business in bearable proportions
creeping into Sri Lanka's business community? Shouts of
"Let's march to the Treasury" or "Let's close the
factories for a day as a mark of protest" echoed at a recent
meeting of associations representing garment manufacturers, exporters
and buyers to discuss a controversial port and airport development
The whole industry
said it opposed the tax. "We have been in intensive care all
this while. This new levy will send us to the mortuary," one
industrialist joked. Jokes apart, the new levy is seen killing the
goose that laid the golden egg in a sector that has grown from a
cottage industry to an international class player.
What is all
the fuss about? Industry representatives have urged the government
not to impose the one-percent levy. But instead of deciding against
proceeding with it, the tax was reduced to 0.75 percent.
are furious and many gave vent to their frustrations by urging street
action to make the government relent. "We may have to protest
on the streets to exert pressure on the government not to levy the
tax. There is no other way they would listen to our pleas,"
said veteran industrialist Cassian Fernando. Another industrialist
suggested closing factories for a day as a protest.
moderate voices cautioned against such radical measures saying one
should not get emotional or act like trade unionists but suggest
a temperate counter-offensive if the tax is not lifted.
- particularly small and medium scale exporters - is "going
through hell", in the words of one manufacturer, because of
a recession in the West coupled with the attack on the Colombo airport
last year which crippled exports. Any additional burden on the industry
would lead to factory closures, job losses and bankruptcies. The
industry also learnt with surprise that Board of Investment levies
were going up.
100 from 869 garment factories are able to keep their heads above
water. The rest are doing badly, the meeting was told. It's not
surprising then that industrialists want firm action and not "verbose
have been given by some cabinet ministers that this tax is a temporary
one to tide over a crisis and would be lifted next year. But is
there any written guarantee, one industrialist asked, saying: "how
do we know they won't go back on their word?"
The call for
street action is a reflection of how society has come to perceive
government and parliamentarians. There is a serious lack of credibility
on the part of all our politicians. They cannot be trusted and the
public is no longer convinced that assurances and promises will
be kept however trusting a minister can be.
is lacking amongst parliamentary representatives and garment industrialists
like many others know that writing letters or meeting government
officials to get assurances don't work any more. The call is now
for firmer action in the only language that governments understand
- street protests.
in recent years by the public over a range of issues have made or
broken ruling parties. Journalists have resorted to it to protect
their rights; human rights groups have taken to the streets to stress
a point and many other protests marches have come from the community.
- who have been at the receiving end of trade union action by workers
- want to join the bandwagon to push the government into some action.
is clear - if industrialists are unhappy about the way government
business is conducted then the UNP's pledge to have a clean government
and to initiate speedy corrective action becomes just a hollow promise.
On the other hand, the government is short of revenue and taxing
business is the only way to fill empty coffers.
If what the
garment sector says is true, there is a need to re-examine tax measures
and make sure they are equitable and bearable.
Doing business in N-E Sri Lanka
Problems, opportunities and challenges
By Muttukrishna Sarvananthan
There are two major problems encountered in doing business
in the northeast despite the Sri Lankan government unilaterally
lifting economic sanctions in January: one is the infrastructural
bottleneck and the other is the taxation by the LTTE. The former
includes poor conditions of roads, lack of electricity and telecommunication,
the absence of railways, inter alia.
The roads in
the LTTE-held areas are in a deplorable condition, which increases
the transport cost of goods. Even after the opening of the A9 highway
from Vavuniya to Jaffna the road transport cost is expected to be
high because of heavy wear and tear to vehicles plying that route.
Particularly the A9 route from Mankulam to Palai is in very bad
condition. The interior roads are even worse especially during the
rainy season, because most of it is gravel roads. Further, the arbitrary
tax imposed by the LTTE on vehicles carrying goods is another key
factor that pushes up the transport cost even higher.
The lack of
electricity, telecommunications and railways are other major impediments
to doing business in the LTTE-held areas of the north and the Jaffna
peninsula. The lack of electricity in the LTTE-held areas prohibits
manufacturing activities. The limited number of electric generators
used is totally inadequate to cater to the needs of the producers
and consumers alike, and is costly. The limited supply of power
in the Jaffna peninsula is far short of the requisite. The absence
of telecommunication links with the rest of the country greatly
increases the transaction cost of businesses in the LTTE-held areas.
Even the limited telecommunication facilities available in the Jaffna
peninsula are totally inadequate to fulfil the demand. Usually,
it takes a long time to make a call to or from Jaffna. The absence
of railways, probably the cheapest source of transport to the province,
is another cause of the cost-push inflation in the province.
The lack of storage facilities is yet another impediment to
doing business in the LTTE-held areas. For example, though the free
flow of petroleum products to the LTTE-held areas is ensured in
the Memorandum of Understanding (MoU) there is a lack of demand
for diesel and petrol in those areas. This is mainly because almost
all the vehicles (two, three, and four-wheelers) in the LTTE-held
areas have been converted to run on kerosene (paraffin) during several
years of economic sanction. Moreover, there are no underground storage
facilities for petroleum products in LTTE-held areas, and over-ground
fuel tanks are wasteful due to evaporation.
storage facilities for agricultural and fish produce are also lacking
for want of suitable buildings and ice manufacturing plants in the
LTTE-held areas of the Wanni region. Therefore, the export of perishable
agricultural and fish produce of the LTTE-held areas to the rest
of the country is undermined. During the pre-war times, while rice
was exported from the Wanni region to the Jaffna peninsula, cash
crops such as onions, chillies, and tobacco were exported to the
South from the Wanni region. Besides, it is claimed that about two-thirds
of the total requirement of fish in Sri Lanka used to be caught
along an 80-mile coastline off Mullaitivu. Hence, the Wanni region
used to be a significant supplier of agricultural and fish produce
to the rest of the country including the Jaffna peninsula. These
past data indicate the potential out there. The lack of storage
facilities for perishable agricultural and fish produce calls for
the revival of the construction industry in those areas. However,
due to the dearth of bank finance (loans and overdraft facilities)
to fund construction activities, the construction industry is still
dormant despite the lifting of sanctions on construction materials
such as cement, bricks, asbestos, tiles, etc.
of the full business potential after the lifting of economic sanctions
is delayed primarily because of infrastructural bottlenecks such
as the poor condition of roads, lack of electricity and telecommunications,
and the absence of railways. Since the lifting of sanctions on January
15, though there is a surge in the export of consumer goods such
as bicycles, bicycle parts and accessories, motorcycles, plastic
furniture, office machinery, stationery, radios, televisions, building
materials, etc, from the rest of the country to the LTTE-held areas,
there is a long way to go to exploit the full business potential.
factor inhibiting the realisation of the full business potential
in the aftermath of the lifting of the economic sanction is the
arbitrary taxation of goods and vehicles en route to the Wanni region
and the Jaffna peninsula by the LTTE. The taxation by the LTTE,
though is justified in order to run a parallel administration in
the territory under its jurisdiction, extends to goods meant for
personal use as well. This arbitrary taxation is debilitating to
the entrepreneurial instinct of the masses, especially in the LTTE-held
Due to the
high transportation cost and extra-legal taxation the prices of
goods in the Wanni region are still quite high though lower than
during the time of economic sanctions. Similarly, though the prices
in the Jaffna peninsula have fallen after the opening of the A9
highway they are still quite high compared to the prices in the
rest of the country, because of high transportation costs and arbitrary
taxation. In fact, the people of the Wanni region are worse off
now than during the time of economic sanctions. During economic
sanctions there were severe restrictions on the export of Wanni
produce to the rest of the country including the Jaffna peninsula.
Therefore, the local agricultural and fish produce were relatively
cheaper in the Wanni region. However, in the aftermath of the lifting
of economic sanctions and the opening of the A9 highway more Wanni
produce is being exported to the rest of the country including the
Jaffna peninsula. These exports have resulted in higher local prices
for agricultural and fish produce in the Wanni region, which has
made the producers better off but the consumers (who are the majority)
the re-building of basic infrastructure such as roads, power, telecommunications,
and railways are sine qua non for the full realisation of the business
potential in the north-east province.
The north-east province encompasses eight districts: five in
the North and three in the East. According to the Central Bank of
Sri Lanka, in 2001, there were about one million people living in
the North and 1.4 million in the East. This data is based on the
latest census undertaken in mid-2001. However, the data for the
North is questionable because the census could not be undertaken
in any of the districts of the province last year. Besides, the
population data for the East is also suspect because about two-thirds
of the land area in the East is under LTTE-control where the census
was not undertaken last year.
actual total population of the north-east is not known to anyone
primarily because no proper census could be undertaken in that province
(especially in the North) after 1981 due to the civil war. However,
according to disparate data from various sources, there may be about
two million people living in that combined province: divided into
one million each, out of the total Sri Lankan population of around
18.7 million in 2001. Thus, nearly 11% of the total Sri Lankan population
resides in the north-east. A substantial proportion of the Eastern
population lives in the government-controlled areas, though about
two-thirds of the land area of the East is under LTTE-control. In
the North, the Jaffna peninsula has a population of about 500,000
and the government-controlled areas in Vavuniya and Mannar districts
have another 100,000. The rest - 400,000 - live in the LTTE-held
areas in the Wanni region.
figures are given in order to estimate the size of the market in
the north-east. However, the population size of the north-east given
above is a rough estimate, and therefore should not be construed
as perfect figures. Nevertheless, the market of the north-east is
quite a big one, which has a significant business potential.
priority for the province (especially the North) is the infrastructural
development, it is highly unlikely that private capital (whether
local or foreign) would flow into this sector especially because
it is still a contested territory by the government and the LTTE.
The infrastructural development should be undertaken jointly by
the government and bilateral and multilateral donors. The agriculture,
manufacturing, construction, educational and financial (banking
and insurance) services, wholesale and retail trade all have huge
potential to exploit. However, due to the aforementioned infrastructural
bottlenecks the realisation of this huge potential is expected to
opportunities are in the agriculture, construction, educational
and financial services, and wholesale and retail trade. The manufacturing
sector (medium and large scale) will take sometime to take off because
the infrastructural prerequisites are very limited at the moment.
The north-east, historically, was an agricultural economy. The predominance
of the agriculture sector has not essentially changed during the
civil war. However, in the pre-war time the region was a significant
exporter of agricultural and fish produce to the rest of the island.
These agricultural exports included rice, onions, chillies, tobacco,
lentils, etc. But, nowadays the agriculture sector in the province
has been transformed by large subsistence agriculture, especially
in the Northern Province. The agriculture sector has been severely
hampered by economic sanctions that had restrictions on fuel, fertiliser,
and pesticide going into LTTE-held areas. Hence, there is a potential
to revive the commercial agricultural sector in the province especially
for exports to the rest of the country.
One of the
most lucrative sectors to invest is in the construction sector of
the north-east. Due to the protracted civil war, damages to homes,
commercial and public buildings, roads and bridge are immense. Therefore,
with the ongoing resettlement of displaced people at their original
homes there would be a huge demand for construction services. Therefore,
the businesses involved in construction services have a huge potential
to exploit in the province.
sector has a key role to play in the reconstruction and rehabilitation
of the north-east. With the anticipated flow of reconstruction and
rehabilitation funds from the government as well as from the bilateral
and multilateral donors the need for the banking and insurance sectors
is real. The lack of capital is a major constraint to investment
in the province. The re-establishment of financial institutions
would go a long way in bridging the gap between savings and investment
in the province. The financial institutions in the province would
also benefit from private remittances from abroad.
the human resources of the north-east have been one of its most
valuable assets. The people of the province have been investing
a lot on education. This investment continued even during times
of war despite severe hardships, such as occupation of schools by
the Sri Lankan armed forces, lack of electricity, transport, etc.
Therefore, the opening up of educational services in the province
would cater to the long felt need of the people, especially in the
fields of information technology and English language teaching.
Information technology and English language are the keys to success
in the 21st century. Information technology and English language
are absolutely essential for all academic disciplines. Therefore,
good quality educational services in information technology and
English language teaching would have a great demand.
There is a
huge pent-up demand for consumer goods especially in the LTTE-held
areas. Economic sanctions of the Sri Lankan government deprived
the people (especially who live in LTTE-held areas) of even basic
consumer goods including pharmaceuticals for over a decade. Therefore,
the establishment of wholesale and retail trade in the north-east
would facilitate access to markets for the population. However,
the lack of power and local taxes imposed by the LTTE is dampening
the realisation of such pent-up demand.
Due to the
long drawn out civil war a large proportion of the entrepreneurial
class of the north-east has migrated to other parts of the country
or abroad. Thus, there may be a dearth of entrepreneurs in the province,
especially in the LTTE-held areas. The involuntary displacement
of the Muslim community (who formed a vibrant trading community)
from the North (particularly from Jaffna and Mannar) also contributed
to this situation. The re-visiting of such entrepreneurs, as well
as newer ones, to the north-east would help shore up the fledgling
There are two major challenges awaiting businesspersons who
would like to do business in the north-east. One is the infrastructural
bottleneck enunciated above. The other is the arbitrary (strictly
speaking illegal) tax regime of the LTTE. It is well known that
the LTTE imposes its own taxes on traders, producers, and households
in the north-east including in the government-controlled areas.
The entrepreneurs and households in the government-controlled areas
of the northeast are paying taxes both to the government as well
as the LTTE.
In the aftermath
of the signing of the MoU the LTTE has spread its tax net to the
people living in the government-controlled areas as well, such as
the Jaffna peninsula, Batticaloa, Trincomalee and Vavuniya towns.
This has resulted in the slow exodus of people from these government-controlled
areas in the north-east to the rest of the island, particularly
to Colombo and the suburbs.
The Tiger taxes
create a moral hazard and an ethical dilemma for entrepreneurs planning
to establish manufacturing, trading, or service-oriented business
in the province. Should we pay or should we not, is the question
often asked. The situation is delicate. There is a huge unemployment
problem in the region due to the civil war. Therefore, the business
community has a social responsibility to establish businesses in
order to create employment opportunities and draw the vast army
of unemployed into the national mainstream, and prevent them falling
into the wrong hands.
On the other hand, how does the business community handle the
issue of Tiger taxes? There are two options - one is to refuse to
pay and the other is to pay up. The former is the ethically most
correct thing to do. Having said that I am not sure how far this
is practically possible. Therefore, some business people may decide
to pay up the Tiger tax and continue to do business in the region.
If this is the option left to any businessperson then I would suggest
a mechanism by which they could mitigate the effects of such unethical
taxes. That is, no one should pay the Tiger tax directly to the
LTTE. Instead they may ask the LTTE to suggest some social welfare
programmes, or community services they would like to do for the
local community and finance such programmes or services. By this
mechanism the taxpayers do not pay cash to the LTTE, but fund community
welfare-oriented projects identified by the LTTE. Thus, the taxpayer
would be providing a social service and at the same time ensuring
that their tax payments are not utilised for military purposes.
This mechanism, I believe, would mitigate the moral hazard of doing
business in the north-east at this critical juncture in the history
of this country.
If you opt
to keep away from doing business in the north-east the consequences
could be fatal to the entire country. Therefore, I would strongly
urge the business community to take up this moral and ethical challenge
and fulfil their enormous social responsibility to the north-east
and to the country at large. However, please try your best to avoid
paying the unethical taxes of the LTTE, if not at least try your
best to minimise the consequences of such taxes.
It is not only
important to establish businesses in the government-controlled areas
of the region. Please remember that it is absolutely vital to open
businesses in the LTTE-controlled areas as well, in order to provide
employment opportunities and revive the dormant economy of those
areas. Historically, the Eastern Province has been relatively less
developed than the Northern Province prior to the eruption of the
civil war. Therefore, please invest in the Eastern Province as well
when you plan to expand your businesses to the northeast.
Government of Sri Lanka also could help the business community in
mitigating the moral hazard of doing business by handing over the
interim administration of the province to the LTTE as soon as possible.
Once the LTTE takes over the interim administration there would
be no justification to impose its own taxes, because official funds
would flow for the development of the province. If the LTTE continues
to impose its own taxes even after the establishment of the interim
administration, what does the business community do? I would strongly
urge non-payment and non-compliance.
community of Sri Lanka is faced with an unprecedented moral hazard
and ethical dilemma in the north-east. I sincerely hope it has the
tenacity to mitigate this challenge.
is an economist and the above observations were made from study
tours to LTTE-held areas in the Wanni region during March and April
2002. However, he says he is yet to travel to the Jaffna peninsula
and the Eastern province and therefore these observations are somewhat