• Spare us or kill the industry - software exporters 
• Donors likely to slam violence
• Balancing the budget-on who's back?
• Chartered men to study the proportionate liability
• Mind your business
• Elections would determine economic performance
• Telecom reform in Africa and Latin America
• PNG economy in turmoil as mining stalls
• News 

Spare us or kill the industry - software exporters 

By the Business Editor

IT heavy weights with strong software export arms are complaining bitterly that the NSL of 6.5% which was extended to cover all service sectors this February has netted in software exports which is classified as a service.

The NSL - a war or defence levy has been steadily increasing by an average of 1% annually to finance the government's burgeoning defence budget and was extended to the service sector this year.

It is possible that lawmakers and authorities did not realize the gravity or the adverse effect of the NSL being imposed on service sectors in which the growth has to be necessarily export oriented, industry players said.

No other export is charged the NSL, they said.

The service sector that deals with the domestic market can charge their NSL levies to the customer but the export field is competitive and if our price is too high we will naturally be pushed out of competition by our cheaper neighbour India, they said.

The highest value addition is in the service side of the software industry, where universal companies come to countries like India and Sri Lanka with a designs or codes and farm out the actual work to software engineers and export the job back to their head offices in developed countries, they pointed out. Big wigs like Keells Business Systems Ltd, Keells , Millenium Technologies and Informatics are spreadheading a software export drive which is strongly supported by newer companies like E Runway etc.

Despite the industry's demands as a thrust export industry receiving top patronage in domestic export and educational spheres from the PA government, statistics on the industry's growth, potential and earnings capacity of exports were very hard to come by.... in fact non existent.

Although the Sunday Times Business spent a good part of a day calling up software exporters, export organizations and institutions involved in software exports or IT and export promotion agencies, no one could give us the IT sector's annual growth rate, its export value per annum, forecast growth rate for the immediate future etc. Maybe the STB missed out someone who could have given us the data but if organisations who have been formed specifically to promote the export arm of the industry and state export promotion bodies do not have these statistics at their finger tips how is an assessment made of our export perfromane in the international arena? Also our growth potential compared our competition? 

As important as the lobby for an exemption of NSL on software exports is the effort and organisation to collate and disseminate data and statistics on the sector.

After all could we say that we are the leading tea exporter if we did not have statistics to back our claim? And how could we say that apparels rake in more foreign exchange than any other export product if we did not have statistics to prove it? So a wake up call needs to be made all around in the IT sector it seems.

Donors likely to slam violence

By Feizal Samath 

"Colombo is certain to face some hard questions from donors particularly due to increased violence during the run up to next week's polls," a private sector economist noted.

But the situation would change dramatically if the main opposition UNP wins the parliamentary poll. Analysts say the business community is hoping for a win by the UNP which has promised to further open out the economy, free exchange controls and reduce bureaucratic delays in decision-making.

More donor aid is also likely in the event of a UNP win, analysts noted.

The ruling People's Alliance (PA) and the UNP are in a neck-and-neck race in the run up to the polls though opinion polls give the edge to the PA. 

Most analysts believe the two parties would get the same number of seats in the 225-seat legislature and would have to rely on smaller parties to form a government."Horse trading and money is certain to exchange hands after October 10," one analyst said.

In the event of a PA victory, the two key events in the economic and political calendar are the national budget sometime in November followed by the Paris development forum meeting. 

There is also the possibility that the newly elected parliament will settle for a vote on account, an interim budget until they settle in and have the budget proper in 2001.

This meeting has been postponed on many occasions, the last time being just before the December 1999 presidential polls, as the government was unable to release senior ministers and officials in view of the poll.

Analysts said donors are concerned about the growing violence in the Sri Lankan polls and this is likely to reflect in reports submitted by two separate polls observer teams from the European Union and the Commonwealth Secretariat. Ironically both teams are submitting their final reports - at the end of the polls - to their respective headquarters without copies to the Election Commissioner unlike in the past when foreign polls observer missions were here.

They said that the EU team in particular has been critical of the level of violence and given past cases of the EU tying up aid and trade to the country's democratic and human rights processes, Colombo would be confronted with some tough questions at the December meeting in Paris.

EU-member countries are among some of the biggest donors to Sri Lanka.

Several chambers of commerce have also warned political parties that the economy would be seriously affected and foreign aid or investments curbed if violence continues before and during the poll.

Chandra Embuldeniya, senior vice president of the National Chamber of Commerce and Industry, said last week said donors, including the European Union, were closely watching the situation and might reduce aid if the October 10 poll was marred by violence.

Pre-election violence between rival political groups as well as suicide bomb attacks by Tamil Tiger rebels on election rallies that have killed several people have affected foreign aid and investment. 

Chandra Embuldeniya, senior vice president of the National Chamber of Commerce and Industry, said last week said donors, including the European Union, were closely watching the situation and might reduce aid if the October 10 poll was marred by violence.

Chandra Embuldeniya, senior vice president of the National Chamber of Commerce and Industry, said last week said donors, including the European Union, were closely watching the situation and might reduce aid if the October 10 poll was marred by violence.

Pre-election violence between rival political groups as well as suicide bomb attacks by Tamil Tiger rebels on election rallies that have killed several people 

become a major issue and cause for concern in the island in the rn up to the poll.

Embuldeniya said he was "sad to note" that the main political parties had not responded to the business community's earlier appeals to stop election violence.

Another source of worry to the business community is the confusion that coud arise if a UNP government has to work with a PA president.President Chandrika Kumaratunga has said in the past that it would be dificult to work with the UNP while the opposition party has vowed to clip the president's power.

"I think the private sector would prefer less confusion and less damage to the economy," one private sector economist said. 

Balancing the budget-on who's back?

By Chanakya Dissanayake

This additional recurrent expenditure is most likely to be financed at the expense of freezing capital expenditure on infra-structure. Successive Sri Lankan governments have used these "hand-outs", as election tactics at the cost of high budget deficits and cuts in capital expenditure.

Central Bank also treated the business community with a liberal hike of interest rates. Repo rates were increased to 13% from 11.75% and Reverse Repo was increased to 16% from 15.5%, on 29th September. 

This was followed by a increase of the Bank Base Rate to 18% from 16%, on last Monday. 

This was mainly due to heavy government borrowing to finance the budget deficit. High interest rates normally deter long-term privet sector investments. It can also result with shrinking margins in highly geared companies due to the high interest cost.

Sri Lanka entered an era of low interest rates in 1997 with a aim of encouraging privet sector investments and to facilitate faster growth. However independent Economists doubt the Central Bank's ability to maintain low interest rates due to heavy government borrowing, especially this year. 

"High inflation can also be triggered off, if the government borrows from the banking sector. As a trend for the past few years' borrowings from the banking sector has been on the rise. If the trend continues, it can fuel inflation", said an independent research Economist.

Businesses are likely to be affected in two ways. "Low investments due to high cost of capital and from inflation created by governments borrowing from the banking sector", said Dr. Dushni Weerakoon speaking about possible outcomes of financing the budget deficit through domestic borrowings.

Analysts also say that the pressure on interest rates would have been much low if the planned privatisation of SLT went ahead.

Chartered men to study the proportionate liability

By Dinali Goonewardene

These firms presently bear total liability when they fail to detect a fraud in a company. A committee has also been appointed to study the feasibility of allowing partners of multiple disciplines to function in audit firms. Current regulations do not permit the admission to partnership, members who are not chartered accountants.

"Our partnerships which are the only legal means for us to practice are exposed to joint and several liability and proportionate liability would safeguard against unfair and unjust litigation," the partner of a leading audit firm said. Proportionate liability would also translate to lower insurance premiums for audit firms as they would not bear the burden of total liability. 

"Huge premiums add to the audit cost at present," sources at audit firms revealed. The system of proportionate liability would operate via courts assigning a level of negligence to the audit firm, which would indicate the proportionate liability the audit firm must bear.

As audit firms venture into new areas of activity the need for expertise from multiple disciplines has made its presence felt. "Clients in complex situations require a depth and breath of knowledge that multiple disciplines will bring, in diagnosing business problems," a partner of an audit firm said. 

However present laws which govern the Institute debars partners from disciplines other than accounting. However this places limitations on audit firms when recruiting personnel form other disciplines as their career prospects may be stifled. An alternative may be to have partners from other disciplines such as IT specialist and lawyers but limit the percentage of seats they have in a partnership to around 25 per cent, suggested a partner of an audit firm whose background is ingrained in accountancy.

Developed countries such as the United Kingdom and the United States are also spearheading studies in areas such as multidisciplinary practices and proportionate liability.

Mind your business

Big business

But for some, even speculation can be big business. That is because bets are being placed in a very organised but strictly unofficial way about the verdict of the election. And the amounts at stake are not just a few rupees but in hundreds of thousands! 

Strictly speaking this would be illegal but then, even some very respected people in the business community are eager participants, so no one wants to question the practice.

Put on hold

Some state ventures made their offers and the initial preparations for the deals were made, only to be put on hold days later.

When inquiries were made apologetic officials said they would like to wait until the election was over because they didn't want to evoke the wrath of powerful people whom the girl had embarrassed recently with a bold public statement

Taboo

The state agencies want to rectify the issue by having a dialogue with all concerned but it may well mean that ads with kids will soon be taboo.

Elections would determine economic performance

The first of these factors arise from the conduct of the election itself. The country has arrived at a critical juncture when the election process itself is being questioned. Public awareness and concern about the need to have a reasonably free and fair election has reached an unprecedented height. The implication of this is that if the public perceive the election as not been conducted in a fair manner, then the legitimacy of the government may very well be challenged. Such a challenge would be disruptive of economic activity as well as erode investor confidence, especially of foreign investors. Therefore it is vitally important from the point of view of the economy that the election is conducted in a fair manner and that the result is generally accepted.

The second issue concerns the impact of the result. This is of particular concern in this election where there is a real possibility that no party may have a clear majority. It is also possible for the majority support in parliament to be different to that of the President's party. 

This would result in constitutional disputes and practical difficulties in forming an administration. In the United States, it is not uncommon for the President to be of one party and the congress to be of another. In the United States there is the provision for the cabinet to be selected from outside Congress. Above all there are conventions and certain provisions to enable the President to pursue policies in a situation where he does not command a majority. 

We neither have constitutional provisions to handle such a situation nor a political culture which could ensure cooperation. Recent events to resolve the "ethnic conflict", as well as change the constitution is a demonstration of our political parties being unable to arrive at a consensus. A constitutional crisis can have serious set backs to the economy. This is particularly so in the current economic context when our foreign reserves are declining.

The third issue is whether the government that is formed after the election would place economic reforms as a central policy issue and whether it would implement economic policies with a greater sense of purpose than we have seen in the last few years. Another related concern is whether extravagant election promises would be fulfilled to the detriment of economic stability and erosion of economic fundamentals.

One of the most significant developments in recent years has been that the main political parties have pursued broadly similar economic policies. This means that this election, whatever its result, will not lead to any drastic changes in economic policies. 

To that extent the country has moved to a stage when elections do not disrupt the broad framework of macro- economic policies. If we can go further to develop an ability for the main parties to cooperate and make the system of government we have to work irrespective of the party composition in parliament, much would be achieved. Such cooperation could be for an agreed time period while a constitutional change is brought about more in line with our political culture.

On the eve of this general election we hope that it would be reasonably free and fair such that the people accept the verdict and the legitimacy of the government is not questioned. We also must hope that there would be no constitutional crisis, whatever the results. A period of political stability is vital for any prospect of rapid economic growth and development. Will this election ensure that?

Telecom reform in Africa and Latin America

Analyses of these reforms typically take one of two forms: case studies or statistical comparisons of sector or firm performance before and after privatization. These studies have found improvements in sector performance following privatization but also suggest that often the regulatory sector does not develop quickly enough. 

Enough time has now elapsed in enough countries to allow us to extend the existing literature by collecting the requisite data for econometric analyses of the effects of reforms.

Preliminary econometric analysis of telecom reforms in 30 African and Latin American countries from 1984 through 1997 indicates that privatization must be combined with building regulatory institutions to bring about performance improvements. 

The table shows the countries included in the analysis that explores the effects of privatization, competition and regulation on telecom performance. Indicators of performance include mainlines per capita, payphones per capita, connection capacity per capita, employees per mainline, and prices of local calls. The fact that most of these indicators have been improving points to the importance of analyses of this sector to control for trends and the potential dangers of simple before/after comparisons since the indicators will almost always be better "after".

In this analysis an incumbent is considered privatized if any shares were sold to private investors. The competition proxy is the number of mobile operators in the country that the incumbent does not own. While mobile firms do not compete directly with the incumbent, they provide benchmark comparisons and have the potential to expand capacity quickly at relatively low cost and therefore can represent a credible threat to the incumbent. 

The regulatory variable is whether the country has a separate, independent regulatory body. This variable may best be interpreted as measuring a country's willingness to undertake regulatory reform rather than the effect of a separate regulator per se.

Methodology used

The regression analysis controls for per capita income, population, share of the population living in an urban area, whether the World Bank was funding a telecommunications project in the country, net loans from the World Bank as a share of GDP (which proxies for foreign aid), and exports as a share of GDP. It also takes into account whether reform legislation was passed, risk of expropriation as measured by the International Country Risk Guide, and country and year fixed effects.

The analysis finds competition from mobile telecommunications firms to be correlated with increases in mainlines, payphones, and connection capacity per capita, and decreases in prices. The results of privatization are more surprising. 

Privatization by itself is not statistically correlated with any benefits, and in fact, is negatively correlated with mainlines per capita and connection capacity. Privatization combined with the existence of a separate regulator, however, is positively correlated with connection capacity and payphone penetration. Moreover, this combination substantially mitigates the negative correlation with mainline penetration.

These results are consistent with conventional wisdom: competition is the best way to bring about performance improvements, and privatization must go hand-in-hand with building regulatory institutions if the telecom industry is to improve. One explanation for the negative results of privatization by itself is that in the absence of regulatory capacity-building a privatized monopoly may look for ways to increase profits that do not necessarily include immediate improvements in service.

Policy implications

The analysis suggests that introducing competition may produce important benefits. However, privatizing without attention to regulatory institutions may be costly in terms of sector performance. 

This has important implications for the question of whether, and for how long, to grant a privatized firm an exclusivity period in a country with a weak regulatory environment. Although the price an investor is willing to pay for a telecom firm will be higher the longer the exclusivity period, the cost of a longer exclusivity period may be delays in performance improvements that would come with competition.

While these findings are provocative, they must be viewed cautiously. The main problem ó which is a critical issue that future analyses must address ó is that causality does not flow solely from reforms to performance. That is to say, this analysis does not capture well the possibility that performance can also affect the nature of reforms.

The analysis controls for passage of reform legislation, which helps mitigate this problem since legislation must precede actual reforms. Indeed, a negative correlation between legislation and performance shows up, suggesting that poor performance can help trigger reforms. Nonetheless, we cannot rule out the possibility that reverse causality drives the negative correlation between privatization and performance ó that is, that poor performance helps stimulate privatization efforts.

Another problem is that the data do not allow us to explore the variations of privatization, competition or regulation. The share of the incumbent sold, the sales mechanism and the conditions attached to the sale may all be important. 

And simply noting whether there is a separate regulator does not begin to address the many flavours and subtleties of regulation. A more rigorous analysis of telecom reforms must begin to deal empirically with these issues. Enough time has elapsed since reforms began in many countries to make it feasible to conduct rigorous empirical analyses. The work described in this artical represents a first attempt. 

In many ways the results are reassuring - competition shows a strong correletion with telecom performance improvements. Other results should give us pause: privatization is correlated with performance improvements only when it occurs in the presence of a separate regulator. In other words, ignoring regulatory institution-building may be costly. These intriguing results, the importance of the questions and the limitations of this analysis point to the pressing need for continuing this research. 

Countries Included in Analysis Africa Latin America 

Botswana Argentina
Cameroon Brazil
Cote d'lvoire Bolivia
Ghana Chile
Kenya Costa- Rica
Malawi Colombia
Morocco Dominican- Republic
Mauritius Equador
Mozambique Guatemala
Nigeria Jamaica
Senegal Mexico
Tanzania Panama
Uganda Paraguay
South Africa Peru
Zambia Uruguay 
Venezuela 
Source: Scott Wallsten
Scott Wallsten is an economist at Stanford University and The World Bank. The views expressed here are those of the author and do not necessarily represent those of The World Bank, its Executive Directors, or the countries they represent.

PNG economy in turmoil as mining stalls

Multinationals, at one time happy to spend millions of dollars exploring and laying claim to vast untapped reserves of oil, gold, copper and nickel, are now abandoning the impoverished South Pacific nation.

The giant British mining house Rio Tinto has all but walked away from its once-profitable Panguna copper mine on Bougainville Island after separatist rebels shut it down 11 years ago.

More recently, Australia's Broken Hill Pty Co said it wishes it had never got involved in the Ok Tedi copper mine near the border with Indonesia because of the hundreds of million of dollars spent paying off pollution compensation claims.

OK Tedi alone accounts for 10 percent of the country's gross domestic product and politicians fear economic disaster if the mine is idled.

Global exploration funds have been constricted by a cycle of low commodities prices in the 1990s, but the situation is proving particularly unsettling for Papua New Guinea, which has little to offer in the way of foreign currency-earning exports.

Exploration spending for the entire country this year is likely to reach only about US$17 million, against $83 million 10 years ago, local industry figures show.

"There is very little being spent on grass roots exploration and because that has dropped right off, it won't give us discoveries for the future," said Greg Anderson, chief executive of the Papua New Guinea Chamber of Mines and Petroleum.

"We are really existing on past prospects, past success, and if we don't maintain our basic exploration we won't find replacements for those prospects and new options for the future," he told Reuters.

"In the medium- to long-term we are looking at a decline in the mining sector and we have to address it urgently."

Anderson said Papua New Guinea risked losing a big chunk of foreign income as the mining and petroleum sectors traditionally contribute about a quarter of total gross domestic product.

"We have the geological potential, it's a matter of keeping the exploration going and you've got to fight hard these days to attract the exploration dollar."

But Papua New Guinea may be losing that fight. Observers point to the country's historically unstable political and economic regime, a raft of litigation against major mining companies and lawlessness. Tax laws also are viewed as a disincentive for investment.

The one-year-old Morauta government has initiated changes to stablise the economy but admits a turnaround could take years.

"There is an additional cost for security for any company when they invest up here and it is definitely a disincentive," said Andrew Gall, treasurer for Westpac Bank in Port Moresby.

Morauta has pinned his hopes — and some say his political future — on getting a new nickel mine up and running as well as a 3,000 km (1,760 mile) pipeline laid under the Coral Sea between his country and Australia.

Blueprints for both projects have existed for years, but no ground has been broken.

"There's an awareness that if one of these big projects doesn't get up, in 10 or 15 years there's going to be nothing left," Gall said.

The pipeline, costing nearly US$3 billion and headed by Chevron Corp, would provide Papua New Guinea with a steady export income for decades, Anderson said.

On a smaller scale, Highlands Pacific Ltd of Australia has spent 18 months negotiating with the government and local landowners to obtain a coveted "special mining lease" for its Ramu nickel mine, but still needs one or more investors willing to contribute to the $838 million cost of development.

Managing director Ian Holzberger said sovereign risk issues were making it difficult to find investors. A survey of sovereign risk for mining companies by Resource Stocks magazine consistently ranks Papua New Guinea near the bottom of the pile.

A taxation review promised by Morauta was urgently needed to help spur foreign investment, Holzberger said. 

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