Sri Lanka private sector seen 'strangled' by regulations

*** From The Daily Mirror 09 October 2009 ***

Sri Lanka's private sector is being strangled by a plethora of regulations and corrupt and inefficient bureaucrats and politicians that stifle entrepreneurship, a top company executive has said.

Sri Lanka is largely a private sector owned economy with the private sector having almost complete freedom to do what it wants as very few sectors are reserved exclusively for the public sector, said Lalith de Mel, chairman, Hemas Holdings.

"But behind this façade of complete freedom there is a monster lurking in the wings," he told the Chartered Institute of Management Accountants (CIMA) 2009 Business Leaders Summit held in Colombo.

De Mel, a former main board director of Reckitt Benckiser, UK, said the 'monster' was the mass of regulations in the country, ostensibly meant for its protection.

"What we now have is a private sector economy that is strangled by the public sector," de Mel said, in a presentation on the link between the private and public sectors and their impact on growth and prosperity.

Although the plethora of regulations is seen as being for the protection of the country, they actually had the opposite effect.

"The strangler is not only affecting the big companies and foreign investors, but goes right down to the village," de Mel said.

"The problem lies in legislation. It is not specific in saying 'if these conditions are met, thou shall give approval', it does not give time frames - it is entirely at the discretion of person approving a decision. That’s the flaw in the legislation."

De Mel also said some public sector officials were infected by the 'virus' of corruption, expecting bribes for giving approvals for businesses.

Public sector officials also preferred not to take decisions for fear of making mistakes, with the result that private sector investment was delayed.

"This is a major problem in the interface between the private sector and the public sector."

De Mel also criticised what he called the practice of 'musical chairs' of Cabinet ministers and senior public servants being rotated during reshuffles and changes of the boards of state-owned enterprises whenever governments change.

Such practices meant there was no continuity or link between administrations, no passing on of learning, and were disruptive of the smooth functioning of the system and its long-term effectiveness.

These were examples of some aspects of the current stance and behaviour of the public sector that inhibits private sector growth.

But de Mel said that any economic model for Sri Lanka will need investment from both the private sector and the public sector, so their co-operation was essential.

The credibility of government officials was also important.

"The single most important factor that influences investment by the private sector is their view of the future and expected returns from investment," de Mel said.

"The public sector has a large role to play in creating confidence about the future.

"If it fails to do so it will adversely affect investment by the private sector which will then impact on growth and the creation of prosperity."

Government actions and how they are perceived by investors is important.

"If the government appears to be hitting the right buttons, it can create confidence. If they are not pushing the correct buttons it will create diffidence and uncertainty about the future."

The public sector, through the finance ministry and the central bank, have to manage effectively the budget deficit, the money supply, the foreign reserves, the movements in government borrowings, debt servicing and the budget.

"These are all relevant to the private sector when trying to form a view of whether or not the economy is going in the right direction," de Mel said.

"The credibility of those who manage these institutions is important. If you think they are bullshitters then you don't believe what they say."

One of the most visible levers of control of the economy and of the greatest concern are short term rates of interest, de Mel said.

"If the rates of interest are in the 20's the private sector investor will come to the correct conclusion that you cannot borrow at 20 plus percent and get a return as the investment will have to provide returns greater than 20 percent for the investment to be viable.

"There are not many opportunities to get returns above 20 percent."