Investing in Growth and Development

The head of the International Finance Corporation in Sri Lanka, Adam Sack, talks about doing business in Sri Lanka, the challenges of infrastructure, weather insurance, the joys of tea and cricket, and bringing in foreign investors

By Echelon.

Published on April 26, 2013 with No Comments

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 The International Finance Corporation, a unit of the World Bank that supports and invests in private sector businesses in developing counties, expects to invest $200 million in Sri Lankan private sector firms in 2013. If this target is achieved it would be the largest amount IFC has invested in one year in Sri Lanka and is over double its investment last year. Excerpts of an interview …

Before we get started, can you give me the Reader’s Digest explanation of what the International Finance Corporation (IFC) does?
Of course. IFC is an international financial institution that offers investment, advisory, and asset management services to encourage private sector development in emerging countries. As a member of the World Bank Group, which aims to eradicate poverty, IFC is focused on supporting commercially viable enterprises that contribute to reducing poverty and increasing shared prosperity.

Great. First off, how about a few words about you and your context. Where have you lived and worked before, and how did you come to Sri Lanka?
I’ve been in Sri Lanka for just over a year, and I’ve been with IFC now for eleven years. In my previous role, I was the country manager for Indonesia, Singapore and Malaysia. I was there for just over four years. Before that I was running IFC programmes in Vietnam, Cambodia and Laos. I’ve been in Asia now for fifteen years, and I jumped at the opportunity to apply for the position in Colombo, where I am now the country manager for Sri Lanka and Maldives. I was very interested in having the chance to live and work in Sri Lanka during this time of transition, with the return of peace and stability. I also personally know Sri Lanka from a long time back – I had my honeymoon here 21 years ago – so I have lots of happy memories, and I also have some good friends from Sri Lanka who I’ve known for a while. So it’s been a country that appealed to me in many ways. I was excited at the opportunity to come here, to enjoy the great quality of life in Sri Lanka and to be part of a very important time for the growth of the economy and the development of the country.

adam1What are the key areas of focus of IFC in Sri Lanka?
IFC has three main avenues of helping the private sector grow, and helping reduce poverty in Sri Lanka: By directly partnering with companies that promote growth; helping small businesses grow through supporting the financial sector and by improving the skills of micro, small and medium business owners; and helping improve business regulations and the business environment. IFC has committed investments of $274 million, invested across the financial sector, as well as in retail, renewable energy, healthcare and tourism. In 2012 alone, we invested $90 million in Sri Lanka. In 2013, we’re targeting investments of over $200 million. Our new country strategy highlights the priority areas of increasing access to finance, development of the tourism and agribusiness sectors, and ensuring that the benefits of growth reach women, and communities that have not yet benefitted from the strong growth of recent years. Our largest investment this year is with our partner Commercial Bank for $75 million, to help increase access to finance for micro and small businesses. We’re projecting that by lending these funds, we’ll be creating 170,000 direct and indirect jobs through 2017.

So how have you seen this unfold in practice?
There are a lot of really compelling stories. For example, recently I was in Jaffna, where we visited farmers. One woman had lost everything during the conflict, like many others, and was displaced along with her four children. She returned after the war and with her children she had to rebuild her life. Her crop yields were low, but one of the difficulties she faced was that she had no access to finance to invest in an irrigation pump. IFC worked with Lanka Orix Micro Credit Limited (LOMC) to develop group lending products for those who have no collateral. With a loan from LOMC, she bought the pump, and when I met her she was harvesting a bumper crop of onions, and even insisted that we take some onions back to Colombo. She said that she will be able to double her income with the pump. She then pointed to one of her kids and said that the child could go to school now due to the increased income. It was just a wonderful story, how this woman’s life – and that of her children – is being transformed simply by being able to access financial services.

What kind of higher finance work does IFC do?
Let me give you an example. I was recently in a village called Hiyare, near Galle. It’s tea growing country, and there are a lot of small holder farms. Through Sanasa Insurance, part of the Sanasa Movement, we introduced a new product to Sri Lanka called weather index insurance. The need for this arises from periods when there is insufficient or no rain, which severely reduces the yields of the tea bushes, which in turn reduces farmers’ income. Many of these small farmers are vulnerable to small adverse dips in their income and they fall into poverty. Depending on the type of crop, what weather index insurance does is pay farmers if the rainfall is less than, or more than, a predefined threshold for a certain period of time in their area. It’s different from, say, the insurance you and I have for our cars. When I was in a small car accident last month, I had to get a report, an estimate from a garage, make a claim, get the claim validated, and so on. For weather index insurance, though, the farmers do not have to make a claim and there is no validation of yields. The farmer gets a payout from the insurance company because the insurance company is monitoring the weather. It tracks the index, and there is sufficient rainfall data available to assess whether the index falls below a certain level. If it does, the farmer gets money from the insurance company, no questions asked. When I visited Hiyare, we observed the payment of claims. Cheques were being handed to tea farmers because it hadn’t rained for a while. It was evident the farmers believed in the product, since after all they had to pay regular insurance premiums. But we also saw a sense of amazement – here they were getting payouts on their insurance policy a few months after they signed up because there had been a period of drought.
I was talking to the farmers that day about what happens when the yields are down. They delay medical attention, their kids don’t go to school, they delay investment in their farms, and there’s a ripple effect. Some of these households may not technically be below the Sri Lankan poverty line. But there are many people living just above the poverty line and therefore are vulnerable to economic shocks.
So insurance is one very important form of protection for low income agricultural households.

What was the process of putting together the weather index insurance product?
IFC has tested weather index insurance in other countries in Asia and sub-Saharan Africa. One of our contributions in Sri Lanka is being able to look globally for good practices, and then find ways that we can adapt them to the Sri Lankan context and offer them here.
For this, with our partners Sanasa Insurance, we brought in an experienced actuary who spent over a year here, designing and testing the product. We shared the costs of bringing in that expertise, designing and developing the product, and then we worked with Sanasa Insurance to help educate farmers about this new product and how it would work. We’re also helping with the monitoring and evaluation to put in place a system to see what sort of an impact we are creating in the lives of the farmers.

adam2What is IFC doing in the realm of tourism?
My view is that Sri Lanka has world class tourism assets, but these assets have not yet achieved their potential. IFC globally invests a lot in the tourism sector. It’s a labour-intensive sector. It creates long-term quality jobs, and also provides foreign exchange revenue. Sri Lanka should be a leader in this.
We’re currently looking at how we can help small- and medium-sized enterprises (SMEs) engage in the tourism sector. For example, we did an SME tourism project in Hikkaduwa to develop a local tourism development association. This was partly funded by the Norwegian Government. What we found was that big hotels were not connecting with small hotels, and neither group was in touch with service providers like the tour operators, guides, tuk-tuk drivers, cafes and so on. Everyone was doing their own thing. By forming this association, by helping build capacity, by providing training, we got all the stakeholders talking to each other, and acting as one.
So the big hotels now realize that it’s much better for their guests if the tuk-tuk drivers know the nice places to see, if they have some language skills, and if the guided tour providers and the fruit and vegetable suppliers are better linked to the hotels. It’s better for everyone if they’re all talking together about raising the standard of Hikkaduwa as a tourist destination. This way, the tourist has a good experience both within the hotel, but also outside the hotel. The whole sector rises together. The same stakeholder group was behind several tourist festivals, and they also coordinate a lot of business training programs, with IFC providing the material. They’ve moved from competition to collaboration. While this doesn’t remove the competition, the benefits of collaboration are very clear, so that the guests have a better experience and are more likely to return.

So, shifting gears. What would you characterize as the greatest challenges to investment in Sri Lanka that are specific to the country?
The World Bank recently conducted an enterprise survey, where they asked businesses about the big challenges they face. The top four responses for Sri Lanka are access to finance, informal practices (that is, practices that aren’t by the book, which harm the business environment), the difficulty of buying and registering land, and tax administration.
Based on our conversations with businesspeople in Sri Lanka, I would cite three other challenges. First is infrastructure. The access to and cost of infrastructure is not where it should be for a middle-income country. This includes the reliability and cost of electricity, particularly outside the Western Province; the quality of roads; travel times between hubs; and the infrastructure around trade such as the ports. We’ve seen a lot of improvements, but there’s a long way to go.
The second challenge is skills. We frequently hear that people entering the work force aren’t equipped with the skills that Sri Lanka needs, particularly for a knowledge-based economy. These aren’t just technical skills, but also skills having to do with teamwork, creative thinking, and problem solving – the skills that you need in your teams, your supervisors and managers, to really drive value-added businesses.
The third area is the predictability of the investment climate. Both domestic investors and foreign investors need a predictable business environment. The Mahinda Chinthana sets out a very good vision for the role of the private sector in contributing to economic development. It’s critical to create a predictable business environment that allows investors to invest for the long term in Sri Lanka. Investors will look carefully at signals about the predictability of the business environment.

adam3What kind of signals are those?
For example, is the policy environment moving in a direction that makes it easier to start and operate businesses? Are the institutions that are needed for business in place? I’m talking about the rule of law, how robust those frameworks are, and whether there are any changes to the direction the country is moving in. In the recent World Bank/IFC Doing Business report, Sri Lanka moved up 15 spots to 81, out of 185 countries. It was one of the top ten reformers globally, in terms of number of reforms made. That’s a very strong positive signal, and that’s not easy to accomplish. It takes a lot of work from a number of agencies. But reform needs to continue. The Doing Business agenda only reflects one segment of the investment climate. It doesn’t address infrastructure, for example. The private sector is becoming more engaged in public-private partnerships to improve the provision of infrastructure. There is a lot more that could be done however in terms of roads, and the quality of airports, ports, power, and water. There’s a role for the private sector to build and operate this infrastructure in a way that reduces the fiscal burden on the government, and allocates the risks fairly between the government and the private sector. We have seen elsewhere that tendering through a transparent bidding process can reduce costs and get projects done more quickly.

Along those lines, how does Sri Lanka differ from the other countries where you’ve worked, in terms of investment environment, government, policymaking – and also as a place to live?
What strikes me and other guests in Sri Lanka is that this is a wonderful place to live. The quality of life is fantastic. Sri Lanka is blessed with its climate, and the fertility of the land. It’s extraordinarily welcoming to foreigners. Also, Sri Lanka is one of the few countries where I can talk about cricket and tea with people who know much more about both than I do, so for a Brit this is a particularly nice place to live.
Sri Lanka has the potential to become a star of Asia. Its location, its endowments and the potential with regional supply chains, is excellent. It has world-class tourism assets. The combination of these, together with peace and political stability, provides a window for getting things done. In some of the other countries where I’ve worked, getting things done can be a challenge, because of fractured political institutions, dispersed authority, and political or ethnic tensions. Also, there are plenty of very sophisticated businesses in Sri Lanka. The established and emerging business groups are operated by committed and smart business leaders who are willing to be partners in Sri Lanka’s development. There is really a common purpose towards the goals of growth and development dealing with the development challenges here.
This kind of combination of circumstances doesn’t last forever, though. My expectation is that Sri Lanka will become a star of Asia, and that it won’t miss this opportunity. But it’s going to take continuous efforts from the government and the private sector to work together to contribute towards Sri Lanka reaching its potential.

A final question. What do you say when an investor comes to you and says, well, I was reading about the Chief Justice in Sri Lanka being pushed out – I’m not sure about the level of political risk?…
Our view is that the more predictable the business environment, and the more predictable the trajectory of change towards a business environment that is supportive of both domestic business and foreign business, the better it is for the private sector. This means that more investments will be mobilized, and more jobs will be created. In our discussions with our private sector partners and the government we reiterate how important it is to maintain that predictability, and all the opportunities that can be realized if it is.

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