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Wednesday July 6th, 2022

Sri Lanka tourism uncompetitive due to high building costs

COLOMBO (EconomyNext) – Sri Lanka’s tourism product is becoming uncompetitive due to high building costs, a top leisure operator has said while the construction industry has also raised red flags on over-priced material from protected ‘domestic industries.’

"High cost of construction in Sri Lanka inhibits capacity expansion in the tourism industry and exerts pressure on Return On Investments," Aitken Spence Hotel Holdings Chairman Harry Jayewardena said in the annual report.

"Thus, the need for the government to play the role of catalyst in the development of infrastructure by facilitating various incentives."

Sri Lanka’s construction costs are high due to a state intervention where politically powerful ‘domestic producers’ are protected with import duties, leading to higher than world prices in steel, bathroom fittings and other building materials.

The nee-jerk reaction to the inevitable unintended negative consequence of an anti-market state intervention is to follow up with several new state interventions to counter its fallout (The law of unintended consequences), economists have long pointed out that the real answer to remove the original problem, and give back the freedom robbed from the people.

In East Asia in particular, under ASEAN free trade rules, it is becoming increasingly more difficult for Mercantilist businesses to fleece the ordinary people, leading to rapid rising of living standards and the emergence of competitive enterprises.

In addition to generally exploiting the ordinary people with high price building materials, the import duty protected businesses are also pushing up the up-front investment costs of foreign investments, where the government is foregoing even income tax for several years to boost investments. But inefficient rent seeking domestic industries have lobbied and gained a ‘negative list’ to force even foreign investors to buy their goods by coercion.

Sri Lanka’s construction industry has already raised red flags over over-priced construction material such as steel.

"There are concerns among the Investors and Developers, that the Construction cost in Sri Lanka is higher than in some of the other Asian Countries," President of Sri Lanka’s Chamber of Construction Industry has said.

"However, if the cost is to be reduced, the negative list issued by the Treasury to the BOI (Board of Investment), with a view to protecting the Local Manufacturers which is now in force, has to be revisited."

Sri Lanka’s investments not only in tourism but in other sectors will be uncompetitive due to the ‘negative list,’ and the negative list also nullifies the benefits of tax holidays given to such firms, by pushing up start-up cost above world levels.

The newly appointed BOI Chief Upul Jayasuriya questioned by reporters in an April media conference said the negative list to protect local businessmen was needed to counterbalance all the incentives given by the government to foreign investors.

"The problem is this. Supposing a hotel is being put up, there are so many support service items that are being manufactured in a country. These investors do not pay any taxes," Jayasuriya said.

"They are able to take away their profits to their countries. They have exit tools they can get rid of their investments and go back. What do we get in our country? We have to protect our industries. At least some amount of the benefit of their investments should go down to the people."

Reporters however pointed out that far from any benefits ‘going down to the people’ protected people were exploiting the ordinary people in a mass-scale with overpriced goods in collusion with state imposed import duties, without giving a cent of taxes to the state while hindering foreign investments as well.

Unlike value added tax or excise taxes, which are imposed without discrimination on imported and domestic goods, import duties and import cesses give profits to producers at the expense of both the people and the state.

Analysts say the solution is not to allow duty free imports of anything to BOI supported investments but to have a value added tax and a low import duty applicable to poor citizens and rich investors alike, like in freer countries so that costs will be equal.

Reporters pointed out that in countries like Vietnam not only are such hindrances not found but that foreign invested companies can also freely sell domestically, through the simple expedient of setting up a trading company, which has raised living standards and forced the creation businesses that can compete against foreign producers and export.

"It should be looked at from time to time, from different perspectives," Jayasuriya responded. "There is no strict embargo on the negative list as such. But for instance take something like furniture. There are a large number of skilled personnel making furniture.

Some furniture has been exported to many other countries. That is also in the negative list. We also know that we can buy cheap furniture from China and several other countries.

"Should we allow that kind of furniture to be brought into this country at the cost to a large number of people who are employed in the industry? Our quality of furniture is excellent at this moment.

"Some of these kings and princesses have ordered our furniture. Prince of Oman for example for their palace."

Reporters pointed that the fact that princesses were able to afford the products of craftsmen was a key problem.

Exquisitely turned out products by artisans were only consumed by the nobility until the industrial revolution in Europe which allowed workers themselves to consume the products, which were considered luxuries limited to the nobility only a couple of centuries earlier.

In Europe at first the debate was to protect the artisans from the large manufacturer who was at the time liberating the ordinary consumer when the feudal-artisan era ended with capitalist mass-production based on low-skilled division of labour.

Economic philosophers in Europe, where nationalism gained ground with the popular vote, have traced direct link between protectionism which discriminates against ‘foreign’ producers which created a mind set that led to discrimination against minorities in the same country.

In Sri Lanka cement, which is owned by foreign firms and minorities – whether coincidentally or not – are under price-control compared to other building materials like steel which are protected.

"In a world in which people have grasped the meaning of a market society, and therefore advocate a consumer’s policy, there is no legal discrimination against Jews," explained Ludwig von Mises, an Austrian economist and philosopher.

"Whoever dislikes the Jews may in such a world avoid patronizing Jewish shopkeepers, doctors, and lawyers.

"On the other hand, in a world of interventionism only a miracle can in the long run hinder legal discrimination against Jews.

"The policy of protecting the less efficient domestic producer against the more efficient foreign producer, the artisan against the manufacturer, and the small shop against the department store and the chain stores would be incomplete if it did not protect the "Aryan" against the Jew."


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