provincial Council's Act.

The needs of each province would vary, depending on the actual position prevailing in a particular province in respect of the matter stated above. The Commission, in recommending the allocation of funds, will first have to compute the "needs" of each of the provinces determined as set out, and then aggregate the whole as the "needs of the provinces".

Since the provincial administrations are permitted revenue sources of their own (such taxation in specified fields and borrowing), the duty to allocate would not extend to all their needs but only in respect of such needs which they cannot meet by exercising their fiscal and borrowing powers. The Government, guided by the recommendations of the Commission would have to meet the shortfall.

Adequate for the purpose
Once a determination is made by the Commission of the "needs of the provinces", it becomes necessary for the Government to provide adequate funds for meeting these needs. Basically, the Government should seek consultation with the Commission, to fill the gap between the expenditure needs of the provinces and the revenue collections available to them from the devolved tax revenues and other revenue sources which may be envisaged in the 13th Amendment.

With regard to making a determination on the "adequacy" of such funds, it is possible to take into consideration the fact that the Provincial Council is empowered to borrow monies, provided that the nature and extent of the actual potential to obtain finance by borrowing is clearly assessed.

The above-mentioned interpretation therefore prompts us to contrast same with experiences in other countries.

The literature available on the experience of Fiscal Devolution in many countries clearly indicates that it can never be modelled on a universal system. It must necessarily be country-specific; although benchmarking models can be useful. In this connection, it is however, pertinent to note a remark made by the Attorney General in the course of his aforesaid clarification on Article 154R. He submitted that "the structure of the Finance Commission; requires a mix of fiscal and socio-economic expertise". The relevance of the latter reinforces the nexus between the Provincial Councils and Local Authorities with the Town and Country Planning legislation. It had the advantage of formulating the Provincial and Local Plans that were statutorily obliged to intrinsically integrate the economic, social, physical, and environmental aspects of land in its declared bounds. Consequently, inherent in the Plan would have been the mix of expertise which was referred to by the Attorney General. It could have therefore been the `centrepiece' of the budgetary process in these respective bodies, as it would have clearly set out the planned duration, and the manner in which the Projects and Programmes of their mandated functions were to be financed, whether from taxation or borrowings or from transfers. It could have thereby facilitated the Finance Commission to formulate its recommendation to the Government for the allocation of funds as would have been adequate for the purpose of meeting the needs of the provinces.

Meanwhile, in 1999, the National Government reacted positively to strengthen the devolved tiers of Government. Thus, by Act No. 31 of 1999 the Sri Lanka Institute of Local Governance (SLILG) was established to focus on the capacity building of Provincial Councils and Local Authorities; more specifically "to provide training to their members and officers and servants with a view to equipping them to perform their official duties efficiently and effectively". Consequently, the statutory mandate and responsibility of this fledgling institute offers a potent solution to the negotiations on both sides of the divide in the on-going Peace Talks. It has already structured itself to assist the Provincial Councils and Local Authorities in the spheres of, a) General management, b) Financial management, c) Engineering, and d) Physical planning. Under this umbrella it also provides assistance in the formulation of By-Laws on revenue generation and non-revenue generation subjects. Furthermore, it has established a Research Division to undertake work on the Needs Assessment of the devolved bodies which could in turn strengthen the Institute's overall efforts in their Training and Capacity Building.

The SLILG functions in collaboration with the Provincial Management Development Training Units (MDTUs). The latter also straddles the Central Governments premier training arm, namely, the Sri Lanka Institute of Development Administration (SLIDA). Accordingly, the SLILG occupies a key slot for the success of a devolved system of governance.

The anticipated strategic role of the SLILG is reflected in the composition of its Governing Council. Of its ex-officio membership, five are Secretaries of key Cabinet Ministries, and in addition, includes representation from Academia, Private and Non-Governmental Sectors, Professional Organisations and from the Association of Local Authorities. It is therefore a powerhouse of enablers. It cannot be, and should not be marginalized in the current context of events. Hence the focus on this relatively low-profile agency is essential, timely and opportune.

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