A Case for Feasibility Studies and Venture Capital
Posted on January 8th, 2022

Sugath Kulatunga

Micro, Small and Medium sized Enterprises (MSMEs) play a major role in the development of the economy due to their potential to promote inclusive growth by reducing inequalities of economic performance, and their capacity to develop into large organizations later on, thereby providing employment to a substantial proportion of the population and contributing to the economic growth of the country over their lifespan.

It is estimated that about 99 per cent of non-agricultural establishments in Sri Lanka are MSMEs, and that about 45 per cent of employment in the country is in the MSME sector. This is a sector which was severely affected by the Corvid pandemic. The Government, in collaboration with the central Bank, introduced a number of relief packages to support the affected enterprises. The Central Bank reports that the total government subsidy payments for the ‘Enterprise Sri Lanka’ loan programme amounted to Rs. 6.0 billion in 2020 and the Saubagya (Prosperity) Loan Scheme has allocated Rs.150 Billion

In addition, with the objective of supporting a production economy, several other government authorities
have conducted programs to enhance market access and to modernise their enterprises. There has also been a focus on training.

It is regretted that there has been less attention in the creation of new enterprises. Even when new enterprises are received for funding they are rejected as they have not been properly formulated. Due to this many projects also fail in a short time.

It is not the first time that massive incentives were offered to the SMEs to promote high value agricultural and processing activities. In the Budget 2007, the KRUSHI NAVODAYA” was introduced to promote high value agricultural and processing activities, and proposed a comprehensive package of incentives such as credit and tax rebate for machinery, equipment and extension services. It was to be extended at Rs. 2 billion for each year over the next 3 years.

Similarly the Budget 2007 proposed an attractive package of incentives such as assistance for research, extensions and quality assurances for value added products and also support the acquisition of advanced machinery and equipment: exclusively used for the manufacturing and processing of high value products from tea, rubber and coconut, and for animal husbandry, pharmaceutical and giftware production by the removal of import duty on such machinery and providing additional credit facilities.

It was expected that 1 million jobs would be created. through new industries and the expansion of existing industries in the SME sector. A new bank i.e. Lankaputhra Bank, was established to finance and supervise these new programs

 Despite the availability of substantial funds and the offer of a number of attractive incentives on new investments, it has been noted that there is a serious dearth of bankable projects coming up for loans in the SME sector. While there is a scarcity of viable projects there is also the problem of the widespread failure of projects financed by the banks. This is seen in the high percentage of non- performing loans in the SME sector.

In this background it is proposed that the government should adopt a more proactive approach with regard to new projects. It is proposed that rather than wait for bankable projects to be presented by investors the government must involves itself actively in the identification of projects and developing project profiles and feasibility studies to be made available to prospective investors.

This is the policy followed by established development banks in India, the National Bank for Agriculture and Rural Development. (NABARD). The participation of a State agency in project identification and formulation would also result in channeling scarce resources into priority sectors of development and would contribute to the reduction of project failure. While this strategy would generate projects for bank financing, at least part of the cost of such a scheme could be recovered from projects accepted for funding by the Bank. A list of NABARD projects in 20-21 is given here; https://www.agriexam.com/nabard-bankable-project

(Small and Medium Enterprises Development Authority – SMEDA, of Pakistan performs a similar function like NABARD of India.The main objective of the pre-feasibility studies prepared by SMEDA is to provide information about investment opportunities to the small & medium enterprises. Their website on projects is  https://smeda.org/index.php?option=com_phocadownload&view=category&id=122&Itemid=308

What is necessary is for some State institution to launch a facility to build up a data bank of feasibility studies and make the information widely available to the public. The proposed institute should develop inhouse expertise on project sectors and have a strong external team of experts. It should also work closely with the IDB for technological assistance and the EDB for marketing knowledge. In due course they should also develop the capacity to advise the clients on machinery and equipment and technology. It may be useful to invite an expert from NABARDA to assist in the preliminary work.I believe the Samurdhi Bank would be a good choice for this function. It can train its staff on identification of project ideas and also follow up on the implementation. The Bank should also act as a Venture (Risk) Capital provider. The risk aversion of the local banks makes it difficult for SMEs to secure funds from them. A contribution of risk capital by another agency makes banks more liberal in granting loans. This was the experience of the EDB in the 1980s when the EDB provided Risk capital to several pioneering projects which would not have invested without the EDB participation in preference shares as a minority shareholder. It is unfortunate that this function which is provided for in the EDB Act was not only ignored the very Division with trained staff was disbanded. I also tried to support a Bank and a government Department to establish a facility for project feasibility studies without much success.

A sound justification for a Venture capital facility for SMEs in Sri Lanka is proposed in a recent ADB study at  website:  -sme-venture-capital-sri-lanka.pdf.  

2 Responses to “A Case for Feasibility Studies and Venture Capital”

  1. Cerberus Says:

    Thank you Mr. Kulatunge for raising this issue. One of the most abundant things we have in Sri Lanka is sunlight. We can get the full benefit from it and get all our energy needs from the sun if we adopt what Germany did a few years ago.
    In Germany a few years ago they introduced a guaranteed price for renewable energy for a period of 20 years. The net result is now Germany is leading in renewable energy. They shut down 84 coal plants and most of their Nuclear plants. The investment was mostly done by the Private Sector. Why don’t our leaders follow the same model that has worked for the Germans so well? If we do that, we could cut down on the import of coal, crude oil, and diesel, save Forex and solar energy electricity for all our needs such as cooking, vehicles, all powering, needs, etc. In the USA too they give tax incentives for homeowners to install solar panels on the roofs. I agree on instead of the Govt trying to do everything, we need to harness the energy of the private sector more. Europe has a very successful Socialist system of Govt which is using a blend of capitalism and socialism. However, we need to be cautious that we do not end up like in some countries where the corporations have taken over the Govt. Even the father of capitalism Adam Smith in his book Wealth of the nations says it is important to keep strong controls on the private sector and to keep all essential services in the hands of the Govt.  

  2. aloy Says:

    All this pie in the sky. What is the database that is free from hack at will in the hands of our so called ICTA big wigs. The case of deleting data at MOH willfully by them is a case in point.

    Now to comment by Cerberus above refers:

    Just before pandemic broke out in March 2020, I was very much interested in manufacturing some solar panels as a pilot project using some skilled staff of a digital company I was looking after on a temporary basis. I prepared video clips of each stage in hand fabricating of panels which were very much less than the cost of panels that were in the market. Knowing that Germany was the leader in this technology I thought it fit to write to Ministry of Finance when they announce a German government assisted program launched here to facilitate local entrepreneurs import from industrial goods from them. After about a month (there is a significance in timing too), I did get a reply asking me to contact the relevant German office. When I contacted and got connected to the head of that unit with difficulty I was told that they will come back to me in due course. That never happened perhaps due to Corona or due to some other factor. However I felt that the unit had been setup not to assist us or trade promotions but with other intentions as usual.

    Solar is the way to go, and we should setup a factory to manufacture solar panels. We should research in using clay or other non-imported material for framing and mass produce them. As far as technology is concerned we must have self reliance except perhaps chip manufacturing. Take S. Korea and Taiwan for example. In south Korea it was the creator of Samsung who was instrumental and in the case of Taiwan also it was one or two individuals and both these nations have surpassed US in terms of technology.

    Here’s a video that describe the state of that technology.


    Sri Lankan parents have the dream of sending their children overseas to find a way out of the mess they are in. I want the GOSL to give these children at A’levels complete understanding of what this girl (a Slavic) is saying.

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