By Chandra Jayaratne –

An Open Letter Submission to the President, Minister of Finance, Chief of Staff of the President, Minister of Justice, Chairman Public Finance Committee, Secretary to the Treasury, Governor Central Bank, Auditor General, Attorney General, Legal Draftsman, Secretary General Parliament, Diagnostics Team- International Monetary Fund

Proposed Enactment of the Economic Transformation Bill

This submission is made in the long-term sustainable interests of Sri Lanka and all its people; and sets out some critical aspects to be considered by you, prior to proceeding with the enactment of the proposed Economic Transformation Bill.

‘A vibrant literature of empirical growth studies lends support to a variety of views on the conditions and policies that spur growth. Because economic theory does not reach clear conclusions on the conditions that best support income catch-up, researchers have looked for lessons from the experience of a large number of countries over long periods. The challenge is to sift through the voluminous (and at times contradictory) conclusions to identify the most robust influences—those that are repeatedly significant across studies covering different samples, periods, and specifications’[i].

Geographic and socioeconomic attributes constitute nearly 50% of the growth drivers, the balance is shared between initial income per capita and demographic factors such as population growth rates, fertility rates, and age composition and only around 20% relate to policy influences[ii]. ‘These results lead to the troubling conclusion that the scope for policies to affect growth may be rather narrow or influenced by other conditions in ways that are difficult to discern’[iii]. Examples of the variable growth drivers of smaller underdeveloped economies of the Central Eastern European economies[iv] vs the experiences of Bangladesh[v] and East Java[vi] bring out these variable results; and are worthy of your attention in developing the best suited policy reform for economic transformation in Sri Lanka.

Sri Lanka’s best option will require a mixed bag of reforms to enhance new investments and tradable goods share of growth, starting with political stability, policy consistency, ease of doing business, improved factor productivity, good governance, safe and corruption free destination with property rights and effective dispute resolution mechanisms, whilst leveraging on developing effective supply chain linkages focused on India and China, and possibly extending to cover options with Asian Tigers. In addition, enhancing per capita incomes of the majority marginal/variable income earners, addressing the specific needs of poor and vulnerable, through new livelihood opportunities led by human resource development, skills upgrading with an acceptable work culture attitudinal change, will in addition lead to enhancement of local consumption led growth; and will require focused training, technology transfers and infrastructure developments, all going beyond the present focus only of reaching debt sustainability.

The above Bill proposes the adoption of a legislated framework by a National Policy on Economic Transformation, setting out long term to be consistently applied macro-economic fundamentals with fixed outcome targets and defined objectives. In addition, the Bill establishes five new public institutions to engineer the required change management and pilot the envisaged economic Transformation along with the repeal of the Board of Investments Law.

‘A country’s comparative advantage cannot lie in keeping its people poor; Bangladesh’s development has largely been driven by one export sector – the ready-made garment industry – which is highly dependent on keeping wages low” the UN Special Rapporteur on extreme poverty and human rights[vii] “: Indonesia being an upper-middle income country and member of the G20 has a relatively low and stagnant Human Development Index[viii],whilst in Central Eastern European Countries the human development indices have improved even exceeding comparator indices of developed countries[ix].

The priority, critical strategic question to be addressed by the Executive, Legislature, growth creating private sector, academia and the International Monetary Fund is, whether the enactment of the Bill in its current form, even when supported by a disciplined and focused strategic change management culture, will be capable of delivering consistent and sustainable growth along with the creation of new livelihood options for the majority of the citizens whilst enhancing their disposable incomes. This segment of society is currently drastically impacted by cost of living, hunger, malnutrition, lack opportunities for human development. This failure is in the context of a severe shortage in meeting market needs for a supportive skilled workforce, and an effectively connected efficient national growth facilitative infrastructure. Whilst acknowledging the need for disciplined and strategic change management in the areas as focused by the Bill in reducing the national debt to planned levels and enabling the nation to enter international credit markets, will it simultaneously lead to be a crucial turnaround contributor to spur the realization of the welfare and wellbeing of a majority of citizens whilst focusing on the timely realization of the UN Sustainable Development Goals?

In the enactment of the proposed Bill, with special reference to Part VIII enabled wide and open cart blanche approval and operations facilitative framework, whereas Sri Lanka does not have adequate and comprehensive laws and regulations to control of monopolies, mergers and anti-competitive and anti-trust practices, (with the Consumer Affairs Authority Act being totally inadequate to provide essential protection), there lies an important legislative and regulatory void which requires priority attention of those addressed by this submission.

It is a fervent hope that those addressed will take steps to avoid a possible risks of a tipping point-based peoples’ uprising, by proceeding with the enactment of the Bill ignoring the perceived inequality and the severe hardships poor and vulnerable are exposed to consequent to the economic crisis.

A further preliminary critical issue requiring careful evaluation is to validate whether the five new public institutions proposed to be established can be avoided by effective restructure, change management, infusion of new talent, skills, and professionalism and using existing institutions where necessary with amalgamations and change of objectives and accountabilities. For example, will a restructured Board of Investments be an option? Can an amalgamation of the Institute of Policy Studies/Institute of Fundamental Studies and Lakshman Kadirgamar Institute replace the planned research Institute and can an amalgamated SLINTEC/CISIR/Industrial Development Board/Other Key Research Institutes not be the vehicles to implement the provisions of the Bill.

Without prejudice to the critical issues outlined above this submission attempts to upgrade, expand, make more comprehensive and best practices enriched, the current provisions of the proposed Economic Transformation Bill; embedding within it, the recommendations hereinafter set out, which will ensure greater transparency and accountability and establish an Efficient, Economic and Effective operational framework.

Consider the value of incorporating the following additions, amendments to the Bill:

1. Add under the preamble “And Whereas Governance Diagnostic Assessment of the International Monetary Fund conducted during March 2023 focused on corruption vulnerabilities and governance weaknesses linked to corruption in macro-economically critical priority areas of:

(i) the anti-corruption, anti-money laundering and combating the financing of terrorism.

(ii) fiscal governance (e.g., public financial management, tax policy and revenue administration, state enterprise management, and public procurement); (iii) central bank governance.

(iv) financial sector oversight; and (v) enforcement of contract and protection of property rights and concluded that confronting corruption in Sri Lanka effectively requires short-term actions to address core vulnerabilities combined with more long-term actions to introduce structural changes in governance and accountability that address the underlying governance weaknesses and dismantling current protections that afford officials immunity for their actions is fundamental to achieving and sustaining success”.

2. Add under the preamble “”Whereas in terms of the Article 28 of the Constitution it is the duty of every person in Sri Lanka –

(a) to uphold and defend the Constitution and the law;

and by

(d) to preserve and protect public property and to combat misuse and waste of public property.

3. Include undersection 2 of the Bill ‘the objects of the National Policy on Economic Transformation include the following:

– To ensure that a consistent long term economic policy framework implemented by the executive and all supportive arms of governance with transparency, integrity, and ethical codes of conduct deploying accepted best practices of good governance, sans corruption and waste placing the long-term best interests of the people as the priority, assuring realization of United Nations Sustainable Development Goals

– To encourage active citizen, business, academia, and intellectual civil society participation in assuring democratic good governance holding those at all levels in governance accountable in delivering the objectives of economic and social transformation envisaged by this Act.

4. Add under section 3 (1) National Policy on Economic Transformation include the following;

– Develop Human Resources with requisite knowledge, skills and values and embed essential, efficient and effective systems, procedures, risk management processes, and controls to support identifying niche and emerging growth opportunities and in enhancing productivity and quality of all existing growth contributors

– Promote human development, poverty alleviation and environmental sustainability in line with Sustainable Development Goals

5. Include as a sub paragraph of section 4-Duty of the Cabinet of Ministers in relation to the National Policy on Economic Transformation ” There should be an option for any future government or any government in an interim period of the five years as stated in section 5 , due to emerging improved or alternative policies/policy priorities, global and local exigencies, or due to emerging fundamental macro-economic challenges and stability risks to amend commitments, policies and priorities set out in sections 3 and 4 above supported by acceptable long term economic and social justifications, with the agreement of not less than 50% of the number of members in parliament

6. Introduce a clause whereby any regulations promulgated in terms of this enactment, all of which should be tabled in Parliament within a reasonable period from issue, for review by the COPF and with such Committee’s comments and Budget Office Critique be placed before Parliament for noting and where appropriate debate and approval

7. Make the provisions of section 8- Oversight Control of Parliament to be expanded with the addition of “with the facilitation support of the Budget Office and COPF “

8. Add the under noted overarching section covering applicable institutions and persons connected with the implementation of the provisions whereby

– All Persons appointed and associated with the administration, supervision, and oversight accountability in terms of this Act to any of the institutions or entities as specified herein shall be governed by a Code of Ethics and good governance and shall be required to report any instances of Non-Compliance With any Acts or Regulations (NOCLAR) to the Chief Executive of the relevant Institution or Entity and / or to the Secretary to the Treasury

– A person exercising powers or performing duties as a member of any board, institution, committee, or advisor ‘shall act in good faith, in the interests of the Commission and shall not act in a manner which is reckless or grossly negligent; and shall exercise the degree of skill and care that may

reasonably be expected of a person of his knowledge and experience. and

– shall refrain from having, directly or indirectly, any interest in any contract, agreement, business, or any other matter made or proposed to be made and, in any event, shall forthwith disclose the nature and extent of his interest to the Secretary to the Treasury

– All Chairmen and Board Members appointed by the President in terms of this Act shall appointed by the President with the recommendations of the Constitutional Council or High Posts Committee of Parliament

9. It is best that Sections dealing with eligibility and registration of foreign investors and investments be

– extended with a proviso stating that all such investments should require that investors and their investments must promote, and advance economic transformation objectives set out in the Act and be net incremental socio-economic value contributors of Sri Lanka

– that the regulations governing the negative list will be valid only post review by the appropriate Committees of Parliament and the Parliamentary Budget Office and upon being duly approved by Parliament and the intent to gazette such a list must be first published prominently by way of a notice in the newspapers; whereupon any citizen or business or a Chamber of Commerce or Business Association could lodge notice of objections and their appeal duly enquired into prior to publication of the formal gazette notice

– Subsection 3 should make it clear whether domestic investors in the Zones and outside the zones are covered by this provision

10. Section 36 and 37 dealing with investment guarantees should require that the relevant businesses to be pre-registered with the Commission

11. Section 37(1) should include a process to challenge determinations and for filing objections, further negotiation, and arbitration

12. Need to examine whether section 37(3)(d) need further amplification and clarity to avoid any perceived risks and legal challenges in the future

13. Reference section 38 (1) (a) if retained without an earlier pointed option at the inception of the investments requiring the validation of net incremental national economic and social value addition, may later lead to damaging Sri Lanka’s economic growth opportunities where instances money laundering or the adoption of other unlawful scheme result in net negative socio-economic value generation for Sri Lanka

14. Reference section 38(2) it may be prudent to provide for this process related dispute resolution and arbitration; and further to revisit provisions of section 38 in the context of essential protection if the transactions covered fall within such provisions necessitates raising a Suspicious Activity Report under FIU or other laws relating to Anti-money laundering and terrorism financing; and in such eventuality the potential rights of the authorities for search, freeze and seizure under applicable laws must be recognized

15. The application of the sections 39 (a) and (b) must be subject to a proviso which takes account of any damage, loss or negative impact on socio-economic and environmental damage, if any caused by the investor and its investment

16. Reference section 41 (1) would it not be best if it is extended to require that the investments must promote and advance the economic transformation objectives and be incrementally contribute to enhancing the net socio economic value addition of Sri Lanka; whilst section 41((2) in addition state that any such gratification is an offense subject to penal sanctions

17. It is best that the section 41(5) includes a specific reference to International ESG Standards

18. Reference section 42(b) the regular structured consultation process initiated under former Minister Athulathmudali may be a benchmark for effective value addition and an effective way forward to address any bottle necks clearance and facilitations investors seek

19. Section 44(1) should be supported by a framework requiring compulsory mediation and arbitration prior to any legal action

20. Reference section 45, all exemptions and incentives granted must be time bound and the minister must in submitting the gazette for review by the COPF of the Parliament and adoption thereof, justify such grants by a submission of the national socio-economic net incremental value addition and facilitative of the realization of the objectives in sections 3 and 4 of this Act

21. All ‘specified institutions’ covered by section 46 (1) recommended by the Minister and prescribed by regulations must be justified by national socio-economic net incremental value addition and facilitative of the realization of the objectives in sections 3 and 4 of this Act

22. Reference section 47 it is best that the Economic Commission has empowerment to sanction any entity or institution failing to facilitate, if such facilitation refusal or non-compliance is unjustified unreasonable or unacceptable or a perceived deliberate act of sabotage of a legitimate and value adding response action expected from the entity or institution in recognition of its objectives and official accountability vested in the entity or institution.

23. By the addition of a provision within the Act, the Chief Accounting Officer of the Ministry must be required to and be empowered to annually set key performance indicators for the Chairman and members of the governing boards and also the respective chief executive officers of the institutions created by this Act; and to require them to submit their self-evaluation assessments of performance in discharge of their responsibility and accountability under this act and in the realization of the strategic objectives set for the respective organizations annually.

24. Expand section 55 with an additional subparagraph stating “Specifying Measures, systems, procedures and control to be applied/implemented for Effective Risk Management, and Assurance of Good Governance practices, legal and regulatory Compliance and Internal Control”

25. Ensure that the interpretation of ‘investments’ in section 59 is comprehensive and includes ‘technology transfers, transfer of Trademarks, Trade names, surrender/transfer of quota and other export entitlements/concessions and facilitative linkages with distribution channels and value chain linkages’

26. Reference section ‘Powers of the Zone SL’ be expanded by the inclusion of ‘Management of Waste Disposal, Adherence to Best Practices of ESG Standards, Social Responsibility, assurance of Health and Safety and Risk Mitigation ‘ in sub paragraph (q)

27. The Board of Zone SL shall publish Designate Codes of Ethics and Best Practices of governance and the methods for promoting Economic Social and Governance Standards and Social Responsibility Commitments by Operators within the Zones

28. With reference to section 100 dealing with the objectives of the Office of International Trade include the following:

– Liaise with the Ministry of Foreign Affairs and overseas diplomatic missions and proactively promote/engage in economic/trade diplomacy; and develop value adding competitive information and statistics of value and identify niche trade/services opportunities, supply chain links and distribution channels, and marketing opportunities and

– Liaise with the local and foreign Chambers of Commerce and Business Associations in and proactively engage in facilitation of trade, services, transfer of technology and inward and outward investments

29. Reference section 101, dealing with powers, duties and functions of the Office of International trade include;

– Identify and facilitate trade, services, and investments and value chain linkages, niche market opportunities, opportunities to promote brand and image enhancement of Sri Lankan origin products, and

– Engage actively in the development of free trade options, quota enhancements and duty waivers for Sri Lankan origin products and facilitate optimization of national economic benefits from existing free trade agreements

30. A generic provision similar to section 106 to be included to cover all members of any Commission, Company or governing board as well as in the appointment of the Director General or Chief Executive Officer of any of the institutions created by this Act

31. In section 135 (a) dealing with duties and functions of the Productivity Commission include the following:

– Sustainable quality, competitiveness deploying technology, best practices, and development of a work ethic built on advanced skills, knowledge, and commitment

– Promoting Change Management advisory services for enhancement of Quality, Productivity with six sigma process improvements

– Development of case studies of successful initiatives enhancing productivity, quality and competitiveness and

– Establish centers of excellence in Innovation and Technology Transformation

– Proactively Liaise with Universities, Academia, and Research/ Science/Technology Institutions

32. Expand sections 163 (a) and (b) by adding ‘and investments’ at the end

Trust the above recommendations will receive your priority attention.

Yours Sincerely,

Chandra Jayaratne

[i] https://www.elibrary.imf.org/display/book/9781589065543/ch005.xml

[ii] https://www.elibrary.imf.org/display/book/9781589065543/ch005.xml

[iii] https://www.elibrary.imf.org/display/book/9781589065543/ch005.xml

[iv] https://www.elibrary.imf.org/display/book/9781589065543/ch001.xml

[v] https://www.bcg.com/publications/2023/bangladesh-grows-economy-with-emerging-champions

[vi] https://www.tandfonline.com/doi/full/10.1080/23322039.2021.1992875

[vii] https://www.ohchr.org/en/press-releases/2023/05/bangladesh-economic-growth-cannot-justify-keeping-workers-poverty-says-un

[viii] https://www.bps.go.id/en/pressrelease/2023/11/15/2033/indonesias-human-development-index-in-2023-reached-74-39–an-increase-of-0-62-points–0-84-percent–compared-to-previous-year–73-77–.html

[ix] https://www.researchgate.net/figure/Human-Development-Index-rank-in-brackets-in-CEE-and-Western-countries-in-1991-and-2017_tbl1_349321762