YAHAPALANA AND THE ECONOMY Part 6
Posted on March 27th, 2018

KAMALIKA PIERIS

REVISED 26.3.2018  and  25.10.18

‘We will revitalize the manufacturing sector by introducing a clearly defined industrialization strategy,’ said Prime Minister Ranil Wickremesinghe in his budget speech in 2017. ‘We must encourage the entrepreneurs to diversify our exports. Other middle-income countries such as Thailand and Vietnam are exporting a more diversified range of high-value products such as automobile parts, machinery and electronics. They are leaving us behind. We will have to catch up to our competitors. We have to change all these things if we are to strengthen the economy and to create more jobs.’

Here are three instances of how Yahapalana is encouraging local industry. A leading Indian non-leather footwear manufacturing company Veekesy Slippers Lanka Pvt Ltd, a subsidiary of Indian footwear conglomerate VKC Group India has set up a factory in Ethukala, Negombo as a Board of Investment (BOI) approved project.  VKC is India’s largest PU (polyurethane) footwear manufacturer. Its daily production is 400,000 pairs.

Veekesy has been allowed to enter the local market without any restriction thanks to the minimum investment requirements needed to qualify for such projects. The Indian company has got approval under Section 16 of the Board of Investment rules allow projects with a minimum USD 250,000 investment. This can be either 100 per cent foreign investment or a joint venture investment with a local collaboration.

This section permits investors’ unlimited access to the local market sales. Foreigners have to remit a minimum of $1 million if they are to undertake trading activity With this very minimum requirement the Indian company has received the opportunity to enter the local market without any restriction, .

The Footwear and Leather Product Manufacturers Association of Sri Lanka has protested to President Sirisena. The local footwear industry feels threatened. They complained that  the BOI has approved this Indian footwear manufacturing project, while the Export Development Board says it is helping local footwear manufacturers attain international standards and enter the highly competitive global market,

Veekesy is a major player in the Indian footwear industry with a capacity of manufacturing more than 150,000 pairs a day said the Association. Veekesy will have a clear edge over Sri Lankan producers in terms of procurement of raw material, machinery, moulds, etc and in addition they will enjoy a huge bargaining power due to the cost advantage associated with their massive output. Other Indian manufactures may follow suit and fields such as local manufacturing and marketing of dairy products, confectioneries, ready-made garments and a range of consumer goods may be adversely affected, they said.

Chairman of Veekesy, Abdul Razak, spoke to Business Times. He was eager to clear the doubts of local footwear manufacturers about his company’s entry into local market. Veekey’s intention is to supply better quality, non-leather footwear to local consumers at reasonable prices. It has no intention of ruining other manufacturers. His company’s production will be very minimal and it cannot hurt the local industry. He met several local footwear manufactures during his stay in the island and they were pleased to welcome his company.

General Manager of the company Fahad Farook noted that they will start production of slippers at the factory initially and consider turning out shoes in the latter stages. . Veekesy Slippers Lanka has adhered to all BOI requirements and received necessary approvals for the Indian venture; he said adding that they have no intension of ousting the local companies. We are willing to discuss any issues with the association at a one-to-one meeting as Veekesy is also in the same business,” he said.

Veekesy will be starting production at its local factory once the all BOI requirements and other approvals were done. The company has invested US$269,581 on the project. It will manufacture non-leather footwear, mainly synthetic and polyurethane slippers for the local market with some restrictions imposed by the BOI. Most of the raw material will be obtained from local companies and the project will provide 250 direct and 250 indirect employment for Sri Lankans. The company is willing to share their technical knowhow and even train Sri Lankan manufacturers and workers to improve the industry said Razak. The company will operate under the normal laws of the country and will ‘only remit their profits to India’.

According to the BOI letter of approval dated 25-09-2017,  Veekesy  should confine its production capacity to 2.1 million pairs per annum and submit the production and local sales details quarterly to the monitoring and investments departments of the BOI. If the company wishes to expand the production capacity then it should submit the relevant proposal along with a substantial percentage of export plan of the company’s total proposed production capacity for the prior approval of the BOI. It would then also have to pay the customs duty, PAL, VAT, NBT any applicable CESS and any other levies. The income generated from local sales is also taxable under the Inland Revenue Act.

Veekesy’s market research showed that Sri Lanka‘s footwear market ‘is virgin and unsaturated.’ The country’s total production capacity is in the range of 20 – 30 million pairs per year. The local industry includes 10 large export companies, 30 medium scale companies and about 3000 small scale manufacturers and at present it employs about 40,000 people directly and indirectly. It produces 75 per cent of all shoes sold in the island. About 95 per cent of the local shoes are made from synthetic materials or rubber. The remaining 25 per cent of shoes sold in Sri Lanka are imported. This amounts to 10 million pairs per year, concluded Veekesy.

This will help to kill the entire local footwear industry which has survived in Sri Lanka during good and bad periods, said the Footwear association. It is a threat to the very survival of local companies accustomed to trade in protected market. Leading footwear manufacturers like DSI and Bata who provide subcontracts to local manufacturers to supply their needs, say local manufacturers, specially SME companies which supply to them  will be seriously affected.

There were 10 large exporters, 30 medium-scale operations and 3,000 small-scale manufacturers employing around 40,000. The local manufacturers produced a range of products including canvas shoes, rubber boots, sandals, sports shoes and leather shoes. Additionally, accessories like wallets, bags, purses and key tags were also manufactured. Local companies fear the negative impact on the market from the new entrant.

DSI spokesman said that BOI had failed to discuss the matter with the local footwear industry. The BOI had gone beyond its jurisdiction in approving the Indian company. Why is the BOI getting involved in the local market, this is the job of the Ministry of Industries. The BOI should be looking at much larger investments from overseas — at least above Rs 200 million investment,’’ the Indian company was not bringing in any new technology nor was it manufacturing branded shoes for the local market. If they are into Adidas and Puma we can understand,’’ he said.

Former BOI chairman Upul Jayasuriya during whose tenure the approval was sought by Veekesy Company, said that in a letter dated July 7, 2017 he had given approval for 10% local manufacturing and 90% exports. When he resigned the new BOI chairman, Dumindra Ratnayaka, has issued the company a fresh letter. The BOI in a statement said the decision to grant approval was taken following a directive from President Sirisena who chaired a meeting on September 11 attended by all stakeholders in the industry. The statement said that BOI had not contravened any law applicable to the subject.

The Footwear and Leather Products Manufacturers’ Association wrote to the President in November 2017 urging that the approval be withdrawn as it would adversely affect local shoe manufacturers. The Footwear Manufacturers Association said the Indian business would be detrimental to Sri Lanka’s industry. Indians did not allow Sri Lankan industries to set up factories there. They are very protective of their industries. Several of our industrialists who wanted to set up shop in India have failed. Shoe manufacturers had also met former President Mahinda Rajapaksa to secure his support in a bid to stall the entry of the Indian company.

On Dec 2017, Sri Lankan shoe manufacturers and trade unions were informed that they have lost the battle to prevent Veekesy from entering the domestic market here. The Prime Minister had explained that it was difficult to reverse the decision and that such a move would have a negative impact on foreign investment. Cabinet Committee on Economic Management (CCEM)   said the same.

The matter came up in Parliament. MP Gunawardena asked on what basis the said company had been given approval to manufacture shoes in Sri Lanka whereas the local manufacturers could meet the demand for footwear in the country.”There are around 350,000 shoe manufacturers in Sri Lanka and they meet demand for shoes in the local market. In a situation like this, why did the government approve setting up this company?

Minister Samarawickrama said that according to the current law anyone who invested USD 250,000 in the country could establish a factory.”We import approximately three million shoes annually. The Indian Company which Gunawardena mentioned is only allowed to make two million of pairs of shoes. Therefore, local manufacturers will not be affected by it. But discussions were underway to amend laws that allowed foreigners to invest USD 250,000 and set up factories which threatened the local manufacturers.

The local footwear manufacturers continued to complain. What is the rationale in granting approval to a company that has technology that is no better than the street cobbler, importing all the raw material, providing an abysmally low number of employment opportunities to Sri Lankans and investing only US$ 250,000,”  they asked..

The Indian footwear manufacturer will produce around two million pairs providing work to around 200 people whereas around 250,000 people are benefitted by around 150 small and medium local footwear manufacturers in Sri Lanka. the footwear industry in Sri Lanka employs over 350,000 workers including SME sector and cobblers.

The proposed investment of US $ 250,000 which is equal to Rs. 40 million, is not enough even to erect a basic building to launch this project. Hence, they plan to have this project in a rented building. All the machinery to be imported are second hand with old technology. The technology that this proposed factory will use has been used by the SME sector for over five years.

In a letter to the Minister of Finance, the Association stated that the Indian footwear company, VKC Sri Lanka, is a sister company of the Indian parent company and therefore, it will be difficult to monitor the transfer price mechanism adopted by this company to avoid normal Customs duties and levies.. Many Indian workers may be employed in this proposed factory under the guise of shoe technicians, thereby draining the foreign exchange earned by other exports.

The population of Sri Lanka is 21 million and of this, may be about 80% use footwear. The VKC factory has been granted permission to make 2.1 million pairs per annum. This covers 10% of the population The local footwear market is saturated and on top of it, stock lots from China makes matters worse,”  the Asocaion said.

Yahapalana government banned the production of    polythene items   with effect from September 1. 2017. The gazette notification specifically referred to lunch sheets, food containers, plastic cups, plates, spoons and forks but did not ban shopping bags. Polythene Producers and Recyclers Association stated that there are around 1,000 polythene manufacturers in the country with 300,000 workers directly and indirectly involved in the industry. If we add the number of dependents, around one million people depend on this industry, the Association said.

The Association stated that they are perfectly capable of producing bio-degradable polythene and plastic products  that would disintegrate within one year and thereafter, completely decay within five years, without causing any environmental pollution. That is because they are doing so already. There are local biodegradable plastic producers who presently export their products to several countries including Australia, New Zealand, Canada and the Maldives, but they are not permitted here. They are blocked by a mafia of businessmen and officials.  The remaining producers could change over to this technology within a short period using the existing machinery. These products could be marketed at the same prices prevailing in the market today, since the cost would continue to be low.

The Association charged that certain state officials who are in league with a group of businessmen are blocking their plans to produce environment friendly, degradable polythene which would perish in six months. This mafia is now planning to import an alternative to polythene bags for the market with the help of a multi-national company. Their plan is to bring in a very expensive type known as bio-starch. One kilo of this costs around Rs. 750 currently and we have information that they are planning to sell a lunch sheet and a bag produced by new technology at Rs. 7-8 and Rs. 10-12 respectively.

Items produced by this method would certainly disintegrate, but it would produce methane gas thereafter. Moreover, industrialists would have to purchase completely new machinery to change over to this production and the products would also be more costly in the market. For instance, a lunch sheet would cost nearly Rs. 7 to Rs 8. Our products is low cost environment friendly bio-degradable here. But the mafia will not allow us to sell it here, stressed the Association.

The government has appointed a committee of 16 experts to prepare a national policy and an action plan as regards the use of polythene, plastic and bio-degradable plastic. This committee does not have a single member representing our interests, said the Association. An agent connected to an England-based company exporting plastic raw materials to Sri Lanka has been appointed to represent us. That company is planning to introduce bio-starch plastic here. We intend to take up this issue with the President, said the Association. We wish to inform him that the polythene mafia is blocking a cheaper and more environment friendly alternative to non-biodegradable plastic.

The Central Environment Authority (CEA) will start raids on the polythene industry to ensure compliance on its manufacture, as per government specifications it was announced in December 2017. Initially, the raids will be on large scale manufacturers of polythene, to implement the gazette notification of September 2017.The directive was for all polythene manufacturers to produce Low Density Polyethylene (LDPE) bags of 20-microns or above gauge, and also to refrain from the manufacture of lunch sheets that are posing serious problems in their disposal.

We will start with the big manufacturers and scale down to medium and small industries,” he said. Industries failing to meet requirements will be charged under the 23W of National Environmental Act No. 47 of 1980 gazette notification 1466/5, and shut down. Violators will be fined Rs.10,000 or, 2 years imprisonment or, both, as the case requires. Two weeks prior to the gazette notification, the CEA had called on all the industries to register for the National Environment Protection Licences that would facilitate the future activities of the industry.

Initially, the raids will only be on polyethylene bags of less than 20 microns and on polythene lunch sheets. With time, other products including polystyrene and rigifoam will be checked. Prohibition of burning polythene and plastic in the open will also be in force.

There are plans to discourage industries from manufacturing LDPE products as they are non bio-degradable. In the relevant gazette notification, Polythene includes high and low density and polypropylene. The Polythene Manufacturing & Recyclers Association (PMRA), which has around 100 registered members, said the manufacturers are ready for the change. The industries have made the necessary changes to the machines and are also planning on the production of compostable lunch sheets. He said the CEA had given time till year end to finish the old stock. We have a little more left and should be rid of it during this month,” he said. An estimated 1,000 industries are into polythene manufacture.

One of Sri Lanka’s largest polythene foil manufacturing plants, Polygen Poly Recycle Pvt. Ltd will open in Bundalama, Chilaw today. The company has invested over Rs. 150 million for this project built on a 6 acre land. Chairman of the company,  Warnakula said that they have being involved in the manufacture of polythene foil for both the agri and construction industry for the past 15 years.

However with the demands increasing we have now decided to construct a new factory and also diversified to the manufacture of Agri Pipes used for watering purposes of the Agricultural sector.”He said that they have also received orders from both China and India to export Polythene ‘tablets’ and this is also one reason for them to invest in the new factory.

Warnakula said that they purchase used polythene waste from all over Sri Lanka and then bail them in their colleting yard in Wattala. Subsequently they are transported to our new factory where the waste would be converted to black polythene foils used to make garbage bags and under cover to lay concrete. This polythene is also used in Agri plant nurseries.

The Chairman said that they currently use around 100 tons of polythene waste per month and produce around 70 tons of foil for the local market. Now we will be able to increase our production to 200 tons per month and we also have raw material to support our operations.

He said that he was disappointed about the decision by the government to ban SDB polyphone bags as they were in a position to recycle them. He also disclosed that over 50% of used polythene is made to perish to the ground and the government must come out with factories similar to his to put this waste in to practical use .Warnakula said that they will reinvest a further Rs 40 million to build a separate factory in the same premises to manufacture polythene agri water pipes

The Yahapalana government is also planning to ban the local manufacture of asbestos. In accordance with a Cabinet decision on September 16, 2016, a committee was appointed to study and recommend substitute materials the industry could produce instead. The factories that are already manufacturing asbestos roofing sheets would be asked to convert to non-asbestos products using these recommendations. The Fibre Cement Products Manufacturers Association (FCPMA) says there are four factories manufacturing asbestos in Sri Lanka. The industry provides around 200,000 jobs and contributes 3 per cent to the GDP. An asbestos ban would cause a loss of around Rs. 3 billion with many Sri Lankans losing their job,

The Association said that no good reason has been given for such a ban. The ban was based on ‘one person’s decision’. The reference was clearly to President Sirisena, said the media. One reason given was that 55 countries have banned asbestos. The Association replied that more than 150 countries still use asbestos roofing material. The ban in those 55 countries was due to the use of harmful ‘friable’ asbestos.  Instead for the last 70 years, the local industry has been using Chrysotile to manufacture asbestos sheets. Chrysotile has no reported health hazards.

In January 2018, Asbestos sheet manufactures asked for a clear message from the government on whether the ban on the manufacturers and use of asbestos sheet was still in force. Due to reasons best known to the government and political developments between Russia and Sri Lanka the government said that the ‘ban’ was temporarily lifted,” said Coordinator of the Fibre Cement Products Manufacturers Association, Anton Edema.

He claimed that without a proper study being done legislation was passed to ban the manufacture of Asbestos from January 1, 2018. However an alternative solution was not provided for the roofing needs of the people. He  said that sheet manufactures and over 200,000 people who are direct and indirect benefited from the Asbestos industry is now in a quandary with regard to this ban.

Edema said the industry needs huge investments and the maintenance of machinery too is very expensive. Hence the manufactures too want a ‘clear’ policy from the government with regard to this ban. We are asking the government to do a proper study once again and come up with clear solution.

Edema said that Asbestos is being used in Sri Lanka for over 70 years and first they were imported from England. Later Sri Ramco started manufacturing them locally and today there are four leading players. Over 3,000 employees are involved in the manufacturing process and none of them have developed cancer or any other health related disease so far. End users too have not had any health hazards. Today over 60% of local roofing needs are met by Asbestos and use of it saves wood and also construction cost and is also a preferred housing option for poor and middle class. It is also fire resistant. Edima said that there are six types of Asbestos sheets used in the world. Some types are banned.

Sri Lanka’s retail traders are voicing their anger over foreigners setting up retail shops here, as they see the space once exclusively available to them is being increasingly occupied by whom they call ‘invaders’. They were from Japan, China and India. They had opened retail shops that sell gifts, shoes, grocery, floor tiles and other items. If this trend continued, the local businesses would have to close shops We can accept if it is a giant retail trade or flagship company. This could uplift retailing standards. But in this case, foreign businesses do not bring any new expertise, knowledge or technology but only replicating businesses that are already here Instead foreign retail traders were investing small amounts of money and making big profits,

The uneven playing field created under the BOI Act is posing a big threat to us they complained., foreign retail companies had several advantages such as obtaining loans at low interest rates — as low as 2 percent — from their countries of origin, Foreigners pay the same tax and duty that we pay and earn bigger profits than us   and take away all the profits to their country.

The local retail industry had been neglected for the last 60 years, they said. Sri Lankan traders obtained loans at interest rates as high as 15 percent. But Sri Lankan industries on the other hand reinvest their profits in the country itself. Some 60 percent of the products sold in his retail shop, said one trader, were made by small and medium Sri Lankan companies. We sell several local products, including cane products from Wevelgama and wooden items from Matara.

The local retailers had met President Sirisena and asked for the repeal of the provision of the relevant law that permits foreigners to enter the local retail market with Board of Investment (BOI) status. But with no success. The process was so easy that foreigners from China, India and Japan set up shops in Sri Lanka just as we open bulath kades (betel leaf shops). Can Sri Lankans open retail shops in other countries?” they asked. The government should have specific criteria for foreigners to come here. China and India had tough regulations to protect the local sector and discourage the entry of foreigners into the retail market. Assistant Company Registrar said the foreigner-owned retail businesses were legal.

Although the Gazette Extraordinary No.1232/14 of 19th April 2002 of Controller of Exchange requires foreign companies to remit a minimum of US$ 5 million, two Indian entrepreneurs have opened a service company by investing a meager Rs. one million rupees reported the media. This is because there is a loophole in the law with regard to the service sector.

The company which is to start business from its Nawala office soon will issue medical certificates to Sri Lankans migrating to Qatar to take up jobs. This sector has been hitherto exclusively handled by local medical centers. In terms of the registration, the company is also allowed to expand its operation enabling it to lease, establish, maintain, operate, run, manage or administer hospitals, medicare, health care, radiology and radiotherapy, nuclear medicine, diagnostic, health aids and research centers and to provide medical relief to the public in all branches of medical schemes.

The Association of Private Hospitals and Nursing Homes said that the setting up of foreigners-owned medical centers would adversely impact the local health care businesses which are sufficiently equipped to provide the same service when permitting such health centers, the Government should ascertain whether the service provider conforms to local guidelines. We have to check whether the laboratories are accredited and safety regulations are followed in conducting the tests,” he said.

The dominance of foreign construction companies in Sri Lanka’s construction industry may bring about the collapse of local construction companies within years, the local contractors said. Chinese and Indian construction companies were taking over mega projects while the Sri Lankan companies watched helplessly. Already Chinese companies were handling about 40 percent of construction projects.

Chief Executive Officer (CEO) of the Association of Major Contractors of Sri Lanka said foreign companies undertaking construction contracts had a big advantage over local companies. The foreign companies were being supported by their governments and had a competitive edge in a fierce bidding market. They also had the advantage of not paying taxes in Sri Lanka. Their workers’ salaries were paid in their own countries. As a result, the foreign workers did not spend much here, except on their food.

The CEO warned that in the near future the foreign companies would move into smaller construction projects, even residential projects. This would lead to a crisis, where local companies would be wiped out within five years. Earlier, Chinese construction companies only went in for international bidding for projects through donor agencies. However when they saw the opportunities available here during the previous regime, they started negotiating unsolicited proposals by influencing governments.

Yahapalana has not been fair when awarding tenders. When awarding contracts a new practice of combining several minor projects into a major one was being adopted. When it became a mega project, local companies did not qualify to bid on the basis of available expertise and human resources. The Chinese companies on the other hand with their expanded work force and expertise bid 30 perecent lower than the local companies and snatched up mega construction projects. In recent times they had stealthily crept into the private sector and taken up major projects including the redevelopment of the clothing mall ‘Odel’ in Colombo 7 and the building of the Pearl Hotel at Bambalapitiya, he said. The Sri Lankan construction industry was also capable of undertaking such mega projects,

The Board of Investment allows foreign companies to bring down 25 percent of the workforce but in mega projects funded by them, the entire work force is brought from overseas. Some local industries are granted sub contracts where the locals get jobs. Local companies can find the expertise to build mega projects but persuading labor to come and work for them has become a huge challenge.

The foreign exchange control Act No. 12 of 2017 allows certain industries to have only 40 percent foreign shareholding with 60 percent for Sri Lankan stakeholders. But, the Act is silent on the construction industry. Foreign construction companies are using this loophole to set up companies which are virtually 100 percent foreign owned. Some foreign companies have invested a pittance of US$ 200,000.

About 27 regulations and rules drafted more than 18 months ago are still to be gazetted and are gathering dust at the Legal Draftsman’s Office,” The proposed regulations were to impose restrictions on foreign national participation in the construction industry. All foreign companies would also have to register with CIDA. The regulations would set a limit of 40 percent on jobs for foreigners in the industry. The CIDA accepted that it had been complacent and had failed in its duty by delaying the gazetting of regulations or proposing new legislation. (Continued)

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