By Hema Senanayake –
We have a corporate sector. And a couple of of corporate leaders not too long ago had spoken to Sri Lanka Everyday News about the new government. One of them created a comment and a request for which I paid a tiny much more attention. This report is about it. In truth the report is not about his certain comment or request, alternatively this article is about an economic principle on which the government ought to establish an critical national policy in regard to his request. I think his request merits in establishing such a national policy.
So, not too long ago, Dr. Rohan Karunaratne, President of Ceylon Institute of Builders had commented as follows
“… with the alter of presidency in January some of the on going improvement projects were halted due to different motives. “We hope that the government would look at to any irregularities if any and re-commence these projects as the market is facing issues due to this.” “We also request the new government that they give priority to regional constructors when awarding future projects” (Day-to-day News).
Construction is an essential sector in the economy. Even although I do not know the precise percentage of the contribution of this sector to GDP, I imagine the figure could be nicely more than 20%. Hence, this sector in the economy is so essential in creation of the nation’s wealth and a lot of direct and indirect employments. This sector will stay so in the next five years as well. Now, on behalf of the people who have direct business or employment interest in this sector, Dr. Karunaratne requests that, “the new government provides priority to neighborhood constructors when awarding future (improvement) projects.”
It seems his request is reasonable. His request seems far more suitable considering that the setting up of the giant “megapolis” project has been mentioned as the flagship development project in the UNP manifesto. Beneath the Megapolis project, it has been proposed to develop the region stretching from Negombo to Beruwela with the city of Colombo as the core. The Everyday News has reported that Megapolis plan will convert the hitherto unplanned Western Province into a main megapolis by 2030 with an estimated population of 8.four million. This indicates a lot of constructions will involve in this project itself.
The building of Mattala Airport was offered to Chinese firm. So was the building of Hambantota Harbor. A billion dollar project of Port City would be again awarded to a Chinese firm even under the government of Prime Minister Ranil Wickremesinghe. The list of development projects which had currently been awarded in the past and which would be awarded in the future to foreign companies would be a lot longer. Why does any government do favor foreign development companies than neighborhood developers?
If we ignore all concerns about corruption and technical knowledge such as designing capabilities, engineering know-how and acquisition of crucial machineries and so on. the easy answer to the above mentioned query is the concern about Balance of Payment (BoP) in the country. I will clarify later as to how the issue of BoP requires in determining how a lot of development projects need to go to neighborhood constructors and how many projects be awarded to foreign firms. Before that, from the above answer we could make an additional easy conclusion in regard to the fundamental rule on creating a feasible national policy in awarding contracts. What is it?
It is that, we have to award all improvement projects to local constructors, if such awards shall not impact the country’s BoP circumstance badly. This is an critical rule. Also, this rule implies that, if any project is anticipated to change the BoP circumstance badly, then, nevertheless the local developer may possibly be capable to win the contract award if that firm could aid in stabilizing BoP. When these two fundamental concepts are incorporated into the national policy of awarding construction contracts, the local bidders recognize that they are partly obligated in stabilizing the country’s BoP, so that the bidders or their regional bankers can come up with a appropriate economic program which helps removing the unfavorable effects that can possibly happen if the project is totally funded with domestic funds/currency.
Some people think that there are no adequate funds in the domestic economic program in order to finance certain mega projects and as a outcome we need to offer you those projects to foreign firms. This notion is not accurate. The issue is not the insufficiency of funds instead the difficulty is about the stabilizing of BoP. Below the existing banking technique which is known as fractional reserve banking which we practice right now, we have literarily limitless quantity of funds but the limit is set by the BoP scenario.
When any nation increases consumption or investment or each, then, that mostly affects the country’s present account. If the country is operating a current account deficit currently which is the case for Sri Lanka, the deficit will enhance when the nation increases consumption and investment. This seems as bad. But if the damaging influence can be balanced out by the funds recorded in the country’s monetary account then the country’s BoP would be stabilized. That is why I talked about above that the limit of neighborhood funds has nothing at all to do with insufficiency rather the limit of nearby funds is determined by the BoP circumstance.
As a result, giving priority to regional constructors is not a basic selection. But it is also not a tough decision, if all stake holders get collectively to facilitate the approach. The crucial stake holders I have in my mind would be the Central Bank, the Treasury, the regional constructors/ tentative bidders and the local industrial banks. Under this approach, the bidders have to submit a economic strategy as well. That is precisely what the Chinese firms do in securing a improvement project. For instance, they submit the bid and Exim Bank of China submit the financial proposal.
Now, below the new method I talked about above, the constructor would submit the bid and their banker would submit as to how a lot they mobilize in neighborhood funds and how considerably they want in foreign funds so as to neutralize the effects of BoP in carrying out the project. Alternatively of paying to Exim Bank in China, now the government would pay to neighborhood bank which financed the project which is an further benefit.
Also, the above talked about policy setting will do yet another essential issue which is that the government will put much more projects in “investment mode” than “consumption mode.” These two “modes” relate to the fund flows in the economy. The government can employ a contractor to do a distinct project. When the project is completed the government would pay the contractor in full. Even though this kind of infrastructure or any other development project is referred to as as an “investment” by the government, in truth such projects should truly be defined as “consumption” when deemed the fund flows in the economy. When a bank finances the project, it will grow to be an investment. It may well be strange, but that is how it functions in the economy.
Given that the Ministry of Finance has now requested the public and private sector institutions and the common public to submit their proposals to be integrated in the proposed spending budget for the year 2016, I submit the above view. I want if the Ministry of Finance pay its due consideration on this matter.