Today I had the pleasure of moderating a session with the trailblazing social entrepreneur, Shanaka Fernando at the ‘International Conference on Social Enterprises & SMEs for Sustainable Development and Poverty Reduction’. Shanaka is Lankan-born and grew up in Australia, and is the Founder of ‘Lentil As Anything’, a unique social enterprise that now spans seven restaurants in Australia and beyond. He has been recognised as an ‘Australian of the Year – Local Hero’ in 2007. As the awards honour roll mentioned, Shanaka has shown that “a commercial enterprise can operate in a socially responsible and altruistic way. ‘Lentil as Anything’ is a bold social experiment that respects difference, promotes trust and defies a consumerist society.”. His model is based on a commercial enterprise with a people-centric ethos, where goodness, generosity, dignity, and business savvy come together to form a unique venture.
In our conversation (audio embedded below), we talked about Shanaka’s personal journey that brought him to where he is today and work on what he is working; his people-focussed philosophy and how that translates into his business; what ‘Lentil As Anything’ is and how the model works; and what top messages he has for Sri Lankan social entrepreneurs. He was a treat to speak with, and it was a refreshing and inspiring post-lunch session. I started with something that had been written about him, and then we took it from there,
“He’s been declared bankrupt, had his business liquidated, and been taken to court by the Australian Taxation Office. He’s had his passport suspended and his bank accounts frozen. He’s even been threatened with jail over unpaid parking fines. In some eyes, all of that would make Shanaka Fernando an inveterate troublemaker, a man who acts as if he is somehow exempt from the laws that most of us live by. But in his own view, and in the view of many others, he’s just trying to shake things up a little, for the good of us all.”
For the audio recording of the full conversation, click play below.
(image courtesy Chandula Abeywickrama, Lanka Impact Investing Network)
Visiting Parliament House in Canberra last weekend was revealing. The degree of openness was noticeable. We drove straight into the car park underground, no security manning the gates, and no boom gate operators. There’s usually a crescat-style entry ticket machine, but as it was a Sunday the boom gates were fully open – free parking. Entering the building, we encountered just two armed security guards, went through a thorough X-ray and metal detector check, and then inside in a flash. After that we didn’t see a single security guard at all (Of course I’m sure we were being carefully watched by a network of CCTV cameras, but nothing imposing). We walked all the way to the rooftop – which is clad with a natural garden – and then just two security guards up there.
We walked around freely, including going into the senate and house chambers. Of course, it may have been very different if we had visited on a day the Parliament was in session. The philosophy when designing the building was that regular citizens should be able to walk right up to the Parliament, walk on the grass and enjoy it. The instructions given to the architect was that all Parliamentary chambers should be below the level at which the citizens walk – so instead of climbing stairs up to the Chambers, citizens walk right up to the Parliament on the same level as the road, and they stand above it all – the Parliament chambers are below this level.
Yesterday, after weeks of speculation that it may not happen, members of the Organisation of Petroleum Exporting Countries (OPEC) – a producer cartel – agreed to cut supply by around 700,000 barrels per day (bpd). In overnight trading, oil prices rose sharply by 5-6% and hovered at close to US$ 47 a barrel. By this morning the gains had somewhat tempered.
Under the agreement, OPEC oil production is expected to be reduced to a range of 32.5 to 33 million barrels of oil per day from 33.4 million. This is first time in eight years that OPEC has struck a deal to limit crude output since the downturn in 2008. The deal, including details of actual cuts, will likely be formalised at the next OPEC meeting scheduled to be held in November.
Why does this matter for Sri Lanka? The low oil prices seen throughout 2015 and early 2016 (as low as US$ 26 a barrel in February) has substantially helped oil importers like Sri Lanka. Low oil prices have meant low oil import bills, and at a time of declining export revenues, this has been much needed relief on the external balances side. Sri Lanka’s oil import bill was 41% smaller in 2015 than 2014 (US$4.5 Bn in 2014 compared to $2.6Bn in 2015). Of total imports, oil imports fell from 24% in 2014, down to 14% in 2015. Looking at 2016 (only H1 figures are available),
– H1 2016 – $1.12 Bn
– H1 2015 – $1.47 Bn
– H1 2014 – $2.5 Bn
% of Total Imports
– H1 2016: 13%
– H1 2015: 18%
– H1 2014: 27%
– H1 2016 Vs. H1 2015 : -20%
– H1 2016 Vs. H1 2014 : -52%
– H1 2015 Vs. H1 2014 : -40%
Of course it remains to be seen at what price oil stabilises in Q4 2016 and early 2017. It’s unclear as to whether this OPEC cut in production will be enough to drive sustained higher prices, given that a big new producer Iran (after sanctions on it were lifted) has been granted an exemption from the cut, Nigeria and Libya are also exempt, and there is substantial US shale oil and gas inventory built up that may now be even more profitable than before to come on stream. The OPEC cut could be self-defeating if there is a big drilling response from around the world, particularly from the US.
For Sri Lanka, we squandered an opportunity to reform energy pricing in the country. We didn’t take advantage of the breathing space offered by low oil prices in 2015. Against a backdrop of declining export revenue, a steady increase in the oil import bill certainty doesn’t help. The way forward strategy is to a) reform energy pricing so that its more in line with global prices and consumers and firms price that in in their consumption decisions; and b) boost export competitiveness and market access so that export revenues rise in line to support a higher oil import bill. Of course in the medium to longer term, Sri Lanka needs to strive to move towards more non-conventional renewable energy sources.
- Sri Lanka’s exports to UK have been stagnating for about a decade now – at around the US$ 1.1 billion level.
- UK is one-tenth of our total exports – but lower than when we had under GSP Plus (was closer to 14%)
- Even after GSP Plus was suspended for SL (so roughly the last 5 years), exports to EU grew at about 4%, while exports to UK was just 0.2%.
- Exports to US and exports to ROW grew at over 10%
- 80% of our exports to UK are apparels (to the rest of the EU its around 60%)
- Pressure is coming from the depreciation in the Sterling. According to economic historians, GBP to Dollar is now at its lowest level since 1792.
- Immediate term – orders up to December are pretty much set. So no immediate fallout from the substantial depreciation of the currency (roughly 13% depreciation since Brexit)
- But the pressure is now building – buyers are repricing their orders, and this will squeeze margins for Sri Lankan suppliers – its already happening in the new orders
- At the moment, the order books are holding. Some softness is seen, as UK consumers are uncertain and consumer spending was down over the last couple of months. But its not too bad yet
- There is a lot of optimism that once Article 50 is triggered and everything is gone through with, post-Brexit the level playing field will be a significant advantage for Sri Lanka
- Let me explain for anyone not familiar – Bangladesh, a key competitor to Sri Lanka (apparels mainly, but also ceramics, travel goods, etc), currently has an EU scheme that is more generous than GSP Plus – called Everything But Arms – EBA. Its a duty free quota free scheme offered to LDCs
- Once UK leaves, B’desh loses EBA access to the UK. This can level the playing field for Sri Lankan suppliers.
- Those I have spoken with argue that the business climate in Sri Lanka, dealing with Sri Lankan companies, the design and delivery competencies of our firms, the quality, environmental and labour standards all of these tip the scales in our favour.
- But the key will be whether Britain extends a generous trade package to B’desh post-Brexit.
- Which is why Sri Lanka needs to use this new goodwill and do a deal with the UK soon, to get ahead.
- If we get GSP Plus again, we have about another year or two of preferential access to the UK, before Brexit happens – so lets use this breathing space.
- Regardless of Brexit, here are some other factors with regard to exports to UK
- ‘Fast fashion’ brands are fast gaining ground in the UK (like Uni Qlo), and this will likely grow if UK consumer sentiment remains down. But not much supply linkages to these brands from Sri Lanka
- But the good news is that categories like ‘Ath-leisure’ – like Beyonce’s IvyPark collection with TopShop – are really growing fast. And the good news is Sri Lankan leading manufacturers are linked into those brands and supply chains
- Ultimately it all depends on which partnerships Sri Lankan firms have – good brands that are on the right trends, and we are fine.
- What is the deal that the UK manages to strike with the EU? Access to the single market without agreeing to movement of people, seems untenable.
- Cost of trade with the UK – UK has to figure out what to do with 13,000 EU regulations – adopt, amend, or give up? Remember that a big war cry in the referendum was burden of EU regulation
- What will be the impact on UK economic growth and consumption from 1) a continued weakness on the GBP; 2) shifting out from the UK of manufacturing and services to other parts of Europe.
- On the growth and consumption side – consumer confidence indicators were sharply down in July, but were down a bit less in August. Manufacturing PMI has also shown recovery up in positive territory of 53.3 in August, from 48.3 in July, same with services PMI.
- On the shifting of businesses. Some banks like JP Morgan and HSBC have said they are considering it strongly – going to Dublin, Frankfurt, Paris. But this can’t happen quickly – because of a practical reason a banker told me the other day – there is literally no office space in these cities to accommodate 5,000, 10,000 new financial industry workers and offices
- But its a real concern, because a key reason that the UK is such a hub of activity is because of free movement of people. This is a key consideration for firms. Figures from the Financial Regulatory Authority show that 5,500 UK registered companies rely on EU passports to do business in Europe from the UK.
- Of course there is a risk – extreme end – that UK goes through a ‘Hard Brexit’ – complete departure from the EU, no single market, no movement of people, no customs union, etc etc. But I think rationality will prevail and this scenario is unlikely.
- Ultimately, it all comes down to industry competitiveness. There is much to be gained from having a preferential trade deal with the UK, but if we dont have competitiveness and innovation in our products, then we will lose out.
- Apparels is a classic example – yes, it is 80% of exports but it may also be the one that can weather the storm. And this is because of innovation and competitiveness. The brands in the UK would continue to want to work with SL because of the competencies they find here and the partnerships they have forged. Look at Brandix, MAS, Hirdaramani, and Hela Clothing.
- Also, we should focus on the suite of other FTAs – for instance with China. The apparel industry has much to gain from the Chinese FTA – many suppliers to China are having to produce in China. But if we have preferential market access via an FTA, several of them have already indicated they are keen to shift those lines to Sri Lanka. many of them already source from us, so they prefer to produce the European and American market orders as well as the Chinese orders in one place. Their factories are seeing substantial wage increases (15-20%).
The Sri Lanka Economic Summit produced many incisive insights, revealing research, but most of all some memorable and thought-provoking quotes. Here are 19 of my favourites.
1. “The unprecedented concessions granted to favoured enterprises by the previous government have created a nightmare for the present government” – Hon. Ravi Karunanayake, Minister of Finance
2. “Professional advice needs to mix with political realities” – Hon. Ravi Karunanayake, Minister of Finance
3. “Sri Lanka is an island of poverty in an ocean of prosperity” – Hon. Ravi Karunanayake, Minister of Finance (on Sri Lanka needing to latch on to Asian economic growth)
4. “Sri Lanka must move from potential to performance, issues to solutions, rhetoric to action” – Samantha Ranatunga, Chairman, Ceylon Chamber of Commerce
5. “Businesses need to recalibrate their risk and take a long view on investment” – Dr. Indrajit Coomaraswamy, Governor, Central Bank of Sri Lanka
6. “Expectations of the new government have not been met. In fact, they got a kick in the stomach” – Prof. Razeen Sally, Chairman, Institute of Policy Studies
7. “There has been the supreme idiocy of imposing price controls, which I thought was something we had left behind in 1977” – Prof. Razeen Sally, Chairman, Institute of Policy Studies
8. “Sri Lanka needs to tell people the growth story, captivate them, and get on board with reforms” – Dato Sri Idris Jala, CEO of PEMANDU, Malaysia
9. “PPPs are a good option for countries with limited fiscal space and can bring down project costs” – Kamal Dorabawila, Investment Officer, International Finance Corporation
10. “If I was to promote any country outside of Australia, Sri Lanka would be it!” – Andrew Fairley, Deputy Chair of Tourism Australia
11. “Research, taking the temperature of what travellers actually want give a huge impetus to developing strategy. Sri Lanka needs to find out what people actually want in the markets that they are selling” – Andrew Fairley, Deputy Chair of Tourism Australia
12. “Bringing private partnerships will helps improve viability and accountability of public infrastructure projects, and avoid another Mattala” – Hon. Eran Wickramaratne, Deputy Minister of State Enterprise Development
13. “It takes two hands to clap. The government alone cannot eradicate corruption” – Hon. Eran Wickramaratne, Deputy Minister of State Enterprise Development
14. “Sri Lanka cannot become a hub by building infrastructure alone, liberal trade and investment policies are key” – Dr. Saman Kelegama, Executive Director, IPS
15. “To avoid the low equilibrium trap, Sri Lanka must shift away from debt financed investment-led growth to FDI- and export-led growth” – Dr. Saman Kelegama, Executive Director, IPS
16. “Sri Lanka must attract non-Sri Lankan talent and build regulatory frameworks that make it the hot bed for next generation businesses” – Rajan Anandan, Managing Director, Google India
17. “We should be thrilled that people in this country are not queuing for jobs. But this is tough for business. We must build businesses that can pay higher wages” – Ashroff Omar, CEO, Brandix
18. “On average an Indian start up will work twice as hard as a Sri Lankan start up. We need to create that hunger in the workforce” – Rajan Anandan, Managing Director, Google India
19. “I don’t want to own your land. I want to make money!” – Desmond Sheehy, Duxton Investments (responding to EDB Chairman’s assertion that foreign land ownership would be prohibited)
Cover image courtesy Ceylon Chamber of Commerce Facebook page
Sinhala language current affairs website, යුක්තිය (‘Yukthiya’) asked for my thoughts on trade liberalisation, particularly in the current context of the ETCA. Here’s what I said:
ලංකා වාණිජ මණ්ඩලයේ ප්රධාන ආර්ථික විද්යාඥ අනුෂ්ක විජේසිංහ මහතා කියන්නේ ඉන්දියාව සමග මෙන්ම වෙනත් රටවල් සමගද අන්යොන්ය වාසිදායක වන වෙළෙඳ ගිවිසුම්වලට ඇතුළත්වීම අවශ්ය බවයි. අපේ නිෂ්පාදන ජාත්යන්තර තලයට ගෙන යා හැක්කේ එවිට පමණක් බව කියයි. කෙසේ වෙතත් ගිවිසුම් සකස් කරනවිට සියලූ පාර්ශවයන්ගේ අදහස් ලබාගත යුතු බවත්, වඩා හයියෙන් කෑගහන අයගේ හඬට යට නොවිය යුතු බවත් විජේසිංහ මහතා කියයි.
(Sri Lanka must forge mutually-beneficial trade agreements. With India, and with many other countries. It will help gain market access for our products, and attract investors to our country. When crafting these agreements, there must be solid consultations with all relevant stakeholders, and government shouldn’t be overwhelmed by listening to those who shout the loudest.)
Link to the full article written by C J Amaratunga – http://yukthiya.lk/2474-2/
The government recently imposed an Annual Registration Fee on Private Limited Companies of LKR 60,000 and a LKR 250,000 closing down fee, both of which were announced in Budget 2016 and came in to effect last month. I find these new fees deeply problematic, for many reasons:
- The fee affects all private limited firms regardless of their size or any other differentiating characteristics. In taxation there is a principle called ability to pay, and expecting a small one person modest revenue operation to pay the same fee as a larger substantially more profitable one does not make sense. Similar here, this ‘fee’ (which is essentially a flat tax) applies to all firms equally. Considering that a large number of private firms are actually SMEs (in fact according to the latest Economic Census, 99% of all establishments are either micro, small or medium), this LKR 60,000 p.a. fee is often a substantial cost on business operations
- Imposing a fee for closing down a firm is a recipe for greater in formalisation. Who would want to formally register a business, taking a risk, when there is a LKR 250,000 price tag in the event of having to close down, i.e., fail. This new fee essentially acts as a penalty for failure and is a strong dampener on both risk taking as well as formality. This does not sit well with a country’s development objective of encouraging greater formalisation of firms.
- This then has a knock-on effect on overall firm growth as well as tax compliance and collection. If such a charge discourages firms from becoming formal, it will affect tax collection. The discouragement to formalisation also affects the firm’s ability to borrow from formal sources, access formal support from institutions, and grow, expand into new markets, access technology, etc.
- I was also told by many entrepreneurs who wanted to pay the annual registration fee and be compliant that for many weeks and months there was uncertainty as to whether this new regulation was confirmed or not; from which date it is being applied; and from who more information can be obtained. This sort of uncertainty, gaps in information, all add to transactions costs for the firm – particularly smaller firms with limited resources to expend on regulatory compliance requirements, unlike larger firms.
These fees need a serious reconsideration. They hurt entrepreneurship. They impose disproportionate costs on smaller firms than larger ones. They discourage risk-taking and put a penalty on failure. They discourage formalisation. They hamper access to finance and firm growth. And they will ultimately affect tax revenue.