Business leaders, professionals have their say on Budget 2019

The 9th consecutive annual post Budget Forum 2019 organised by Daily FT and the Colombo University MBA Alumni Association brought together a host of business leaders and professionals to dissect Budget 2019 and share key insights on its impact on the economy and different sectors of the economy. It was the first public post-Budget forum and saw Finance Minister Mangala Samaraweera deliver the keynote address.The Forum featured John Keells Holdings Chairman Krishan Balendra, former Central Bank Deputy Governor W.A. Wijewardena, Chevron Lubricants Lanka PLC Managing Director and CEO Patrick McCloud, National Chamber of Exporters President Ramya Weerakoon, Standard Chartered Bank CEO Bingumal Thewarathanthri and Technical partner PwC’sTax Advisory Director Charmaine Tillekeratne. Finance Ministry Senior Advisor Mano Tittawela and Economic Advisor Deshal de Mel also figured on the panel which was moderated by Daily FT Editor Nisthar Cassim.

The most sought-after post-Budget forum was backed by Standard Chartered Bank as Strategic Partner.  Technical Partner was PricewaterhouseCoopers, Market Research Partner PepperCube Consultants Ltd., Creative Partner Triad, Print Partner Print Point and Hospitality Partner was Cinnamon Lakeside.

Q: What are your initial observations of Budget 2019?

Krishan: One of the big positives is that Budget 2019 is broadly consistent with the policies that were laid down in the past two years. Thereby, we have not seen any arbitrary or ad-hoc changes as seen in past budgets. Measures taken to broaden the tax base and tax net are commendable, as we haven›t lost focus despite the temptation during an election year.

In terms of physical investments and large investments, one of the concerns we have with capital allowances and so on is that there is no guarantee of continuity, which we need to have it in reference – hope that it will be in BOI reference to give some kind of assurance on the continuity of those taxes.

The other big positive is on the construction industry and construction costs, which affects all of us in terms of housing, hotels and apartments. Commitment to bringing down construction cost by reducing cesses is a major positive. We get duty concessions to BOI agreements over the years and there will be many other taxes that have been reduced, but on large projects like Cinnamon Life it is very substantial.

Wijewardena: Being an election year, there was a wide speculation for an election budget and even in the post-Budget survey conducted by the University of Colombo, 37% has viewed it as an election Budget. However, from an economic point of view it is not an election Budget, because in an election what you find a bag of relief or ‘sahanamalla’ containing sprats, onions, dhal and all kinds of goods which ordinary people consume and we might take pride in presenting that kind of sahanamalla to the people.  Fortunately, the Finance Ministry has now broken away from that and diverted the entire Budget from consumption to investment. One of the key factors that I see is that more funds have been allocated for the development of physical infrastructure and human capital, and it has also gone along with the fiscal consolidation program which he introduced in 2017.

Therefore, it has laid the foundation for any finance minister in the future to take the country forward. Unfortunately for him, the downside of the Budget is that he has challenges in implementing and his team Mano and Deshal have to do a round-the-clock job to implement these Budget proposals. In my view, it is a good development-oriented Budget that has also given space for innovation, invention and development of human capital in the country.

Ramya: From a National Chamber of Exporters perspective, Budget 2019 has taken up quite a few proposals addressing exporters, especially in the rubber and cinnamon industries. I feel this is more of an export-oriented Budget and has given more focus to support trading and development of the exporters.

Being in the apparel industry, the major challenge we have is retaining the workforce and the proposal to empower women and granting maternity leave is highly commendable. It is good for the worker and employer as they can continue the same work. Budget 2019 has reduced certain taxes like Economic Service Charge (ESC) which has a very large revenue impact for exporters.

Patrick: This Budget has a very positive impact on the multinationals in Sri Lanka because it indicates the spring of demand. Demand is good in our industry and hopefully this Budget will continue with the positive signs with clear support for entrepreneurship and education. The proposal to include IT in the education curriculum is a very positive sign. Recognition of technology start-ups with 10-15 people and providing tax benefits on payroll are quite positive.

From a Chevron perspective, empowering women was a powerful proposal because as a company, we value diversity tremendously and allowing flexible work hours. From a nurturing the poor perspective, investing in underdeveloped areas like the north and east and in the fisheries sector is commendable. Foreign construction companies to tie up with local companies is also a very positive sign.

On the flipside, the concerns I have are on the implementation timing and increasing revenue schemes. The increased taxes on motor vehicles will inherently have an effect on demand, thereby reducing the revenue associated with it.

Bingumal: Going into the fifth year of the IMF program, we are on a very narrow path as an economy and in that context, the Government has presented a very reasonable Budget looking at both short- and long-term goals. We can clearly see there are plans around improving the balance of payment and foreign reserves.

They are very important because as a country we are running on three months based on our reserves, which is at $ 6 billion now. In ASEAN markets, they have got nine to 10 months imports while we are running with three and these are some of the larger challenges we have to address.

On FDIs, we are seeing some larger perspectives. FDI is a very large part of the sustainable development of the country. With the economy running on a yearly budget and thinking YoY basis, how we are making the numbers and FDIs will drive a long way. We have done pretty well in 2017 and 2018; hope we can continue that momentum.

On the fiscal side, 15% increase in revenues is an optimistic target. The good news is that most of it is coming from alcohol and tobacco so there won›t be a lot of stress on daily expenses. Tax income, again a 13% increase is very optimistic. While we can be happy with improving from 11% to 13%, we also need to compare it with emerging markets of our size, which are hovering at around 16% to 18% GDP to tax income ratio across the markets – we need to catch up on those areas.

There is a lot of stress on bankers to lend money at 6% which is now at 11% and somebody has to pay that bill. Many think banks as an industry are making a lot of money, but banks are going through a bit of turmoil right now. In the papers very soon you will see that our return on investments (ROIs) is coming down, which is not very healthy for the economy.

All proposals to look after the SME sector that is greatly contributing to the economy are a very positive sign. Someone can argue that this is an election Budget, but there are a lot of proposals to counter that with sustainable development of the economy.

Q: There are lots of positives you mentioned, but what do you think is the game changer in the Budget?

Krishan: The effort to encourage female participation in the labour force is a big positive. If you can amend some of the laws to allow that, we can see the results in a big way, particularly in the hospitality industry.

Q: The Government has now stipulated that foreign firms should partner with local firms. As a big developer, how do you see this proposal?

Krishan: It is good to encourage the local construction industry, but from a business point of view getting the lowest cost is what matters – we have to get that right.

Mano: Some of these foreign-funded projects, technically the Government projects, were not given to private companies. We found that this move resulted in very little retention to the local economy in various ways.

When we spoke to the local construction industry, they felt that since some of these foreign-funded projects, in the Government particularly, had various concessions in terms of their costs, they were in an advantageous position when they bid for other contracts because they had the necessary equipment and so on which could be used for the other contracts.

I take Krishan›s point, which is ultimately the cost. We wanted to create a level playing field particularly for contractors who come for Government project contracts. However, the private sector has to decide on the best cost for their shareholders. They can’t entertain high costs. But for Government projects, we felt that it was a requirement for participation as well as for technology transfer.

Q: Industry says Government contracts are fine, but the problem is that they are really poor paymasters. What do you say?

Mano: Generally in Government, there is no paymaster at all sometimes. It is one of those vicious cycles, because when people come into Government contracts they factor that into account and as a result they sort of factor it into their margins, otherwise why would they bid for Government contracts? But it has a spiralling effect on cost, because ultimately we pay.

These are mostly not grants, but loans, thus from our point of view we can assure that the public gets a fair deal and you don›t have a loan because we are funding with the costs being high. It is one of those vicious cycles we need to remix.

Q: What is your take on proposals that had most impact?

Wijewardena: We are trying to convert Sri Lanka from a simple technology-based economy to a high-tech-based economy by promoting investments and innovations across the board. The foundation has been laid and the universities in Sri Lanka are being promoted as high-tech promoting institutions and have been given additional funds.

In the case of educational reforms, one of the key reforms suggested is the segregations of students into different schemes along with the introduction of STEM 10+A scheme, where you add arts and science together so that science students will learn arts and arts students can learn science.

As a result of this measure, we may build a flexible workforce in the future that has ability to think. I hope that any future government in Sri Lanka will follow this and enable the creation of a flexible workforce rather than just developing segregated sectors.

Q: In the context of the SAITM fiasco, does that mean it is a dead-end for private universities? Has the Government addressed that challenge or are reforms just taking time?

Wijewardena: Only 30,000 students get the opportunity to study in Government universities due to lack of space and the balance 70,000 will have to move either out of Sri Lanka or shift into some other kind of professional examinations.

To fill this gap, there is now a large number of private universities that have come up and the Government needs to validate the accreditation of these private institutions. The proposal to provide interest-free loans where students need to pay back to the Government in a 10-year time period is a good suggestion and as a result many of the students in Sri Lanka who are unable to get admission to a State university can fulfil their aspirations.

Even in my study years in the late 1960s, we studied on a loan which was given by People›s Bank and after joining the Central Bank I started to completely repay the loan. So it was more a private sector investment than a Government investment.

Q: In terms of providing foreign university scholarships, is there a current arrangement with Harvard? Is this just a fancy idea or it is a real case for Sri Lanka to engage in a direct scholarship program?

Deshal: There is a very strong case for it, but of course there are a lot of criteria we have to meet. We have just started the discussions with the universities. Even those universities typically fund quite a few scholarships for students in developing countries and we could also leverage on those.

But the Government actually wants to set aside the funding and give a chance to students who need it. We have to support the additional arrangements. It will be up to individual merit, but the Government will anyway support it via a MoU.

Q: What is your opinion on the game-changing factor of this Budget?

Ramya: As I said before, this Budget has given a lot of opportunity for exporters with R&D and empowering women. Women participation in most of the industries is about 75%, but with this proposal it can be increased further and enable them to work longer despite getting married or having to raise kids.

Q: There was an issue in the apparel industry in relation to decent accommodation for zone staff and transportation. Are those two not addressed?

Ramya: In the apparel industry we provide both these facilities, but unions are saying it is not true. We are taking it up with JAAF.

Mano: We have introduced a special loan scheme which addresses this whole issue where transportation for manufacturing units is given at a very concessionary rate where people can replenish their transportation vehicles with new ones.

In fact, there is a major garment manufacturer which has already come to us and almost 200 of their transportation vehicles will be replaced with modern, good vehicles through this loan scheme.

Q: You mentioned public sector reforms, but struggling to sell three hotels for the past few years. What’s the latest update?

Mano: Hopefully we will get rid of the Hilton and the Hyatt this year. A lot of the work has been done. There are about 30 EOIs we have received so far.

Q: We have started to bring in online reservations also to the tax net. What is your reaction?

Krishan: It is a good initiative, but taxing the informal sector is not going to result in a level playing field where the formal sector is priced at a different level. It is only fair that they are also coming to the tax net. The more important thing is, they should be regulated to some extent because you have not set service quality standards and there are a lot of issues and accidents. So regulation is more important than bringing them to a level playing field.

Q: Could you shed some light on NBT on credit card transactions overseas which also include foreign exam fees?

Deshal: It is a revenue measure, where the stamp duty of 2.5% has been increased to 3.5% now. It was also to address some of the digital services. At the moment, Netflix, Uber and purchases from any type of e-commerce transactions overseas are completely untapped. This is only targeted at external transactions, there is no impact at all on local e-commerce companies. It gives some degree of space for the local firms to play with foreign players.

Q: Is there no innovation rather than taxing tobacco and liquor as usual? Also the industry has been warning that the more you tax, there is less revenue and a shift to illicit. Isn’t that a reality check for the Treasury?

Mano: There have been ad hoc changes over the years and companies have not been able to plan for the future. From this year onwards, we will introduce what is called ‹indexation› giving a three-year period for the industry so that they have some certainty and their prices will be increased over a particular band.

It is important to keep a difference between soft and hard alcohol. Because the difference was slightly higher, we felt that there is a migration not only for soft alcohol but also for illegal. We have tried to address this, but not particularly in the first year.

It is true that beyond a point, it has effects on other things. It is a balancing act. The industry also requires some certainty for their investments and we have begun to address it. We have not included it in this Budget, but we will talk to the industry and tell them on how we are planning to go about in future.

Q: The National Economic Council (NEC) created by the President’s requirement and his party is not part of the Government; there is a feeling that the NEC is not really affective. What is the reality?

Mano: Looking from a political view, it’s a bit of a disjoint. In reality, it is not as bad as it sounds. Now at official level, there is quite a bit of integration.

Q: Any proposal you all were looking forward to that was not included in the Budget?

Bingumal:  Budget 2019 referred to concessions around trade treaties with India and China. These two markets are big for SCB. For the first time in history 50% of the world’s middle-class will be coming from Asia predominantly driven by India and China and 60% of global trade will come from Asian countries excluding Japan.

We shouldn’t underestimate the power of these two growth engines – India and China. I don’t see enough effective discussion and initiatives on expanding trade ties with India and China due to political sensitive. As a country, we have to figure out where we fit in this important trade corridor between India and China.

Patrick: We welcome increased support for exports. What we didn’t see is acknowledgement of companies which have domestic markets here but also do exports. The ESC reduction is good to see. However, the Finance Ministry must also consider companies which are not 100% exporters but export a part of their local production. There must be some relief on taxes paid by such companies.

Krishan: Streamlining the number of taxes is one aspect and there was no reference to divesting non-core State assets. We hope these will be addressed soon.

Wijewardena: It is a matter of the NCE under the President to come up with a program that is aligned with a long-term vision. Once the proposal comes, the Finance Ministry has to align it to the Budget and targets. Right now it has aligned itself to economic strategy and we have to wait for the National Economic Plan by the NCE to accomplish goals for Sri Lanka by 2030.

Ramya: Overall there are 31 taxes related to all industries and I would suggest it be simplified to a few so in the corporate world we can reduce the number of people working on these tax areas. The Tax Department also needs to be made online, to reduce the unnecessary work.