Financial Times

Jaffna forgotten by investors

The prospect of improved business links between the north and south and of reviving industries in Jaffna was talked about with much enthusiasm shortly after the ceasefire was signed last February. Delegations from various business chambers even made visits to the peninsula amid much publicity. More than one-and-a-half years have passed and the region remains neglected as this series of special reports from Jaffna by Suren Gnanaraj reveals. In this interview with The Sunday Times FT, M. Ramadasan, President, Yarlpanam Chamber of Commerce, talks about the state of business affairs in the north.

Despite the ceasefire, why are investors still reluctant to set up new industries in the region?

Everybody is anticipating a permanent peace settlement, which means we might have to wait for a long time. But the truth is that we can't wait any longer. We need to take risks and we need to invest now. Otherwise, what's the point of displaying slogans such as "Sri Lanka First" and "Regaining Sri Lanka"? The support we have received from financial institutions has also been extremely poor.

Could you explain?

Banks require collateral to secure loans, but the reality is that most of the industrialists have lost their land and houses as a result of the war. How do we provide collateral? At a time when we needed life insurance, there was no life insurance in Jaffna. The insurance companies have introduced it only now. At present the construction sector, which is a heavy risk sector, requires performance bonds to be secured by insurance companies, but none of the insurance companies in the region has yet offered such a scheme.

What was the outcome of the visit made by Colombo business chamber officials to Jaffna?

As soon as the ceasefire agreement was signed, the Colombo chambers gave northern investment top priority, and expressed their interest in setting up several new industries. Today, Jaffna has been forgotten, and they are no longer interested in investing here until they see a permanent peace settlement.

Does this mean there is a deadlock between the chambers of the South and the North?

No. There is a programme under the auspices of the UNDP and International Alert to unite all regional chambers, in order to facilitate a dialogue with each other, to identify and solve common issues faced in each region. The project is titled "Invest in Peace" and aims to highlight the market potential in each region. In a few months we intend to form joint ventures with several other regional businesses.

What is your strategy to create industries without help from Colombo?

We are looking at a two-pronged approach. One is to mobilize capital from within the region, by attracting the expatriate community, who are currently visiting the region and sending money via foreign remittances. We are currently disseminating information to them, identifying potential industries and highlighting the current business environment in which they could make a healthy investment.

The second approach is to revive previously existing businesses in the North, which were once thriving in the region such as the aluminum factory and the sea food factory. At present the aluminum factory in Mawatuowam cannot be revived since the factory comes within the High Security Zone.

What is the extent of foreign remittances that are coming into the region?

Currently a private foreign exchange operator deals with close to three million rupees a day. There are about 15 foreign exchange dealers. The total foreign exchange earnings per day in the region, through both legal and illegal channels, is approximately Rs. 40-50 million, including what comes through the banks.

This money is currently being used unproductively on buying consumer goods and appliances. A lot of people are also buying land, and the land value has suddenly sky rocketed. We are trying to attract such funds towards investment and break away from the traditional investment tools such as gold, real estate and fixed deposits. Two UK-based Jaffna investors recently opened up an upmarket restaurant and guest house in the Jaffna town.

What does the business community in Jaffna feel about the LTTE tax system?

There is no transparency or consistency in the LTTE tax system. They are still to provide us with a formal document listing out the tax rates for each trade item, which is currently decided at their discretion. Therefore, it is very difficult to plan our cost structures, and this affects the management of our businesses.

What are the tax rates like?

The current tax slabs are between five and 20 percent for the construction sector, 20 percent on all electrical items and packaging materials and a further 15 percent on automobile spare parts.

What has your chamber done to mitigate the effects of this tax?

We have discussed the issue of tax with the LTTE on several occasions, and highlighted that taxes must be reduced in order to attract new investors who are willing to set up industries in the northern peninsula. However, there has been no response, since the LTTE does not have an economic and business development organization within its ranks that can take policy decisions. The economic groups they have are simply making working arrangements for projects.

To what extent has the LTTE tax affected businesses in Jaffna?

Up to now, the market flow of goods from the south to the north has not been affected by the LTTE tax since demand for such goods is extremely high and buyers are willing to purchase them at any cost. However, it is the supplier in the north that is affected, because he cannot compete with the south due to the high cost of transport, which at present is primarily through land.

Has it served as a disincentive for new industries in Jaffna?

It has not served as a disincentive to industries in the region, since at present there are no products being manufactured in the region. The press has painted a distorted picture to the international community about the whole tax issue, but the truth is that we have not seen a single business being shut down as a result of the prevailing tax system.

What is the current status of the construction sector in the region?

It is indeed a sector that is thriving, but it is also a sector that is in crisis. The entire labour force in the sector is employed, and the labour rates have increased by 100 percent corresponding to the increase in demand. Many government projects have been shelved as a result of the sharp increase in wages. Building materials have also seen a sharp increase in price, especially the prices of sand and steel. Currently we are looking into ways in which we can recruit labour from the south to meet with the existing demand, but workers are still scared to come to the north. (See charts on prices)

Has there been any training facilities granted to the people in Jaffna?

The Minister of Industrial Development Professor G.L. Peiris has designed a programme to provide skilled training for the people in Jaffna. However, the programme has been structured in such a way that the man in Jaffna must travel to the main industrial cities, at his own cost, spend two weeks in Colombo for training and return home. When the demand for skilled labour is high in this region, no one would be willing to leave a day's wage for two weeks of no-pay training. Therefore, the government must sponsor this type of initiative, because people can't afford such training. We were not even consulted when these plans were drawn up, so how do you expect the objective of this project to benefit the north?

Are you satisfied with the current development programmes and projects that have been drafted to develop the north?

All projects and programmes for the northern region must be drafted in consultation with the people in Jaffna. Unless you're in the region, you cannot identify its needs. People in Colombo do not have the required data and statistics of the region to decide as to what we need, or what we require to get our economy moving. Therefore, we need to be absorbed into the decision making process. Otherwise, such plans will be unsuccessful.

With very few industries in the region, what is the extent of the employment problem in the region?

Currently the entire manual labour workforce is employed. However, nearly 40-50 percent of the educated workforce is struggling to find jobs to suit their qualifications. There are close to 300 graduates that pass out from the Jaffna university each year who cannot gain employment. Therefore, they must be encouraged to set up their own businesses or create self-employment opportunities by way of a grant or a loan which would be repaid once their businesses begin to flourish. There is so much potential in this region and it just needs a bit of help to get it started.

What are the current problems with regards to agriculture?

At the moment 30-40 percent of all agricultural produce that is sent to the south is damaged or contaminated, and as a result it goes waste. Both the LTTE and Army checkpoints in Muhamalai and Omanthai, insist that each sack containing vegetables and fruits is unloaded and inspected, which results in a lot of handling. Therefore, there is an urgent need for quality packaging in the region, to prevent such losses, and ensure that the Jaffna farmers get a better return for their effort.

What are the existing problems facing the fisheries sector?

The lack of cold storage facilities is a huge problem. There are only two ice factories in the region who are struggling to meet the existing demand. The Federation of Chambers, Commerce and Industry of Sri Lanka (FCCISL) promised in 2002 to set up a cold storage facility in Vavuniya, which would ease the burden of the northern fisherman, but the project is still to materialize. The government has also made no attempt to provide poor fisherman with new fishing equipment.

Any there new developments in the agricultural and fisheries sector?

Yes. A microbiology lab is to be set up in Jaffna, in collaboration with a foreign quality certifying institute. This would enable both agricultural producers and fishermen to get their produce tested, and receive foreign accreditation as to its quality, so that their produce would be better accepted in the south.

What type of progress has been made in developing Palmyrah products?

I feel that though the Palmyrah Development Board (PDB) has been vested with a lot of resources in terms of a modern research centre, they have not been able to enhance the potential of the industry. A key problem in developing this particular industry is that it is monopolized by a particular caste of people. This caste was a low income group, and were involved in toddy tapping and making various Palmyrah handicrafts. However, after the PDB began the Palmyrah Distillery, the industry became a huge money spinner, with the caste satisfied with the revenue they were earning and they didn't bother to do further research on developing more byproducts out of the Palmyrah fruit.