Private sector pension fund among budget proposals from regional SMEs
View(s):The regional chambers of commerce in Sri Lanka have responded to a call in August from the Ministry of Finance and Planning for budget proposals from the various stakeholders.
The budget is to be presented on November 21 by President Mahinda Rajapaksa, a few days after the conclusion of the historic Commonwealth Heads of Government Meeting (CHOGM) in Colombo.
According to a statement issued by Asia Foundation, the government has identified the Small & Medium Enterprise (SME) sector as a key driver of economic growth. In the post war development context, SMEs are expected to stimulate economic growth by contributing to the GDP and by deepening economic integration within the country. Given the fact that most of the business lobbies are situated in Colombo, there has always been a demand to get voices from other regions to inform and influence the budget discussions.
The SME sector needs not just support and stimulus but also requires more inclusion and representation, the statement said.
Asia Foundation said in response to the Finance Ministry call for representations, the Chamber of Commerce and Industry of the Central Province, representing the Regional Chamber Advocacy Forum, with support from the foundation conducted a series of consultations with business groups and trade associations to elicit and consolidate budget proposals across different provinces (other than Western).
Between August 30 and September 8, 2013 consultations were held at five regional hubs: Batticaloa (Eastern province), Jaffna (Northern Province), Kurunegala (North Western Province), Kandy (Central Province) and Rathnapura (Sabaragamuwa and Southern Province). Around 77 representatives of various business chambers and trade associations participated in these consultations and shared their concerns and priorities.
The proposals covering all key sectors and critical enablers have been submitted to the Ministry of Finance and Planning for consideration. Key cross-cutting recommendations from the SME representatives include: innovative ideas for credit guarantees, increased use of Value Chain Finance, strengthening the services of Credit Information Bureau, minimising administrative and procedural processes, import substitution in selected areas, setting up a private sector Pension Fund, establishing a Land Bank at provincial levels, subsidised schemes and incentive packages for alternate energy sources and promoting women entrepreneurs.
Several proposals made by regional chambers representing SMES in the last 2013 budget, under a similar Asia Foundation-led consultation, were incorporated in the budget for implementation.
Here are the proposals submitted by the regional SMEs in the national budget 2014 process:
A) SECTOR – Dairy
Constraining issues:
=High market penetration of imported milk powder due to cost advantages.
=Low pricing of domestic milk – rates lower than that of packaged water.
=High transportation costs from farm to factory.
=Low productivity of domestic dairy sector.
Policy/Tax proposals
=Higher import tax per kilogram of imported milk to shift existing consumer base to local providers.
=Setting up milk purchasing centres in clearly demarcated local areas in close proximity to dairy farmers, to facilitate collection of milk with low transport costs.
=Extension services to be provided to transfer technical knowledge and inculcate best practices among local dairy farmers.
=Focused efforts from Livestock Development Department and other relevant agencies to Business Development Services to encourage new industries in this field.
B) SECTOR – Construction
Constraining issues
-Small and medium contractors are unable to claim input VAT.
-Contract selection criteria stipulate prior experience which inhibits new local entrepreneurs, especially in post-conflict areas, to participate.
Policy/Tax Proposals
The VAT system should either be:
=Fully implemented for all sectors (including retail sector) with a lower threshold and abolish the NBT system or, =Completely abolished and charge NBT for manufacturing, import and service sectors at different rates similar to BTT system.
=The second option is beneficial in the Sri Lankan context for the IRD (Tax Department) as well as the tax payers. Even though the VAT system is sound in principle it complicates matters. Eg. VAT branch fraud, complaints on delay and non-payment of VAT refunds. All these burdens will end if VAT system is abolished.
C) SECTOR – Tourism
Constraining issues
=Though tourism is booming as a result of peace and stability, the sector is hit hard by lack of trained and qualified personnel.
=Visa extension facilities are not available in the regions.
=Outreach of Tourism Matching Grants has been limited due to operations through a single bank – People’s Bank.
Policy/Tax Proposals
= Activating and developing Hotel Management Schools in coastal areas like Trincomalee and Jaffna and reactivating defunct schools like the one in Pallekelle.
=Tourist Visa extension services should be decentralised through regional offices of the Department of Emigration and Immigration.
=Widening the access to Tourism Matching Grant facility by allowing more banks to participate.
D) SECTOR – Agriculture
Constraining issues
=Severe shortage of warehousing facilities for paddy, vegetables and fruits during the harvesting season result in wide price fluctuation.
=Inadequacy of funds for the paddy buying agencies (appointed by the government) to buy large volumes of paddy during harvesting period. Inadequacy of funds for the paddy buying agencies (appointed by the government) to buy large volumes of paddy during harvesting period.
Policy/Tax Proposals
=Renovation of abandoned warehouses in areas where large scale cultivations are practiced.
=Incentives and concessionary loans for the private sector to encourage construction of large scale warehouse to provide storage facilities on a rent basis based on floor area and optional facilities provided.
=Introduce loans with concessionary rates for purchases of agricultural produce.
=New technology and innovations to be introduced for augmenting and improving storage facilities with international and government assistance.
E) SECTOR – Transport
Constraining issues
=Unregulated three-wheeler taxi market has made this sector extremely profitable and runs the risk of being overcrowded.
Policy/Tax Proposals
= Strict regulations for metered taxis.
SME ENABLERS
Cross Cutting Enabler
1) Finance
Key issues
=Host of issues plague the financial support systems for SMEs – constraints in access to credit, low availability of information on financial schemes, demand for collaterals, high interest rate, etc.
Policy Proposals
Proposals mooted are organised under five specific heads:
1.1 – Policy/ Tax Proposals
=Introduce credit guarantees in collaboration with identified donor agencies as a means to reduce collateral requirements and reduce the risks for lenders.
=Introduce a system for furnishing Personal Group Guarantees from individuals involved in the same business.
=Consider acceptance of Floating Mortgages on movable assets such as stocks, debtors, etc.
=Consider entrepreneurship skills and track records of the business as a qualification for loans. Allow private Venture Capital firms to invest in profitable SMEs.
1.2 – Encourage Value Chain Finance
=Encourage the increased use of “Value Chain Finance”, integrating commercial banks within specific supply chains which will increase the availability of funds for small producers and SMEs.
=Introduce interest free profit sharing loans where banks can get a percentage of profits as an alternative to the current practice of banks charging high interest rates.
=Central Bank should monitor SME loans from initial inquiry up to issue of loans.
=Make legal provisions to ban and/or introduce penalties to prevent banks from charging unfair bank interest and associated charges on loans granted from SME loan funds.
=The banks should issue a reference number by which entrepreneurs could inquire about progress processing of loans, if necessary.
1.3 – Strengthen services of the Credit Information Bureau (CRIB)
=Make provisions to prevent CRIB entries which could adversely affect SMEs.
= Appoint CRIB clearance officers or CRIB Ombudsmen at district levels to attend to complaints by SMEs.
= Investigate and clear CRIB entries where reasonable (black-mark clearance officer).
1.4 – Introduce SME Loan Insurance Scheme
=Design and introduce SME Loan Insurance schemes.
=Involve the Central Bank to mitigate risks to banks and SMEs.
1.5 – Minimise Administrative and
Procedural Issues
= Introduce SME Loan officers (desk) in each of the respective regional bank branches and ensure that they have a sound knowledge of all SME loan schemes. Introduce incentives to the loan officers in terms of volume of loans granted in each month.
= A system should be developed to record every loan inquiry or application from the date of inquiry or issuing of application.
= Introduce a system to involve the Central Bank to record and monitor progress of SME loans and investigate any delays in releasing loans by banks.
= Certain foreign grants have not been given to new industries due to non-approval by state authorities. The government should appoint a special desk in each district to provide quick approvals for such foreign grants.
2. Banking
Key issues
=Over-lending by banks has resulted in inability to pay interest and installments and subsequent failure of so many businesses around the country.
=Loans are usually issued under floating interest rates to minimize risk. However due to government liquidity issues, the Central Bank regularly increases interest rates.
Policy Proposals
=Banks should be directed to specifically check the total gearing ratio including leases and other form of loans and also ensure that the total cumulative interest charge is less than the cash (liquid) profit of the entire business.
=Government should pursue a very stable and consistent interest rate and also instruct banks to issue all business loans at fixed interest rate.
=SME businesses are often ‘locked up’ in a single service contract with banks with no access to critical services like cheque discounting facility resulting in relying on informal expensive arrangements like ‘Poli Mudalali’.
=All banks to provide mandatory cheque discounting facilities.
3. Competitive Environment
Key Issues
=Unfair trade practices stifle local entrepreneurship. This coupled with poor regulation makes survival of SMEs difficult.
Policy Proposals
=Setting up a Monopolies Commission with adequate investigative and enforcement powers to pursue and penalise complaints related to unfair competition and restrictive practices.
4. Import Substitution
Key issues
=Unregulated import strategy has resulted in both adverse macroeconomic conditions and shrinking profitability of local SMEs.
Policy Proposals
=Forming a separate unit within the Central Bank to identify areas for import substitution and continuously make fiscal policy adjustments to demotivate imports and motivate local production.
5. Customs Clearing
Key issues
=Lack of accountability and widespread instances of rent-seeking activities.
Policy Proposals
=Installing and using electronic scanners to identify export and import goods without physically opening packages and electronic determination of product category (HS code) and duty rate so that human intervention and resulting corruption could be avoided. This system could be initiated at the Hambantota Port.
=An independent panel to act as Ombudsmen for mitigating grievances in the Customs sector.
6. Labour
Key issues
=The EPF department has taken steps to recover EPF for the ‘war’ period from employers in the Northern and Eastern Provinces. The businessmen who are already trying to survive with extra expenses to overcome the effects of the past war are burdened with past EPF.
= There is a lack of suitably trained employees and staff in the private sector. Inspite of high salaries, there is an exodus of skilled labour force from the private to public sector for reasons of job stability.
Policy Proposals
=It is proposed that an amnesty be provided for all labour-related charges such as EPF, ETF, gratuity and other benefits during the war period.
= To strengthen welfare benefits in the private sector, two specific proposals are mooted: Setting up a Private Sector Pension Fund, and setting up an EPF Bank to provide loans to employees.
= Both these mechanisms can be funded through existing funds available in the EPF account.
7. Land
Key issues
=Businesses cannot put up factories within a short time due to long and complicated process of leasing or purchasing state land.
=Regulatory processes for land approval are cumbersome and require multiple visits to numerous agencies/departments.
Policy proposals
=A Land Bank to be established at provincial level to assist entrepreneurs to obtain suitable land in a short time frame to set up business operations.
=To streamline regulatory procedures, a One-Stop Shop for land transactions should be set up at the provincial level.
=Identify suitable land and develop more industrial estates in every district to create more business opportunities and job opportunities.
8. Power and Energy
Key issues
=Recent hike in power tariff has had a major adverse effect on many industries, especially those operating under price-control regimes.
=Existing restrictions that limit power supply to local industries with 60 Amps power-lines allow operations of machinery only up to 30 HP.
=Tariff differentials within the same value chain – for e.g., in the poultry industry, power tariffs differ between cool room building and cool room container.
Policy Proposals
=Subsidised schemes and incentive packages for alternate energy sources like solar energy.
=Augmenting existing single 60 Amp power lines to 100 Amp or provide two 60 Amp lines.
=Harmonisation of power tariffs within a particular value chain.
=Subsidy scheme for SMEs in power deficit areas to procure generators.
9. Incentives for Women Entrepreneurs
Key issues
=Difficult in access to credit for women in business as there is no special treatment for women.
=Difficulties faced by women entrepreneurs in obtaining Business Development Services (BDS) in government offices which is dominated by male officers.
Policy Proposals
=Establish separate unit or desk for women in the existing banking system where only women work in the desk to serve women. It is also proposed to have a special bank for women.
=Every government department too should have a desk for women operated by women.