by Muttukrishna Sarvanathan
The Government of Sri Lanka (GOSL) and the Liberation Tigers of Tamil Eelam (LTTE) signed a Memorandum of Understanding (MoU) in February 2002, which paved the way for an indefinite ceasefire between the warring parties. This inspired renewed interest of the business community in starting businesses in the North&East province in order to resurrect the dormant economy of the province. The following observations are made from my study tours to the LTTE-held areas in the Wanni region during March and April 2002. 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 encountered in doing business in the North&East Province despite the Government of Sri Lanka unilaterally lifting the economic sanction in January 2002: one is the infrastructural bottleneck and the other is the taxation by the LTTE. The former includes poor conditions of roads, lack of electricity and telecommunication, the absence of railways, inter alia.

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 the road transport cost is expected to be high because of heavy wear and tear to vehicles plying that route. Particularly the A9 route from Mankulam to Palai 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 other major impediments to doing business in the LTTE-held areas of the North and the Jafffna peninsula. The lack of electricity in the LTTE-held areas prohibits manufacturing activities. The limited number of electric generators used is totally inadequate to cater to the needs of the producers and consumers alike, and is costly. The limited supply of power in the Jafffia peninsula is far short of the requisite. The absence of telecommunication with the rest of the country greatly increases the transaction cost of businesses in the LTTE-held areas. Even the limited telecommunication facilities available in the Jaffna peninsula are totally inadequate to fulfil the demand. Usually, it takes a long time to make a call to or from Jaffna. The absence of railways, probably the cheapest source of transport to the province, is another cause of the cost-push inflation in the province.

The lack of storage facilities is yet another impediment to doing business in the LTTE-held areas. For example, though the free flow of petroleum products to the LTTE-held areas is ensured in the Memorandum of Understanding (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 (paraffin) during several years of economic sanction. Moreover, there are no underground storage facilities for petroleum products in LTTE-held areas, and over-ground fuel tanks are wasteful due to evaporation.

Furthermore, storage facilities for agricultural and fish produce are also lacking for want of suitable buildings and ice manufacturing plants in the LTTE-held areas of the Wanni region3. Therefore, the export of perishable agricultural and fish produce of the LTTE-held areas to the rest of the country is undermined. During the 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. Besides, it is claimed that about two-thirds of the total requirement of fish in Sri Lanka used to be caught along an eighty mile coastline off Mullaitivu district. Hence, the Wanni region used to be a significant exporter of agricultural and fish produce to 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, tiles, etc.

The realisation of the full business potential after the lifting of the economic sanction 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 the economic sanction on January 15, 2002, though there is a surge in the export of consumer goods such as bicycles, bicycle parts and accessories, motorcycles, plastic furniture, office machinery, stationery, radios, televisions, building materials, etc., 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 enroute to the Wanni region and the Jaffna peninsula by the LTTE. The taxation by the LTTE, though is 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 the LTTE-held areas.

Due to the high transportation cost and extra-legal taxation the prices of goods in the Wanni region are still quite high though lower than during the time of economic sanction. Similarly, though the prices in the Jaffna peninsula have fallen after the opening of the A9 highway they are still quite high compared to the prices in rest of the country, because of high transportation cost and arbitrary taxation. In fact, the people of the Wanni region are worse off now than during the time of economic sanction. During economic sanction 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 cheaper in the Wanni region. However, in the aftermath of the lifting of the economic sanction and the opening of the A9 highway more and more Wanni produce is being exported to 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 (who are the majority) worse off.

Therefore, the rebuilding 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&East Province.

Opportunities

The North&East Province encompasses eight districts: five in the North and three in the East. According to the Central Bank of Sri Lanka, in 2001, there were about 1 million people 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 & East Province is not known to anyone primarily because no proper census could be undertaken in that province (especially in the North) after 1981 due to the civil war. However, according to disparate data from various sources, there may be about 2 million people living in that combined province: divided into I million each, out of the total Sri Lankan population of around 18.7 million in 2001. Thus, nearly 11% of the total Sri Lankan population resides in the North&East Province. 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 rest 400,000 live in the LTTE-held areas in the Wanni region.

These population figures are given in order to estimate the size of the market in the North&East Province. However, the population size of the North&East Province given above is a rough estimate, and therefore should not be construed as perfect figures. Nevertheless, the market of the North&East Province is quite a big one, which has a significant business potential.

Although the priority for the province (especially the North) is the infrastructural development, it is highly unlikely that private capital (whether local or foreign) would flow into this sector especially because it is still a contested territory by the Government of Sri Lanka and the LTTE. The infrastructural development should be undertaken jointly by the Government of Sri Lanka, and bilateral and multilateral donors. The agriculture, manufacturing, construction, educational and financial (banking and insurance) services, wholesale and retail trade all have huge potential to exploit. However, due to the aforementioned infrastructural bottlenecks the realisation of this huge 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 & large scale) will take sometime to take off because the infrastructural prerequisites are very limited at the moment. The North&East Province, historically, was an agricultural economy. The predominance of the agriculture sector has not essentially changed during the civil war. However, in the pre-war time the North&East Province was a significant exporter of agricultural and fish produce to the rest of the island. These agricultural exports included rice, onions, chillies, tobacco, lentils, etc. But, nowadays the agriculture sector in the province has been transformed to by and large subsistence agriculture, especially in the Northern Province. The agriculture sector has been severely hampered by the economic sanction that had restrictions on fuel, fertiliser, and pesticide going into LTTE-held areas. Hence, there is a potential to revive the commercial agricultural sector in the province especially for exports to rest of the country.

One of the most lucrative sectors to invest is in the construction sector of the North&East Province. 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. Therefore, the businesses involved in construction services have a huge potential to exploit in the province.

The financial sector has a key role to play in the reconstruction and rehabilitation of the North&East Province. With the anticipated flow of reconstruction and rehabilitation funds from the government as well as from the bilateral and multilateral donors the need for the banking and insurance sectors 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&East Province have been one of its most valuable assets. The people of the province have been investing a lot on education. This investment continued even during times of war despite severe hardships, such as occupation of schools by the Sri Lankan armed forces, lack of electricity, transport, etc. Therefore, the opening up of educational services in the province 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 world of 21st century. Information technology and English language are absolutely essential for all academic disciplines. Therefore, good quality educational services in information technology and English language teaching would have a great demand.

There is a huge pent-up demand for consumer goods especially in the LTTE-held areas. The economic sanction of the Sri Lankan government deprived the people (especially who live in LTTE-held areas) of even basic consumer goods including pharmaceuticals for over a decade. Therefore, the establishment of wholesale and retail trade in the North&East Province would facilitate access to markets for the population. However, the lack of power and local taxes imposed by the LTTE is dampening the realisation of such pent-up demand.

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

Challenges

There are two major challenges awaiting business persons who would like to do business in the North&East Province. One is the infrastructural bottleneck enunciated above. The other is the arbitrary (strictly speaking illegal) tax regime of the LTTE. It is well known that the LTTE imposes its own taxes on traders, producers, and households in the North&East Province including in the government-controlled areas4. The entrepreneurs and households in the government-controlled areas of the North&East Province are paying taxes both to the government as well as the LTTE.

In the aftermath of the signing of the MoU the LTTE has spread its tax net to the people living in the government-controlled areas as well, such as the Jafffia peninsula, Batticaloa, Trincomalee, and Vavuniya towns. This has resulted in the slow exodus of people from these government-controlled areas in the North&East Province to the rest of the island, particularly to Colombo and suburbs.

The Tiger taxes create a moral hazard and an ethical dilemma for entrepreneurs planning to establish manufacturing, trading, or service-oriented business 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&East Province due to the civil war. Therefore, the business community has a social responsibility to establish businesses in order 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 Tiger taxes? There are two options - one is to refuse to pay and the other is to pay up. The former is the ethically most correct thing to do. Having said that I am not sure how far this is practically possible. Therefore, some business people may decide to pay up the Tiger tax and continue to do business in the North&East Province. If this is the option left to any business person then I would suggest a mechanism by which they could mitigate the effects of such unethical taxes. That is, no one should pay the Tiger tax directly to the LTTE. Instead they may ask the LTTE to suggest some social welfare programmes, or community services they would like to do 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 behest of the LTTE at the same time ensuring that their tax payments are not utilised for military purposes. This mechanism, I believe, would mitigate the moral hazard of doing business in the North&East Province at this critical juncture in the history of this country.

If you opt to keep away from doing business in the North & East province 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 North&East Province and to the country at large. However, please try your best to avoid paying the unethical taxes of the LTTE, if not at least try your best to minimise the consequences of such taxes.

It is not only important to establish businesses in the Government-controlled areas of the North&East Province. Please remember that it is absolutely vital to open businesses in the LTTE-controlled areas as well, in order 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 eruption of the civil war. Therefore, please invest in the Eastern province as well when you plan to expand your businesses to the North&East Province.

Finally, the Government of Sri Lanka also could help the business community in mitigating the moral hazard of doing business in the North & East province 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. If the LTTE continues to impose its own taxes even after the establishment of the interim administration, what does the business community do? I would strongly urge non-payment and non-compliance.

The business community of Sri Lanka is faced with an unprecedented moral hazard and ethical dilemma in the North&East Province. I sincerely hope it has the tenacity to mitigate this challenge.

1. A paper presented at a seminar on the ‘Business Community and the Peace Process’ jointly organised by the Ceylon Chamber of Commerce and the Centre for Policy Alternatives on June 20, 2002 in Colombo

2. Research Fellow, International Centre for Ethnic Studies, Colombo, Sri Lanka. Correspondence: sarvi@slt.lk The views expressed are those of the author and not of the ICES.

3. The Wanni region incorporates four districts, viz. Mullaitivu, Killinochi. Mannar, and Vavuniya.

4. See ‘Tigers, Taxes, and the Tamils’ by the author.