Celebrating 10 years in the business
Sri Lanka's economy is going through one of the most difficult periods in the past two decades. A ceasefire has given it some security and comfort given the fact that the guns are silent since December, more than 1,500 lives have been saved in the past six months and defence spending has come down. But other problems like rising costs of living, a revenue shortfall and a bloated cabinet with increasing demands for development cash are growing by the day.

Last week's sharp drop in fuel prices should have led to a reduction in prices but that is easier said than done. Bus operators, transporters of vegetables and bakers have been quoted as saying that other costs apart from fuel have gone up and they were unable to pass on the benefit of the fuel reduction to consumers.

It is in this economic backdrop that The Sunday Times Business completed 10 years earlier this month, marking a milestone in the history of the paper. While the Sunday Times was re-launched by Wijeya Newspapers Ltd on June 7, 1987, the business section emerged on August 23, 1992.

The paper's business and economic sections have strived to provide a forum for all shades of opinion in the world of business and commerce, promote big and small business ventures and take up issues that confront the business community. Over the years, the paper has seen the growth of the stockmarket from a small, office room operation to a mega stock exchange which has technological features that many other regional stockmarkets don't have. But unfortunately the market is not playing true to its potential because the country's 19 year long conflict has driven off foreign investors and tourists.

We have seen the struggles and travails of an economy that has tottered from one crisis to another during this period but maintained a five percent or near growth rate annually prompting analysts and bankers to dub the Sri Lankan economy as "one of the most resilient in the world".

The pattern of Sri Lanka's economy has been to suffer shocks through war and external recession but promptly recover the following year. "Sri Lanka's economy is so resilient that it always recovers from a bad year," one analyst said. Some political analysts suggest that this pattern may be one of the reasons why the country has not been able to end this conflict.

"We need to hit the bottom for people, particularly the business community, to wake up and take notice. Otherwise why bother with a solution when the economy is doing so well or recovers from a bad year?" one analyst noted. Other countries in conflict have recovered only after the business community intervened and persuaded warring factions to negotiate.

It took Sri Lanka's business community 18 years to realise just that. In the words of a top businessman, the July 2001 attack on the Colombo International airport and the September 11 crisis in the US was a "wake-up call for us". Indeed the business community suffered - struggling through a garments crisis exacerbated by a recession in the United States - and seeing export orders falling and insurance costs rising due to ships and planes flying into a high-risk country.

SriLankaFirst, a pro-business peace group, took the initiative to bring the business community into the peace process after a ground-breaking effort by business leaders Ken Balendra and Lalith Kotelawala in bringing the People's Alliance and the United National Party to the negotiating table didn't work out as planned.

This paper has consistently commended these "better-late-than-never" peace efforts and urged the business community not to lose heart in the wake of criticism of failed efforts or attacks like "why were you silent when thousands of people were dying in the 1980s and the 1990s?"

As it starts a new decade of publication, The Sunday Times Business will continue to support the business community and its role in Sri Lanka's economy as a private sector with a "human face" and its initiatives towards peace. We will also continue to support the role of small businesses and encourage its growth in addition to taking up issues that stifle growth.

The need for pension reforms
By Mahinda Samarasinghe
With growing calls for pension reforms and for the government to move out of public-funded pensions, Labour and Employment Minister Mahinda Samarasinghe looks at changes needed to make pensions more attractive in a country where the population is ageing faster that most nations. "Reforms where the current accrued pension benefits of public sector employees can be transferred to individual pension savings accounts (PSA) so that he or she can take greater responsibility for their pension funds through growth and management in order to provide adequate security in retirement is called for," he argues in this article.

Ageing is an inescapable certainty of life. Therefore it is vital that we save during our productive years to finance our retirement. Except for the few who can generate surplus disposable income which can be channelled into long-term savings during their productive years to achieve financial security in retirement the vast majority of us who are covered under formal pension systems have to rely on them to deliver this security. The very security that people seek is in great jeopardy due to fundamental flaws in the way these systems operate. Unless these flaws are corrected at the earliest possible instance every ensuing day will only compound the situation and make it even harder to rectify.

In order to address this most pressing need I have sanctioned a seminar sponsored by the International Labour Organisation (ILO) to be held in August to discuss the looming problem and to formulate solutions to avert a crisis in the future. This seminar will bring in the key stakeholders into a constructive dialogue in order to discuss the current pension system and to ascertain the best way forward. I do believe that a lack of proper understanding of this looming problem has brought about scepticism about each one's motives as well as insecurities as to the best way forward. The seminar will be the start of a process of understanding the problem, addressing the insecurities and formulating solutions to avert a crisis in the future.

Demographic time bomb
Sri Lanka has made great strides in terms of socio-economic achievements. We have a 92 percent literate population and male and female life expectancy of 69 and 74 years respectively. It is these very achievements that have implications on the future demographic and socio-cultural patterns, namely:

A population that is rapidly ageing. It is estimated that by 2025 the percentage of the population above 60 years will increase to 20 percent from the current level of 9 percent.

The fertility rate of our women is not sufficient to replicate ourselves. We are the poorest country in the world to have achieved this and this transition has been made at a relatively low level of income. The poorest country in the world to have achieved below replacement levels of fertility. This transition has been made at a relatively low level of income.

A population that is living longer, with improved access to the quality of universal health and advances in medicine, life expectancy will increase further.

There is a gradual erosion of the extended family support system and nuclearisation of the family where protection for old age is primarily done by investing in children.

We are currently experiencing a demographic bonus. We currently have the largest percentage of our population within the working age and this is a one-off phenomena that will steadily decline in the future.

These indisputable eventualities have profound policy implications to the retirement system in this country, specifically:

Currently for every 1,100 working age people in the retirement workforce there are 1,540 retirement age people in the workforce retirement, by 2025 for every 1,100 person working age people in the retirement workforce there will only be 3,266 retirement age people in the workforce retirement (not all working age people in the population are in employment). If we are to avoid inter-generational conflicts there is an urgent need for the current labour force to finance their own retirement rather than relying on taxation systems to transfer benefits to them from the future workforce. With increasing life expectancy the period in retirement will be greater. Either we increase the retirement age (this has implications to youth unemployment) or create greater savings to last us through our longer period of retirement.

We must create sufficient economic growth to make the best use of our demographic bonus.

Current pension schemes
The formal pension systems in Sri Lanka have two variants:

Public Sector:
All government employees (0.9 million people) and teachers (0.8 million) are eligible to the Public Sector Pension Scheme (PSPS). There are currently 3,760,000 people drawing pensions. The PSPS is a pay as you go system (PAYGo), which means current taxes are utilised to pay pension recipients. Eligibility for retirement for most is at 55 years. The maximum age of retirement is at 60 years.

The replacement rate (percentage of your final wage at retirement) of the PSPS is very generous - it is between 75 percent-90 percent of an individual's retiring wage. Pension payments have a cost of living allowance built in but this is not explicitly linked to inflation, allowance increases are dependent on government decisions. There have been no cost of living increases in the recent past, in an environment of rapid inflation this has led to a marked decrease in the real income of pensioners.

The primary attractiveness of the public sector used to be the generous pension benefits. This has changed with the cessation of the defined benefit privileges to new entrants (they are now covered by a system similar to EPF/ETF).

The current structure of the public sector pension system acts as a deterrent to labour market mobility. One has to retire from the public service to be eligible for government pensions, for example a public sector employee cannot conceive making a move to the private sector at say the age of 50 since he or she loses all pension benefits. This severely inhibits labour market mobility.

Pension payments currently account for 10 percent of recurrent expenditure of the government and is expected to grow steadily if remedial action is not taken.

The public pension is a defined benefit. Therefore there is an explicit liability that the government has to recognise. It has been estimated that this liability is a staggering Rs. 580 billion which is 41.5 percent of GDP.

This liability is not funded. This is an explicit obligation that has to be met. It is inconceivable that when the government debt is already at an astronomically high level of 103 percent of GDP further government borrowings can be used to fund this deficit. The other alternative is for future taxpayers to bridge this deficit. Demographics dictate that the future working population will decrease so it will place a greater burden on future generations which will create severe inter-generational conflicts.

It is not inconceivable that governments in 10 to 15 years will be faced with an unmanageable problem if the current status quo remains, ultimately current public sector employees stand to lose their much-cherished benefits due to fiscal un-sustainability.

Reform where the current accrued pension benefits of public sector employees can be transferred to individual pension savings accounts (PSA) so that he or she can take greater responsibility for their pension funds through growth and management in order to provide adequate security in retirement is called for. This will restore the essential link between effort and reward, in other words between personal responsibility and personal rights. This will also restore greater freedom for public sector employees so they can decide when to retire (subject to a minimum balance), and allow movement to the private sector without losing pension benefits.

Private sector pension
Private sector employees retirement needs are primarily covered by the Employees' Provident Fund and Employees' Trust Fund (EPF/ETF). Contributions are 23 percent of monthly wage (8 percent by employee and 15 percent by employer) and are mandatory for all private sector employees. There are approximately two million active members under the EPF system. There are 204 other approved private pension fund (APPF) companies who had schemes that preceded the EPF Act of 1958. They cover approximately 165,000 members.

The EPF/ETF system is a defined contribution system, it is fully funded and members of the system have explicit balances. The cumulative assets under management are in the region of Rs. 300 billion.

At age 55 or above members have the option to cash in their lump sum.

Unlike the PSPS, the EPF/ETF does not have any ramifications for labour mobility. The system is managed centrally and is not tied to the place of work. So the problem of job lock does not exist. On the face of it the system does not lack any of the shortcomings of the PSPS. A World Bank study completed in 1998 estimated that the replacement rate (percentage of your final wage at retirement) that the EPF/ETF provides for its members is only a paltry 25 percent.

Can any individual survive with 25 percent of one's monthly income in retirement?

The reasons for this outcome are the poor returns that the EPF and the ETF generate for their members. Since the early 1980s the real annual returns have only been 2-3% and the weighted average real rate of return has been 1.7 percent. Member balances are predominantly utilised to finance the government budget deficit, the rate of interest paid to members is determined on an arbitrary basis. The World Bank study estimates that the interest paid to members would be two percent lower than a market-based system, if the latter is used in determining the cost of these funds to the government.

Due to below market-based rates of returns members view EPF/ETF contributions as an indirect tax. There is widespread delinquency either in terms of avoidance or underpayment.

For those segments of the labour force that are not in formal employment there are other voluntary pension schemes depending on one's vocation (e.g. farmers, fisherman, the self-employed, etc.). These schemes are based on defined contributions, their effectiveness in mobilising contributions have been limited. Employment is still heavily dependent on the rural sector, with 71 percent of the population living in rural areas and 38 percent of the workforce engaged in agriculture. Most agricultural workers do not come under formal systems of employment.

Formal pension systems only cover 50 percent of the working population, which means the balance 50 percent (approximately 3.3 million people) have no pension protection at all.

So the following spectre faces the workers of this country; the PSPS system promises generous benefits in retirement but its future solvency is in question while the EPF/ETF is a well-intended mandatory savings vehicle but poor returns do not generate adequate savings for retirement. The very security that pension systems are to provide in old age is in question.

Quite literally the workers of this country when it comes to their pensions are caught between the devil and the deep blue sea. This is not a desirable outcome. There lies the need for reform.

Economic growth
The demographic bonus that we are currently experiencing has led to a large number of new entrants into the labour force. This has created an acute need for employment generation which has to be addressed by attaining higher levels of economic growth.

Economic growth is a function of the mobilisation of resources for generating output, these resources are namely labour and capital. The two are inextricably linked. Increased levels of sustained economic growth can only be achieved by improving the effectiveness and efficiency in the way we use these resources (i.e. productivity). We are a country rich in labour resources but poor in capital resources, hence great emphasis must be placed to maximise the productivity of our capital. Further the greatest benefit of the productivity initiative that has been launched will only be realised by enhancing capital productivity.

Capital productivity at a national level is a function of how much we invest as a percentage of GDP to the amount of GDP growth that we generate. So we should strive for a low ratio, which means we can create greater economic growth with our current level of investment. When this ratio is computed over the last decade for Sri Lanka and compared to other fast growing countries while they were in similar periods of economic development to us the results indicate that we have been extremely poor in our capital productivity.

For example if we had the capital productivity of China during the last decade we could have achieved a 40 percent higher rate of economic growth.

The path to improving capital productivity will entail multiple co-ordinated reforms on many fronts; product market, labour, financial sector and land reforms and the government reducing its budget deficit.

It is worth investigating whether the twin problems of inadequacy in the pension system (i.e. the need for greater returns) and the need for improvements in capital productivity for greater economic growth can be addressed by suitable reforms in the way pension savings are invested.

Our population aspires towards greater economic progress at an individual level. Should they not be given an avenue in sharing the rewards of increased economic development not only in terms of income from employment but also the returns as shareholders of current and future economic assets?

If this is possible we will create the foundations of a true shareholding demo-cracy. When workers feel that they own a part of the country and the benefits that flow from ownership directly and not through politicians they will be more attracted to the free market and a free society.

Carsons pulling out of hotels?

Carson Cumberbatch and Co, the diversified conglomerate that is in the brewery, palm oil and equities investment business, is keen to invest in infrastructure.

The company wants to get out of the hotel business and is holding talks with prospective buyers for the Pegasus and Giritale hotels which it intends to divest.
The company is currently "working closely with some leading regional players who are renowned world-wide in their respective fields" and is looking out for investment opportunities in infrastructure in the light of the anticipated economic recovery, a spokesman said. He declined to name the foreign firms.

"Their expertise will be combined with that of the Group companies in building synergies for existing businesses when expansion programmes are undertaken," he said.

"Infrastructure projects do fall within the scope of our interest for diversification, and investment resources will be earmarked for any infrastructure projects that may surface," he added.

These investments, however, would depend on "correct commercial structuring" and a conducive operational environment with concessions granted by the government, he said.

The proceeds of the rights issues by Ceylon Guardian Investment Trust and Ceylon Investment Company "will be channelled into infrastructure projects and green field projects that are expected to come under the private enterprise development thrust of the current government," the spokesman said.

Asked about the company's long-term outlook for its overseas oil palm plantations, the spokesman said:

"The long-term prospects for the industry as a whole, and for the Indonesian oil palm industry in particular, appear bright especially with high yielding areas coming into the production stream. The approach by the two biggest palm oil producers in the world, Malaysia and Indonesia, for mutual co-operation to expand the overall market share for oil palm products is definitely a positive sign."

Any expansion programme for the moment will only focus on developing the current reserve land base of about 2,000 hectares in the present location in Indonesia, he said.

In Carson's Malaysian plantations, only a total area of 186.71 hectares is currently under immature plantation as a major part of the replanting programmes that were planned had to be curtailed due to the drop in prices witnessed in world markets in the recent past, he said.

"With the upward trend in prices, replanting plans will be revived with the aim of having palms aged 20 years or less," he said.

An area of 7,416 hectares in its overseas estates is expected to mature by 2004. "This will result in higher returns per labour hour which in turn will result in a low cost per unit of Crude Palm Oil or Palm Kernel produced," the spokesman said.

Additional productivity will be achieved with this maturity of plants as it enables the company to realise the benefits of mechanisation programmes implemented during the last few years and the long range mechanisation programme now in the pipe-line, he said.

Asked how the company intends using its real estate assets in and around Colombo, the spokesman said: "The current focus will be on achieving 100 percent occupancy for all its developed properties."

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