Editorial

Security

Politics

World

Letters

Sports

Obituaries

Archives

Opportunities and challenges

The following is a paper presented by Muttukrishna Sarvananthan, Research Fellow of the International Centre for Ethnic Studies, Colombo at a recent seminar on 'Business Community and the Peace Process'. The seminar was organised by the Ceylon Chamber of Commerce and the Centre for Policy Alternatives.

Vibrant fishing industry in Jaffna before the war

The Government of Sri Lanka and the Liberation Tigers of Tamil Eelam (LTTE) signed a Memorandum of Understanding (MoU) in February, which paved the way for an indefinite ceasefire between the warring parties. This inspired renewed interest in the business community in starting businesses in the North and East Provinces to resurrect the dormant economy of the area.

The following observations are made from study tours to LTTE-held areas in the Wanni region during March and April. However, I am yet to travel to the Jaffna peninsula and the Eastern Province, and therefore my observations are somewhat limited. Problems

There are two major problems in doing business in the North and East despite the Government unilaterally lifting economic sanctions in January. One is the infrastructure bottleneck and the other is taxation by the LTTE.

The former includes poor conditions of roads, lack of electricity and telecommunication and the absence of railways.

Damaged school buildings, the result of the protracted civil war

The roads in the LTTE-held areas are in a deplorable condition, which increases the transport cost of goods. Even after the opening of the A9 highway from Vavuniya to Jaffna, road transport costs are expected to be high because of heavy wear and tear to vehicles plying that route. The A9 route from Mankulam to Palali in particular is in very bad condition. The interior roads are even worse especially during the rainy season, because most of it is gravel road.

Further, the arbitrary tax imposed by the LTTE on vehicles carrying goods are another key factor that pushes up the transport cost even higher.

The lack of electricity, telecommunications, and railways are major impediments to doing business in the LTTE-held areas of the North and the Jaffna peninsula. The lack of electricity in LTTE-held areas prohibits manufacturing activities.

The limited number of electric generators is totally inadequate to cater to the needs of the producers and consumers and costly. The limited supply of power in the Jaffna peninsula is far short of the requisite amount.

The lack of storage facilities is yet another impediment to doing businesses in the LTTE-held areas. For example, though the free-flow of petroleum products to LTTE-held areas is ensured in the MoU, there is a lack of demand for diesel and petrol in those areas.

This is mainly because almost all the vehicles (two, three, and four-wheelers) in the LTTE-held areas have been converted to run on kerosene during several years of economic sanctions. Moreover, there are no underground storage facilities for petroleum products in LTTE-held areas, and over-ground fuel tanks are wasteful due to evaporation. During pre-war times, while rice was exported from the Wanni region to the Jaffna peninsula, cash crops such as onions, chillies, and tobacco were exported to the South from the Wanni region. It is claimed that about two-thirds of the total requirement of fish in Sri Lanka used to be caught along an 80 mile coastline off Mullaitivu district. The Wanni region used to be a significant exporter of agricultural and fish produce for the rest of the country including the Jaffna peninsula.

These past data indicate the potential out there. The lack of storage facilities for perishable agricultural and fish produce calls for the revival of the construction industry in those areas. However, due to the dearth of bank finance (loans and overdraft facilities) to fund construction activities, the construction industry is still dormant despite the lifting of the sanction on construction materials such as cement, bricks, asbestos and tiles.

The realisation of the full business potential after the lifting of economic sanctions is delayed primarily because of infrastructural bottlenecks such as the poor conditions of roads, lack of electricity and telecommunications, and the absence of railways. Since the lifting of economic sanction on January 15, though there is a surge in the export of consumer goods such as bicycles, bicycle parts and accessories, motorcycles, plastic furniture, office machinery, stationary, radios, television and building material from the rest of the country to the LTTE-held areas, there is a long way to go to exploit the full business potential.

Another critical factor inhibiting the realisation of the full business potential in the aftermath of the lifting of the economic sanction is the arbitrary taxation of goods and vehicles en route to the Wanni region and the Jaffna peninsula by the LTTE. Taxation by the LTTE, though justified in order to run a parallel administration in the territory under its jurisdiction, extends to goods meant for personal use as well. This arbitrary taxation is debilitating to the entrepreneurial instinct of the masses, especially in LTTE-held areas.

Due to high transportation cost and extra-legal taxation, the prices of goods in the Wanni region are still quite high though they are lower than during economic sanctions. Similarly, though prices in the Jaffna peninsula have fallen after the opening of the A9 highway, they are still quite high compared to prices in the rest of the country, because of high transportation costs and arbitrary taxation. In fact, the people of the Wanni region are worse off now than during economic sanctions.

During economic sanctions, there were severe restrictions on the export of Wanni produce to the rest of the country including the Jaffna peninsula. Therefore, the local agricultural and fish produce were relatively cheap in the Wanni region. However, in the aftermath of the lifting of the economic sanctions and the opening of the A9 highway, more and more Wanni produce are being exported to the rest of the country including the Jaffna peninsula. These exports have resulted in higher local prices for agricultural and fish produce in the Wanni region, which has made the producers better off, but the consumers worse off.

Therefore, the re-building of basic infrastructure such as roads, power, telecommunications, and railways are sine qua non for the full realisation of the business potential in the North and East.

Opportunities

The North and East Provinces encompass eight districts: five in the North and three in the East. According to the Central Bank of Sri Lanka, in 2001, about one million people were living in the North and 1.4 million in the East. These data are based on the latest Census undertaken in mid-2001 (after a gap of 20 years).

However, the data for the North is questionable because the Census could not be undertaken in any of the districts of the province last year. Besides, the population data for the East is also suspect because about two-thirds of the land area in the East is under LTTE control where the Census was not undertaken last year.

The present actual total population of the North and East is not known to anyone primarily because no proper census could be undertaken after 1981 due to the civil war. However, according to disparate data from various sources, about two million people may be living in the area: one million in each, out of the total Sri Lankan population of around 18.7 million in 2001. Thus, nearly 11 per cent of the total Sri Lankan population resides in the North and East.

A substantial proportion of the Eastern population lives in the government-controlled areas, though about two-thirds of the land area of the East is under LTTE control. In the North, the Jaffna peninsula has a population of about 500,000 and the government-controlled areas in Vavuniya and Mannar districts have another 100,000. The other 400,000 live in the LTTE-held areas in the Wanni region.

These population figures are given to estimate the size of the market in the North and East. However, it is only a rough estimate. The market of the North and East is quite a big one, which has significant business potential.

Although the priority for the areas (especially the North) is infrastructural development, it is unlikely that private capital (whether local or foreign) would flow into this sector especially because it is still a contested territory by the Government and the LTTE.

Infrastructural development should be undertaken jointly by the Government and bilateral and multilateral donors.

The agriculture, manufacturing, construction, educational and financial (banking and insurance) services, and the wholesale and retail trade all have huge potential to exploit. However, due to the aforementioned infrastructural bottlenecks, the realisation of this potential is expected to be slow.

The immediate opportunities are in the agriculture, construction, educational and financial services, and wholesale and retail trade. The manufacturing sector (medium and large scale) will take some time to take off because the infrastructural prerequisites are limited at the moment. The North and East, historically, was an agricultural economy. The predominance of the agricultural sector has not changed during the civil war.

However, in pre-war times, the provinces were significant exporters of agricultural and fish produce to the rest of the island. These agricultural exports included rice, onions, chillies, tobacco and lentils. But, now the sector has been transformed to by and large subsistence agriculture, especially in the Northern Province.

The agriculture sector has been severely hampered by economic sanctions that had restrictions on fuel, fertiliser, and pesticides going into LTTE-held areas. Hence, there is potential to revive the commercial agricultural sector in the province especially for exports to the rest of the country.

One of the most lucrative sectors to invest is the construction sector. Due to the protracted civil war, damages to homes, commercial and public buildings, roads and bridges are immense.

Therefore, with the ongoing resettlement of displaced people at their original homes, there would be a huge demand for construction services. The businesses involved in construction services have a huge potential to exploit.

The financial sector has a key role to play in the reconstruction and rehabilitation of the provinces. With the anticipated flow of reconstruction and rehabilitation funds from the government as well as from bilateral and multilateral donors, the need for banking and insurance services are real. The lack of capital is a major constraint to investment in the province. The re-establishment of financial institutions would go a long way in bridging the gap between savings and investment in the province. The financial institutions in the province would also benefit from private remittances from abroad.

Historically, the human resources of the North and East have been one of its most valuable assets. The people have been investing a lot on education. This investment continued even during times of war despite severe hardships, such as the occupation of schools by Sri Lankan armed forces, lack of electricity and transport.

Therefore, the opening up of educational services in the areas would cater to the long-felt need of the people, especially in the fields of information technology and English language teaching. Information Technology and English language are the keys to success in the 21st century.

There is a huge pent-up demand for consumer goods especially in LTTE-held areas. Economic sanctions had deprived the people (especially those living in LTTE-held areas) of even basic consumer goods including pharmaceutical for over a decade.

Therefore, the establishment of the wholesale and retail trade in the North and East would facilitate access to markets for the population. However, the lack of power and local taxes imposed by LTTE is dampening the realisation of such pent-up demands.

Due to the long drawn civil war, a large proportion of the entrepreneurial class of the North and East has migrated to other parts of the country or overseas. Thus, there may be a dearth of entrepreneurs in the province, especially in LTTE-held areas. The involuntary displacement of the Muslim community (who formed a vibrant trading community) from the North (particularly from Jaffna and Mannar) also contributed to this situation. The re-visiting of such entrepreneurs, as well as new ones, to the area would help shore up the fledgling markets there.

Challenges

The LTTE imposes its own taxes on traders, producers, and households in the area including in government-controlled areas. The entrepreneurs and households in the government-controlled areas of the North and East pay taxes to both the government and the LTTE.

After the signing of the MoU, the LTTE has spread its tax net to people living in government-controlled areas as well, such as the Jaffna peninsula, Batticaloa, Trincomalee and Vavuniya towns.

This has resulted in the slow exodus of people from these areas to the rest of the island, particularly to Colombo and the suburbs. These taxes create a moral hazard and an ethical dilemma for entrepreneurs planning to establish manufacturing, trading, or service-oriented businesses in the province. 'Should we pay or should we not?' is the question often asked. The situation is delicate. There is a huge unemployment problem in the North and East due to the war. Therefore, the business community has a social responsibility to establish businesses to create employment opportunities and draw the vast army of unemployed into the national mainstream, and prevent them falling into the wrong hands.

On the other hand, how does the business community handle the issue of LTTE taxes? There are two options - one is to refuse to pay and the other is to pay up. The former is the ethically correct thing to do, although it may not be practically possible. Therefore, some business people may decide to pay up the tax and continue to do business in the North and East.

If this is the option left to business people, then I would suggest a mechanism by which they could mitigate the effects of such unethical taxes. That is, no one should pay the tax directly to the LTTE. Instead they may ask the LTTE to suggest some social welfare programmes, or community services they would like to implement for the local community and finance such programmes or services. By this mechanism, the taxpayers do not pay cash to the LTTE, but fund community welfare-oriented projects identified by the LTTE.

Thus, the taxpayer would be providing a social service on behalf of the LTTE, at the same time ensuring that their tax payments are not utilised for military purposes.

If you opt to keep away from doing business in the North and East, the consequences could be fatal to the entire country. Therefore, I would strongly urge the business community to take up this moral and ethical challenge and fulfil their enormous social responsibility to the area and to the country.

It is not only important to establish businesses in the government-controlled areas of the Province, it is also vital to open businesses in the LTTE-controlled areas, to provide employment opportunities and revive the dormant economy of those areas. Historically, the Eastern Province has been relatively less developed than the Northern Province prior to the war.

The Government of Sri Lanka could also help the business community in mitigating the moral hazard of doing business in the North and East by handing over the interim administration of the province to the LTTE as soon as possible. Once the LTTE takes over the interim administration, there would be no justification to impose its own taxes, because official funds would flow for the development of the province.

News | Business | Features | Editorial | Security
Politics | World | Letters | Sports | Obituaries

Produced by Lake House
Copyright 2001 The Associated Newspapers of Ceylon Ltd.
Comments and suggestions to :Web Manager