Budget Speech

Dr. Sarath Amunugama, MP, Minister of Finance and Planning presenting the first UPFA Budget in Parliament said:

Part "A"

1. Mr. Speaker, it is a great honour for me to present to you and this Honourable House the first Budget of the Freedom Alliance Government, under the leadership of Her Excellency the President, Chandrika Bandaranaike Kumaratunga.

2. At the very outset, it is my duty to thank the people of this country who only eight months ago gave a resounding mandate to the Freedom Alliance and its partners to take the country forward on the basis of the "Rata Perata" program that was placed before them.

Let us remind ourselves that the people of this country have on eight occasions since 1992 endorsed the leadership of President Chandrika Bandaranaike Kumaratunga and her policies.

3. It is not only in Sri Lanka, Mr. Speaker, that the masses have rejected neo-liberal economic policies. Our entire region in the recent past has witnessed an electoral rejection of policies, which create little enclaves of growth amidst countrywide poverty.

Voters have called for an economic strategy that is both 'pro-growth and pro-poor'. At the last General Elections, Sri Lankan voters rejected the economic policies of the United National Front in no uncertain terms.

They also rejected the rampant corruption, the abuse of State machinery, subservience to foreign interests and the arrogance of power, which characterized that regime.

4. Mr. Speaker, I am proud to say that the budget I am presenting today is the product of a wide consultative process, which attracted inputs from almost all stakeholders. It is based on a homegrown economic development strategy.

Unlike in the past, our policy has been developed through a consultative process, which included the Trade Chambers, industry associations, SME organizations and Research Institutions. An opportunity was also given to our citizens to participate in the preparation phase of this budget.

We received over 1,000 specific proposals from the public, in response to our call. Many of my Parliamentary colleagues, of varying political persuasions, also participated in this consultative process, with a good number of them providing direct inputs based upon discussions with their constituents.

I personally sat through several dozen meetings and heard first hand of the issues that remain and opportunities that have to be seized to strengthen the national economy.

Her Excellency the President met the NCED Cluster Committees to find out first hand about the inputs the Government should provide to ensure a meaningful economic development.

5. I wish to acknowledge also the contribution of non-Governmental stakeholders like international agencies, private sector representatives, the media, Trade Unions and lastly and most importantly, the patriotic citizens of our nation.

They have displayed a great deal of maturity and understanding, especially when faced with the twin consequences of a prolonged drought, and the high escalation of global oil prices, which put unprecedented pressure on our economy, leading to a heavy burden on the cost of living.

In spite of various political and parochial differences that have kept our nation divided on many issues, the willingness of our people to put nation before self has been an encouraging feature.

6. May I also convey my gratitude to my hardworking and efficient team of officers at the Ministry of Finance & Planning, and their Public Sector colleagues associated with the preparation of this Budget?

Our approach to development

7. Mr. Speaker, I hope this budget which I am presenting exactly 143 days since I took office as the Minister of Finance, will not only meet with your expectations, but possibly exceed it, and more importantly, put this nation on an accelerated path of sustainable economic and social development, based on local values and national priorities as well as a shared vision of the future which would be acceptable to all our citizens.

8. Although, I am proud to say that we are a resourceful nation, in the same breath, I must admit with some dismay, that even after 56 years of independence, our valuable human and natural assets still remain largely untapped and underutilized.

Our geographical proximity to the world's largest emerging markets of South Asia and the busiest shipping lanes which go past the southern city of Hambantota should form the backdrop of our economic growth. Our biodiversity provides good opportunities to produce more food than we need.

Yet, we import sugar, milk powder, potatoes, onion and many other commodities. Our vast ocean and inland water resources should make us a net exporter, but shamefully we import fish for our consumption. We sit on economic opportunities of substantial value in every part of the country; doing nothing with them.

It is a colossal waste. We cannot any longer afford not to accept the challenge of radically transforming our economy.

9. It is time that we in Sri Lanka understand the value of our resources, the real cost of processing them, and the net margins involved. We have lacked the courage to unlock the value of our assets.

We have a defeatist mindset that we don't have access to funds, technology or the markets to produce end-consumer finished products. We do not sell our own brand names with overseas marketing channels.

The value difference in our export income loss is high because of our lethargic and unimaginative approach to value-added production, supply-chain, and export market development. Overall, I am sorry to say that we add little or no value to most of our domestic raw materials.

10. For instance, our gemstones get exported in raw and polished form, with hardly any value addition. Our jewelry craft skills and stone buying know-how gives us a competitive advantage, along with our unique local gemstones.

A vibrant economy can be easily created around the jewelry trade, and this we must do in earnest. Our mineral sands are sold in raw from for a fraction of its value. Sri Lankan Silica is ideal for manufacturing chips and solar panels.

Our Phosphate deposits remain untouched except by some puny exporters who scratch at the surface. Sri Lanka is losing billion dollar value addition opportunities while her manufacturing sector is basically confined to garment trade.

11. All of us have failed this nation by not focusing on developing our industrial capability, technological and marketing prowess and skills to realize the full value of our human and natural resources.

We have neglected research and development, intellectual property rights, adoption of best practices, and many other critical areas that are too numerous to list, which have to be adopted if we are to really enter a period of sustainable economic growth.

Therefore, Mr. Speaker it is time that Sri Lanka moved in the direction of high-technology product manufacturing using our raw materials and agricultural products.

12. Another clear message I want to send today is that our nation cannot any longer afford to tolerate corruption and mismanagement. Those engaged in corrupt practices seek an unfair commercial advantage, a short cut in the procurement process, and the subversion of a "level-playing" field for all competitors.

It is a bad influence on our economy, and a cost to the consumer. It adds to be cost in doing business in this country. It has eroded economic value and inflated transaction costs.

Mr. Speaker, it is time that we rise above our political differences to stamp out this cancer in our body politic.

13. Let me now turn to another basic issue. The Report of the UN World Commission on the Social Dimension of Globalization has a positive but critical message regarding the current path of globalization. It says that the potentials of globalization, in term of growing connectivity and productive capacity, are immense.

However, current systems of governance of globalization at national and international levels have not realized such potentials for most of the world's people-and in many instances have made matters worse.

14. The report states: "Seen through the eyes of the vast majority of men and women around the world, globalization has not met their simple aspiration for decent jobs, livelihood and a better future for their children."

As the report puts it quite succinctly: "There is no point to a globalization that reduces the price of a child's shoes, but costs the father his job".

15. The vision put forward by the Commission is one of bringing into being a system of global governance that is genuinely supportive of and conducive to national development strategies it says "There can be no successful globalization without a successful localization", where efforts to achieve coherence between economic and social objectives would place the needs and aspirations of ordinary people at the centre of rules and practices.

16. The report argues for making decent work a global goal. Work is central to people's lives and is the main test by which they judge globalization. It is a source of dignity, stability, peace and the credibility of governments.

Since job creation goes hand in hand with enterprise development, it underpins private initiative and investment. And it is the key to reducing tensions behind so many ethnic and their conflicts, as well as social challenges, such as migration, youth unrest, gender inequality and poverty.

Strategic thrust in our development plan

17. The Freedom Alliance government was elected by the people of Sri Lanka who experienced a development strategy followed for a period of two years which yielded virtually no benefits to the majority of the people, particularly those living in rural areas.

Our people had two choices - before the last general election - The Regaining Sri Lanka program of the UNF Government and the "Rata Perata" program presented to the people by UPFA.

That being so the people placed their faith in the new Policy Framework enunciated in "Rata Perata" program thereby supplanting the "Regaining Sri Lanka" program.

18. Mr. Speaker, our country, has followed economic liberalization, deregulation and privatization policies for nearly 30 years, in-keeping with global trends. During last 15 years, our country has witnessed a "lopsided" annual growth rate of around 5.5%.

I deliberately use the word "lopsided", as the benefit cascade of this growth has been one-sided. If one examines the result of these policies it is clear that income-generating opportunities were concentrated in a limited geographical area - namely the urban centres in the Western Province.

People in the rest of the country were sinking in an ever widening and deepening quagmire. Whilst the wealthy in urban Colombo saw a doubling of their incomes, the average income of rural people, who form 70% of the population, saw no trickle down of benefits. Unemployment and high cost of living was their fate.

19. Mr. Speaker, in this globalized economic environment we have to choose. The previous government chose a policy of relying on the private sector and initiated a process of opening the economy, hurried privatization of State enterprises, phasing out the role of the public sector and deregulation of economic activities.

The last budget came-up with a target of reducing 100,000 public sector employees by 2004 and a further 200,000 by 2006 from lower and middle income grades.

This was the thrust of the Regaining Sri Lanka strategy. We may have recovered from the setback in our economy in 2001 which was due to multifaceted difficulties that have been well documented in the 2002 Annual Report of the Central Bank of Sri Lanka, but, that recovery was only a constituent element of the normal growth path experienced during the past 15 years.

The new strategies of the UNF regime had no relevance for the majority of the people.

20. In many countries high per capita income growth has always been pro-poor. Usually, it increases the income of the poor more than it increases the income of the non-poor. However, in Sri Lanka during the last 15 years or so the situation is remarkably different.

The poor benefited much less than the non-poor from growth. In fact the share of the poorest 40 percent in the national income which was 21 percent in 1980 has steadily declined to 14 percent in 2002, a distressing 1/3 decline in the share of income of the poor.

The share of the rich increased more dramatically. For the richest 20 percent the share increased to 54 percent. The conclusion is clear, a growth rate alone is not sufficient to ensure a reduction in poverty and to achieve the goals of Sri Lankan society.

21. The country's economy has always remained vulnerable to external shocks with devastating impact on the poor. Their income levels are not adequate to cushion these sudden spikes, with no supplementary income opportunities to tide over increasing household expenses.

III sequenced liberalization has displaced many of the local industries and placed the employment of many people at risk.

Income generating small cottage industries, and local industries have closed down, leaving the poor more vulnerable. Strategies designed to down grade the village, and draw the villager to an urban setting, is perhaps the most unreasonable and ill-informed economic plan that could have been unleashed on our country.

In the village the poor at least have a home, an inter-dependent support base and the ability to grow some food. The village tank is their security. Under the "Regaining Sri Lanka" Strategy the villager gets reduced to becoming a shanty dweller in an urban environment, with all of his income beings pent on food, lodging and transport costs, with little or no savings.

This lopsided strategy of an urban economy propelling the nation forward has to be reversed. Instead a rural economy that is anchored on local area resources and natural raw materials should be pulling the national economy forward.

There has to be a gradual, but a definite shift towards high value added domestic resource based production activities. The pro-growth strategy Sri Lanka needs in the present global context is one, which would actively favour manufacturing and agricultural production.

No doubt the services sector must be encouraged. But the long neglected rural production capacity must be utilized to the full. This in essence is the difference in our respective strategies.

22. Prosperity must benefit all the people. Our Government has launched multi-pronged initiatives to awaken the rural economy and ensure the prosperity of the hinterland. The "Sanwardhana Sangramaya" that her Excellency the President inaugurated recently, along with the "Maga Nagma" or rural road rehabilitation program, "Dahasak Maha wev" tank rehabilitation program, "Thousand Industrial Entrepreneur Village" program and the "Navodaya School Development program", are few of the several community centred, economic capacity building programs.

These are home grown programs that our Government is committed to. We hope to create an enabling environment for rural entrepreneurs to self generate opportunities for themselves and be proactive participants in bridging the urban-rural divide.

This is the way forward to reduce poverty and create growth. Our friends in the donor community should take note of this and help us in this gigantic effort of giving support to pro-poor growth strategies. We share a common interest in ameliorating the conditions of the poor.

23. I am convinced that it is the unequal distribution of opportunities and lack of access to modern know-how and technology that has widened the incidence of poverty. It is this gap that the UPFA Government hopes to bridge.

Once a rural entrepreneur is put on a level playing field with his urban counterpart, I have no doubt that he will succeed.

24. Mr. Speaker, our economy is predominantly a small and medium enterprise economy. Over 50% of our Gross Domestic Product is produced by this sector. 65% of our tea production is by smallholders in the plantation sector. 50% of our nation's apparel and garments industry is handled by individual entrepreneurs.

Around 70% of public transportation is dominated by private bus and lorry operators. 80% of domestic trade activities are done by sole proprietorships and partnerships. 45% of tourism and recreation services are handled by family entrepreneurs.

50% of the construction industry is supported by small and medium enterprises. In a nutshell, the economic backbone and much of the economic muscle are provided by the SMEs and the entrepreneurs behind them. The development of such an economy needs to recognize the partnership between private and pubic sector.

A policy based on the competitive advantage of domestic resources, including human resources, must be formulated.

In this background, the principal thrust of our economic policy will be to re-engineer small and medium enterprises- the real private sector in Sri Lanka - in order to achieve a balanced rate of economic growth, regionally distributed benefits and a high level of employment and productivity.

Therefore there is an urgent need to establish a multi-prong, integrated support mechanism to promote SME entrepreneur competitiveness including comprehensive assistance to exporters who engage in high value addition to domestic resources.

25. Mr. Speaker, markets are powerful forces, but they are not perfect. Institutions needed to make them work efficiently are often weak or absent. Government institutions are needed to improve market outcomes. The legitimate role of the government need not only be to concentrate on macro economic policies, leaving everything else to the private sector. Government must ensure that public interest is best served.

Therefore repositioning of the public sector in the national economy will be a priority. We will conduct a comprehensive skills gap analysis of the public service. The UPFA Government believes in investing in people, as we want an efficient administration.

The public service needs to be equipped with skills and knowledge to deal with the emerging economy. Those detractors who failed to see the wisdom of our policies, will one day thank the UPFA Government for having the foresight to invest in training for the recently recruited 42,000 young graduates.

We intend to prepare them to become effective public servants and change agents who are knowledgeable and service oriented.

26. When it comes to food security, agricultural plays a vital role in our economy. Domestic food self-sufficiency in high nutrition value foods is a must.

Agriculture is basically a private activity in Sri Lanka and, hence, public investment has a crucial role to play in creating infrastructure in terms of irrigation, roads, markets, storage facilities, rural electrification and technology development.

This is besides investments in public education and health. The pace and pattern of agricultural development are largely conditioned by the growth of infrastructural facilities. Infrastructure helps ensure timely and adequate delivery of supplies and services to farmers, and helps integrate local markets with national and international markets.

Further, we must realize that there is a strong relationship between rural infrastructural development and the value of output from agriculture. Therefore, an adequate and efficient infrastructure system is essential for realizing the potential of this sector. It will be given high priority by the Government.

27. Mr. Speaker, another view gaining ground in recent times is that the decline of capital formation in the public sector has been compensated through investment by the private sector.

Logically, this argument looks attractive but it becomes clear that this is unrealistic when one examines the composition of private capital formation. Private sector capital formation is essentially for commercial ventures.

However, public sector capital formation is mainly in the form of construction of dams, roads, marketing centres, rural electrification, etc, where private sector capital formation is hard to come by.

Therefore, public sector capital formation needs to be managed and focused on areas like irrigation and watershed development, rural electrification, extension services infrastructure development where private sector investment is not available.

We articulated that strategy in our Economic Policy Statement "Creating our Future - Building our Nation". Most agree that this vision is appropriate for our country. That is the path we have chosen.

Economy in 2004 and our challenges

28. Mr. Speaker, let me now turn to economic performance in 2004. The Sri Lankan economy in 2004 was confronted with the twin negative impact of the continued global oil price escalation and a devastating drought, which wiped out agricultural production in the second quarter of this year.

Despite, these difficulties our economy remained resilient and grew from 5 to 5.5%. The plantation, agriculture, fruits, vegetables, manufacturing and services sectors, particularly the hospitality industry, provided the major impetus to this growth.

29. It is with a sense of satisfaction that I announced that our savings have increased by Rs. 45 billion, recording a 14% growth over the last 7 months.

Imports of investment goods increased by 39% and private credit demand has increased by 20% largely in production activities thereby reflecting widespread economic progress. This augurs well for economic growth.

30. Exports have increased by about 8% in US$ terms. This is a welcome relief to us especially in the wake of rising energy costs. The wider the access to diversified global markets, the greater the insulation from economic down turn cycles.

The apparel industry is now able to hedge the potential risks of the US market with the growth of European markets.

Apparel exports increased by 5% and value-added manufactured exports increased by 8% in US$ terms.

Tourist arrivals have increased by 11 percent this year, providing stability to the hospitality industry, and the much-needed income to all of the support services in the tourism trade. Remittances from abroad grew by 5% making a solid US$ 1,140 million in 8 months.

Tea, rubber and coconut which provide livelihood for smallholder agriculture have bounced back both in terms of good international prices as well as robust growth in production.

Unfortunately, paddy production suffered a setback due to the severe drought in the second and third quarters of this year.

Approval granted for housing in Greater Colombo rose by 19%, telecommunication services increased by over 10% and Colombo Port achieved a growth of 10% in container handling as well as in cargo handling.

Stock market capitalisation increased to Rs. 361 billion almost Rs. 100 billion increase over 10 months depicting the best performance in the regional equity market.

31. Mr. Speaker, the cost of living, remains a major concern. The government has incurred about Rs. 8 billion as fuel subsidies in order to provide relief to the people although it has increased the fuel prices by about 30%, Prices of rice, lentil, sugar, milk powder, gas and many other essential commodities have increased. Some of these prices have increased due to the cost escalation in oil prices.

Other items like rice increased due to the supply shortages resulting from the drought. At the current prices the annual cost of oil imports could reach US$ 1,600 million in comparison to US$ 837 million in 2003.

If not for the high oil cost and the drought, trade deficit would not have been more than US$ 1,100 million and the budget deficit would have been less than 7% GDP.

Managing our resources Food

32. To bring down high prices, food production need to be increased on a priority basis. Although as a temporary measure we have reduced duties and taxes on some food items, we must reintroduce these duties and taxes to protect our farmers.

We must provide remunerative producer prices in order to increase local food production. We need to give high priority to food security by increasing production of rice, sugar, vegetables, milk, fish and livestock. We spend too much foreign exchange on the importation of these items.

Our consumption habits must also change. As a nation we have to change our dietary habits and focus on consuming nutrition rich food, which are essentially indigenous vegetables and pulses, which are today commanding premium prices abroad.

The local supermarkets and food distribution companies would be encouraged to introduce more local varieties, and voluntarily reduce high cost imported foods that have little or no nutritional value. Our farmers should also benefit from new marketing.

Our Trade and Tariff Policy needs to develop a defensive mechanism to prevent the dumping of condemned food. Recently we were alerted to the activities of unscrupulous importers of food that is not even fit for animal consumption. Laws need to be strengthened and customs be made more vigilant in this direction.

Energy and Water Conservation

33. We also need to produce alternative energy sources to reduce our imports and enhance efficiency and productivity. We need to develop a National Energy Plan.

It should develop an alternative energy infrastructure, including the move towards using more fuel-efficient vehicles and even considering public transport that can be run on cheaper sources of fuel.

I am glad that Railway management is working on cheaper and more fuel-efficient models, which are due to come on stream within a few months.

34. Whilst all the alternative energy sources will take time to be discovered and developed, the nation has to find solutions immediately to the energy crisis. It is here that consumers play a vital role. We need to modify our consumption habits, and be more energy efficient in everything we do.

We need to adopt energy conservation practices and reduce wastage. Our vehicle owners particularly, those whose fuel bills are paid for companies and the government and also the luxury vehicle owners who can afford to pay, must realise that we as a nation cannot afford to spend our hard earned foreign exchange, largely earned by poor women workers, as subsidies for petroleum products.

35. Therefore the public has a very big role to play in energy conservation, both in the use of electricity, which is largely generated with diesel turbines, and also in the use of vehicles.

Corporate citizens must also be more responsible and realise that it is self-defeating to engage in wasteful energy consumption practices, for ultimately it is Sri Lanka's competitiveness that will suffer. A dollar saved is a dollar earned.

36. The same is true when it comes to a necessity that we take for granted, namely water. The treated drinking water that comes to an urban household costs the Government Rs. 20 per liter. We provide domestic households a large quantum of water at subsidised rates.

Most people waste this treated drinking water to wash their cars and water plants. A developing nation such as ours, cannot afford to let our drinking water be wasted in this manner. Supplies are limited and it costs the Government millions to purify. It is also an energy consuming process.

We spend foreign exchange on electricity to purify and pump water. Thus our citizens must adopt more responsible practices such as rain water-harvesting at home. The public must understand that the country pays a heavy price for indiscriminate water use.

37. Our farmers too must adapt their agricultural practices to take advantage of the rains, and follow a calendar of activities to maximise the use of water collected in the reservoir. The Government has embarked on a useful project of restoring our irrigation systems and reservoirs. It is a worthy beginning.

The water is the reservoir should be kept as a reserve and to improve ground water levels on land and moisture levels in the air. Paddy agriculture should use the minimal amount of water. We must get away from the wasteful ways we employ today. Our ancestors understood the value of water.

The great Parakrama Bahu instructed us to use every drop of water carefully and not let it flow to the ocean without benefiting man. His key message was do not waste a precious resource. It is not our intention to impose water taxes on farmers.

But through a process of information dissemination, we must voluntarily move to regime of better water usage and conservation practices.

Conspicuous Consumption

38. We will need to consider high taxation for conspicuous consumption. This is why we introduced high taxes on motor vehicles. It is important that we reduce excessive and wasteful consumption, whilst making exceptions for genuine users of energy, particularly the SMEs.

Whilst it is the duty of the Government to ensure that electricity and fuel is made available for cooking, transportation and basic amenities, any additional usage over and beyond the standard consumption units, needs to be charged at the full cost of energy paid for by the country.

Mr. Speaker it is time that our nation realises that we must live according to our means. Living beyond our means is the reason why we face a huge debt and other economic problems.

39. So my plea to the nation is to be more mindful and responsible in your consumption habits. I rather prefer, we modify our consumption habits voluntarily, than it be mandated by law. After all, we are in a market economy with a healthy respect for individual freedom.

Please do not abuse that freedom. In more advanced economies, the citizens proactively initiate conservation campaigns, and social service organisations, professional organisations and other NGOs adopt good practices without looking to the Government to modify public behaviour.

It is time that our citizens also adopt more socially responsible practices.

Taxation

40. When it comes to paying taxes, only a fraction of our population complies. Many do not make proper declarations. While someone may ask why pay taxes to a system that wastes money, the hard reality is that all of us citizens do enjoy many public services, and we need a tax system to pay for it.

Who pays for the maintenance of the roads? The hospitals? And for medicines? The schools? The teachers? The indirect and direct tax payer is the answer. We have a working population of 6.8 million people but less than 200,000 people pay taxes.

80 per cent of tax revenue is raised from indirect taxes on consumption. Is this fair? The UPFA Government will therefore, widen the tax net and bring those who avoid paying taxes and revenue duty to book.

At the same time, we will reward those law-abiding citizens who pay taxes as well as those businessmen who make proper declarations. It is time that our people are encouraged to become responsible citizens, and understand that we must all pay our dues.

Financial situation

41. Mr. Speaker, before I turn to the economic and financial policies of our Government, it is important that I make a comprehensive assessment of the current financial situation of the country for the benefit of the members of this House and the people.

42. When we formed the Freedom Alliance Government in April 2004 we inherited a poorly designed and unrealistic budget.

In it, revenue has been grossly overestimated. It included a profit transfer of Rs. 5,000 million from the Central Bank to the consolidated fund. Such funds were not provided for in the Balance Sheet of the Central Bank.

It included a further sum of Rs. 4,500 million from so-called EPF dormant accounts which belong to the workers of this country. It has assumed land sales of Rs. 3,000 million. In reality none of these revenue sources have been available.

43. On the other hand there were commitments, not provided for in the budget estimates. Despite the instructions to suppliers by the then Government to refrain from annual price adjustments in terms of various commodities such as gas, petroleum, flour etc., the 2004 budget had not made any provisions to meet such payments or subsidies.

On the premise that regional bus companies and Railways Department were to be privatised, no provision had been made to make the required expenditure for those enterprises. Such enterprises had not been allowed to adjust their prices to recover costs.

Consequently, the additional burden imposed on the budget on account of Railways and the bus companies alone was around Rs. 5,000 million. No provision had also been made for the committed wage adjustments in the health sector and the increased cost of pharmaceutical requirements for hospitals.

The additional burden on these were Rs. 4,000 million. Several foreign aided projects had been incorporated in the national budget, without adequate counterpart provisions.

In effect, for every five dollars that has been identified, as inflows to the budget for foreign aid programs, there should have been at least two dollars or more budgeted as the local input.

The total under-provisioning on account of conflict area rehabilitation projects, the Southern Highway Development Project, land acquisition, water supply schemes, the wildlife conservation program etc. is around Rs. 16,800 million.

We had to top up these contributions through supplementary provisions to ensure that project assistance from our development partners was utilised.

There were also deferred payments to contractors and suppliers by the previous regime due to inadequate provisioning in the budget, which has put the construction industry into serious financial difficulties.

44. The UNF Budget has also assumed nearly US$ 200 million of foreign funding on the basis of certain commitments, which were not eventually realised.

For instance, a pledge had been made regarding the creation of a Revenue Authority, the privatisation of People's Bank, privatisation of regional bus companies, implementation of a compensation formula under the Termination of Employment Act (TEWA) together with a whole host of other commitments and performance targets.

Consequently, before even our Government came into office, due to difficulties in implementing program conditionalities, and inability to keep to performance benchmarks, the IMF itself had suspended the PRGF facility in September 2003.

It is in this background that the original budget estimates that were set forth in the 2004 budget became totally divorced from reality. In both income and expenditure estimates, the UN Budget was an 'Alice in Wonderland' exercise.

45. The report submitted by the outgoing Secretary to the Ministry of Finance had confirmed in terms of the provisions of the Fiscal Responsibilities Act of 2002 that the budget deficit was going to increase from the original target of 6.8 per cent of GDP to 7.8% of GDP.

So we inherited a much high budgetary deficit for 2004 than was articulated by the previous Government in its propaganda campaigns regarding the economy.

46. Mr. Speaker, it is also relevant to ask whether it was desirable to continue with the budgetary strategy adopted by the previous Government in terms of the 'Regaining Sri Lanka' programme, which was essentially a debt reduction strategy.

But public debt/GDP which was 103 per cent of GDP in 2001 increased to 106 per cent by 2003.

In per capita terms it increased to Rs. 96,813 from Rs. 77,552. Furthermore, Capital Expenditure declined to 5.0 per cent of GDP. The result was that infrastructure projects such as roads, bridges, and buildings came to a halt.

The legacy of that short-lived administration was half built bridges, roads and public buildings. Work on the Katunayake Expressway was started in 1999. If this was not mishandled, by now a new road would have been added to our network.

It will now cost much more. Rural infrastructure was totally neglected. How can a debt reduction strategy be sustained without a genuine effort to increase Government revenue? Tax revenue declined from 14.8 per cent of GDP to 13.2 per cent.

In real terms it was a 12 per cent decline. The much talked about exchange rate improvement was a result of the weakening of US $ at that time, as well as budgetary support from donors.

47. On the other hand we had to confront two serious economic crisis this year. First was the drought in the second and third quarters.

In many rice-producing districts it had a devastating impact on the Yala production, resulting in a drop of about 40 per cent in output. It created a mismatch between supply and demand, pushing the rice prices in excess of Rs. 50 / kg as compared to an earlier price of below Rs. 30 / kg.

Simultaneously the world entered into a fuel crisis with prices rising from US $ 30 / bbl prior to April 2004 to a near US $ 60 / bbl. At the current prices, annual cost of oil imports could reach US $ 1,600 million in comparison to US $ 837 million in 2003.

The result is an increase in cost of imports by almost over US $ 450 million. This in turn led to large subsidies resulting in an additional burden on the government and state enterprises such as Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB).

48. We took measures to consolidate the Government revenue effort significantly. All enabling legislations have been made operational in order to ensure that revenue measures proposed in the 2004 budget are implemented.

We corrected the leakages introduced to the system through the infamous tax amnesty legislation. We have set a target of Rs. 3,000 million to be collected from this source alone, this year.

In place of creating a Revenue Authority against the wishes of the employees, we managed to persuade the staff of the Inland Revenue Department to provide collective leadership in launching a modernisation program.

The staff committed themselves admirably to a major revenue drive. The tax revenue growth upto October this year is 19% despite low tax collection during the first half of the year.

The Inland Revenue Department will move onto a new administrative structure with a heavy investment in human resource development, sectoral automation and professional tax audit activities beginning from next year. We have sought assistance from the revenue agency of the government of Thailand and the ADB for this purpose.

To the credit of the Steering Committee of the Inland Revenue Department's Modernization Project, a new tax code and a code of conduct are ready for launching soon after this Budget Session. With all these efforts we have attempted to maintain this year's budget deficit in the range of 8-8.5% GDP.

49. Nevertheless, Mr. Speaker, the borrowing levels by the government and public enterprises remain excessive due to fuel subsidies and ballooning foreign exchange requirements for imports, particularly fuel, motor vehicles and food.

While retaining private sector credit demand for productive activities, consumption demands need to be curtailed through appropriate price corrections in fuel prices and reduction in expenditure on motor vehicles and food imports.

The Government and public enterprises need to reduce their debt financing in order to reduce monetary expansion below 15 percent and stabilize inflation at a single digit level.

50. In this background, we have taken some painful and perhaps unpopular measures to consolidate the financial environment. Price of petrol and diesel have been raised to catch up with international price increases. We are still behind but we are making some headway.

Consequent to these price adjustments, we allowed the bus operators also to correct their fare structure. Postal rates have been revised, Electricity tariff revision is pending.

Taking note of a large increase in luxury consumption expenditure, particularly from imports, we introduced a rigorous taxation and stringent condition regime on the importation of motor vehicles.

Excise tax on cigarettes was raised. Countervailing measures were introduced to discourage smuggling of tobacco products to protect Government revenue.

The revenue gain from this was around Rs. 1,000 million. The government believes that general subsidies on diesel and petrol are not desirable and we will phase them out although we had to accommodate Rs. 8 billion in subsidies this year.

However, special needy groups such as the three-wheeler operators, public transport operators etc. will be protected from further price increases.

51. Mr. Speaker, despite many difficulties caused by these unexpected crises, we also took the first steps in creating a new economy.

We implemented the fertilizer subsidy scheme, the 1000 tank rehabilitation program, provided employment for 42,000 unemployed graduates, launched a free nutrition program for primary school children in rural areas, re-scheduled loans of small paddy millers, provided drought relief and began the rehabilitation of rural roads.

52. We need to consolidate the positive results of these policy initiatives while addressing the cost of living problem and rising costs of oil.

In order to reduce the cost of living, we have eased supply conditions by removing duties and value added taxes on rice, sugar, and lentils. We intend improving market supply conditions in order to stabilize the cost of living.

We do not think however that the removal of taxes on petrol and diesel is a solution to the current energy crisis.

We certainly need to adjust to realistic international price levels while protecting the vulnerable groups. Removal of taxes on these commodities will only provide unfair benefits to rich urban consumers and not to the poor.

New Policy Initiatives

Mr. Speaker, soon after our Government was formed, we created several important national institutions namely, the National Council for Economic Development (NCED), the Strategic Enterprise Agency (SEA), The National Procurement Agency (NPA) and the National Council for Administration (NCA) - They are mandated to promote governance and efficiency in their respective fields.

53. National Council for Economic Development - NCED

We need an independent institution like NCED to harness diverse policy inputs and place them before the Government. NCED is built on the concept of bringing together a group of private sector and State sector stakeholders to jointly develop national economic policies and plans.

They will also address issues that affect different sectors. We have institutionalized the process of pairing public servants with proven private sector domain experts and other non-governmental stakeholders to do the thinking and planning on behalf of the country.

In This short space of three months since the NCED was created, it has constituted 18 cluster committees and directly engaged over 200 key private sector and citizen volunteer committee members to participate in the policy formulation and execution process of the Government.

These cluster committees also include high-powered clusters for donor coordination and North-East Development, Millennium Development Goals, Employment Creation and Labour Relations, Trade and Tariff, Financial Sector Reform and Public Sector Reform among many others.

54. Strategic Enterprises Management Agency - SEMA

As stated in our Policy Framework, Government will not privatize strategic state Enterprises. Alternatively, we have created the Strategic Enterprise Management Agency (SEMA) to strengthen the management of these enterprises and to improve their performance.

SEMA is managed by the team of professionals with domain knowledge and expertise to assist business development of strategic enterprises.

They are mandated to ensure that 14 key state sector institutions adopts best management practices and corporate strategies, to undertake management reforms to ensure optimum productivity and focus on initiatives to become efficient partners in the national economy.

Our Government is steadfast in its belief that with the introduction of good management practices, retraining standards and a disciplined approach to corporate planning and implementation, a State enterprise could match or even exceed the performance of its private sector counterparts.

This is shown by the successful performance of the two State banks. With Performance linked incentive pay and other productivity enhancing strategies, these organizations could be turned around.

Strategic business plans that have been prepared for these enterprises will be submitted for the approval of Cabinet before the end of this year.

55. Administrative Reform Committee - ARC

The need for carrying out a program of administrative reforms in order to make the Government's administrative machinery and efficient, citizen- friendly and modern entity has been long felt.

An Administrative Reform Committee had been established under the preview of the Prime Minister to oversee institutional reforms in the public service. This committee has drawn up a 16-point work plan.

The major area of reform will be the rationalization of the functions of Government agencies. This will ensure that they will concentrate on functions relevant to current needs. This will be followed by an exercise to improve the procedures through which the Government operates.

Special emphasis will be placed on the need for transparency and the use of modern information technology. The other aspect of institutional reform will be upgrading of the quality of personnel in the public service.

In an attempt to make the administration closer to the people, the Divisional Secretariat will be our focal point in institutional reforms.

The Government proposes to coordinate the execution of the budget at Divisional Secretaries level in order to ensure effective use of public funds and to drive the rural economy.

56. National Procurement Agency - NPA

The National Procurement Agency has been established to strengthen and streamline the government procurement system. IT is mandated to prevent delays and inefficiencies by formulating simplified and harmonized procurement policies, guidelines and standards.

The NPA will also engage in capacity building, accreditation and monitoring in order to ensure value for money accountability and transparency in government procurement practices. Our expectation is to manage procurement functions as a specialized activity by professionals to maximize value for money.

57. The National Council for Administration - NCA

The NCA was set up to revive the recommendations of the salaries Commission 2000 which called for the establishment of a permanent commission on administration with statutory powers and a Secretariat.

This was a considered decision to get away from the earlier practice of appointing salaries commissions for specific purposes without a mandate to follow up on their recommendations.

The Board of Management of the NCA has now been appointed and the commission has commenced work. The Council is composed of member who have wide experience in the public service as well as those from the private sector.

Its initial responsibility is to revisit the salary structures recommended by the Salaries Commission of 2000 taking into consideration the ad hoc increases of salaries granted to specific sectors and the continuing anomalies in salary structures of the public service.

The responsibilities of the council are wide. Apart from continuously monitoring salaries, allowances, overtime, incentives etc. and making relevant recommendations to the government, it has been tasked with developing a national wage policy, cadre management in the public service, review of line ministries and other government agencies, identifying institutional shortcomings, managerial limitations and removing such constraints.

Mr. Speaker, through the setting up of these institutions together with the active participation of line Ministries we have commenced the re-engineering of Government to fulfil its role in the socio-economic development of our country.

This process involves a massive skills upgrading and training program, including IT skills as well as teaching of best management practices. We hope to make human resources of the public services equal to the task like their private sector counterparts.

In addition to training new recruits to the service, Government will soon launch an agency wide re-training program for all public servants, linking private sector education institutes and public institutions, to jointly work out an accelerated program of knowledge and skills empowerment.

We will also be doing a baseline survey of current productivity levels, and adopting proven productivity measurement tools to enable the Government to consider rewarding performance.

We hope the international donor community will support this initiative. It is absolutely essential that our workforce is trained and equipped with up-to-date knowledge and skills.

The world is today operating in a knowledge-based economy, and if Sri Lanka is to remain competitive as a place for investment, we must ensure that our Government service performs at an acceptable level.

I have no doubt that they will. We are already witnessing a change in the Government work culture, particularly in the State banks and in the revenue agencies.

58. Budget monitoring and aid utilisation -

Although there is some improvement in the utilisation of foreign aid the overall result is still inadequate. Unutilized aid commitments are in excess of US $ 3,000 million.

Sri Lanka's budgets now aim at obtaining US $ 1,000 million each year from loans and grants. This is in addition to a large volume of domestic provisions earmarked for various development activities.

In this context several bottlenecks that affect the smooth implementation of projects such as procurement procedures, provision of adequate local resources, implementation capacities, accounting and administrative procedures, release of funds by the Treasury etc. has been examined and a new monitoring arrangement has been set up in the Ministry of Finance and Planning.

This should ensure speedy implementation of major projects. The entire project profile on the ground as well as the new projects to be executed are now on a web-page for easy monitoring.

The new unit entrusted with budget monitoring and aid utilisation, together with the National Procurement Agency, are working on execution schedules to facilitate this task.

In order to further strengthen this an Inter-ministerial Cabinet Sub-Committee headed by Her Excellency the President has now been set up for vigorous performance monitoring. As project management teams play a very critical role, the government also proposes to introduce a reward mechanism based on the performance assessment of each project.

This new system will rank each project in terms of its performance outcomes. We propose to link this system to the 270 Divisional Secretariat.

59. Enterprise Development Bank (SME Bank)

The principal thrust of our economic policy will be to transform SME as a nerve centre in our development process in order to achieve a balanced rate of economic growth, regionally distributed benefits and a high level of employment and productivity.

There is therefore an urgent need to establish a multi prong, support mechanism to promote SME entrepreneur competitiveness including full assistance to exporters who engage in high value addition to domestic resources.

60. Collateral dependent debt, and shortfall in equity financing has been identified as problems faced by SME entrepreneurs across all sectors. High interest rates and low availability of credit are the main barriers to business expansion and productivity.

A recent Asian Development Bank (ADB) survey revealed that absence of a SME business friendly bank and prevalence of complicated loan application procedures is a significant factor inhibiting SME access to credit.

In terms of SME entrepreneur and enterprise weakness, the absence of a business plan, and lack of management skills are attributed as reasons for failure and consequent inability to repay loans.

Therefore, an initiative was taken by Her Excellency the President to set up a bank to service the funding and business development needs of small and medium enterprises in Sri Lanka.

Our Government also welcomes the initiative taken by the International Finance Corporation (IFC) of the World Bank to set up a SME Fund in our country.

The Japanese Bank for International Corporation (JBIC) and the ADB have also included SMEs in their lending portfolios to support a 'breakthrough' development in the SME sector.

Knowledge and skills development

61. The education capital budget declined steeply from 5 per cent of Government capital spending in 1999 to about 2.5 per cent in 2002. In the Education budget capital expenditure has decreased from about 20 per cent to 16 per cent in 2002.

This fall in capital investment constrained progress of the education system. Less than 20 per cent was invested in quality inputs such as equipment and technology, furniture and tools. Many rural schools have empty classrooms, while urban schools are heavily congested.

Construction activities in the university system are also uncoordinated with heavy expenditure devoted to buildings without a clear plan based on the needs of the university system as a whole.

As a consequence of the low investment in quality input, we are now on the wrong side of the digital divide. We are seriously constrained in equipping the future generation with modern knowledge, skills and competencies.

Our vision of increasing access and progressively upgrading the education sector is based on restoring performance, maximising available opportunities and enhancing the prospects for school and university students to compete qualitatively with their peers in the other parts of the world.

62. Mr. Speaker, today the world is characterized by a knowledge led economy. Therefore our education system must play a vital role in ensuring that our nation is equipped with a productive workforce, possessing appropriate knowledge and relevant skills.

In order to achieve these goals we have not only developed a comprehensive education program, but also have begun the process of transformation.

63. Keeping with our commitment towards achieving the Millennium Development Goals (MDG) and the National Action Plan for Children, schools in rural and disadvantaged parts of the country will be equipped with adequate physical resources both from the Consolidated Fund and through a variety of Donor Funded Projects.

64. As a priority, we will be strengthening the intake and output capacities of all our primary, secondary and tertiary education institutions, including the much-neglected technical and vocational schools. New institutions will also be created to fill knowledge gaps.

Streamlining admissions to schools and other administrative systems, introduction of modern classroom teaching methods and resources such as IT infrastructure, computer laboratories, revised textbooks and e-libraries, are part of a package of extensive measures that will be proposed in this budget.

65. On President Chandrika Bandaranaike Kumaratunga's initiative, the Navodaya School Development program targeting 397 schools will provide good quality eduction for rural children.

These schools will be equipped with IT and Science labs, libraries, sports and musical facilities in order to provide a wide range of skills training.

The Central School revival program and a special program for developing schools in the plantations and in the war affected North and East, occupy a priority position in our education infrastructure upgrading program.

66. The introduction of English and Information Communication Technology as new subjects in the school curriculum will be progressively expanded from the higher grades to the lower.

The present 50-1 pupil-to-teacher ratio will be reduced to accepted international levels. We are also developing a program to improve the quality of our teachers through the re-opening of teacher training schools and introduction of modern methods of teaching.

New books are being published and distributed to schools to substantially improve standards of textbooks made available to students.

67. In addition to school, the current workforce will also be encouraged to equip themselves with new knowledge ant IT skills.

The thrust sectors of our economy will be encouraged to establish links with leading tertiary education institutions and corporate sector knowledge leaders overseas to build up local knowledge development and skills training capacity.

Special attention will be paid to inculcating moral values and a sense of social responsibility through the teaching process.

In the Budget, I propose to assist and encourage such teaching and confer some benefits to the Sunday Schools, which play a very important role in disseminating religious and cultural values to a large number of our children.

Agriculture

68. The majority of our population depends on agriculture for their livelihood. Yet agriculture has been neglected. To our great cost, we have become dependant on imports for day-to-day living.

The cost of food imports which include rice, flour, sugar, potato, onions, milk powder, etc. is around US$ 700 million. This is almost the same cost as for the import of crude oil.

69. Many of our conventional economic indicators such as GDP, stock market, balance of payments, budget deficit etc. do not mean anything to those living in the rural economy, trapped in poverty.

To them, what matters are water, seed, fertilizer and markets for their cultivations, low transport costs to distribute their produce, roads, electricity, better health and education facilities and improved life chances for their children. Economic indicators are not meaningful unless they reflect the hard realities on the ground.

70. Therefore, rapid development in food production while protecting the environment, water resources, and biodiversity will be given high priority in our policies.

Fragmented land use, insufficient availability of water, credit, seed, technical know-how, technology, marketing, storage and transportation continue to weaken productivity in agriculture.

Agricultural extension services that have been allowed to whither away needs to be revitalized. 100,000 hectares of agricultural lands that have been neglected will be brought under cultivation through the rehabilitation of 10,000 tanks under "Dhasak Maha Wev" programme.

Budgetary allocations for Research and Development in agriculture, which has been run down abysmally needs to be raised. Bad water usage practices that have aggravated droughts will be corrected by farmers who will be encouraged to preserve water through timely cultivation and better knowledge of the value conservation.

New high yielding varieties will be introduced. Innovation and development in indigenous technology should also be considered. In addition, minimizing of post harvest losses and low quality production needs to be addressed to improve productivity. This requires storage, packing and better transportation facilities.

The major part of local demand for diary products can also be met from within our country. Diary Co-operatives, have been formed to encourage livestock development. Agricultural development cannot take place in a vacuum. It should be linked to agro based industries and services.

Industrialization Strategy

71. The pro-growth strategy Sri Lankan needs in the present global contest is one, which would emphasise agricultural production and manufacturing.

There has to be a gradual but a definite shift of emphasis towards high value added domestic resource based production. Manufacturing activities offers opportunity for product diversification, expansion and productivity increases.

Therefore, industrial policy should strengthen the existing export orientation of the country's manufacturing sector. On the other hand industrial policy need not completely ignore import substitution.

Our strategy will be to promote such industries in line with their own potential in terms of market size, liberalization commitments, and trade agreements in order to ensure competitiveness.

Mass consumption items such as processed foods in fact offer chances for successful export and opportunities for penetrating world markets. Industry promotion requires a system of policy based financing.

72. Financial sector reform therefore must be guided by the need for development financing the economy in addition to strengthening of State banks as strategic enterprises. Adverse impact on domestic entrepreneurs of interest rate differentials between Sri Lanka and its competitor countries need to be minimized through proper policy actions.

In order to complement the existing commercial and merchant banks as well as development financial institutions in providing working capital as well as medium term fixed capital, the proposed Enterprise Development Bank-SME Bank, will have a role in providing concessionary working capital for entrepreneurs either directly or through other financial institutions backed by risk sharing arrangements.

Regulatory supervision and surveillance by the Central Bank needs to focus on reducing high intermediation cost in Sri Lanka's banking system to provide a positive rate of interest to depositors and keep lending rates low.

73. Labour market reform for flexibility in the management of capital labour relationships are no doubt essential but the introduction of a strict hire and fire legislation is hardly a solution to our labour problems.

We must cultivate a culture of collaboration between the employer and employees, where the economic fundamentals of the organization, and the cost drivers are transparently known to the workforce and a productivity linked incentive pay structure is developed.

The compliance of ILO standards have in fact enabled many of our industries to consolidate their market position in the global economies which value best practices in corporate governance.

74. In the Exchange Rate Policy our main focus shall be competitiveness in the currency to promote more exports as well as a competitive import substitution industry. Competitiveness is not ensured by merely allowing demand and supply forces to determine the exchange rate.

Many forces underpinning the supply of foreign currency into the local foreign exchange market have little or nothing to do with the productive focus of the domestic economy. Therefore, a tendency towards overvaluation will be avoided in our exchange rate policy.

In fact our exchange rate is undervalued and quite favourable to exports. At the same time, the Government will enable the local banks and funds to offer attractive rates for foreign currency deposits, including the introduction of multi-currency investment instruments that export income earners could use.

75. In reviewing our industrial policy, it was very clear that the contribution of the SME sector has gone unrecognized and that there were no special measures to assist them and empower them.

The rest of the world understood the value of SME. Even large companies in those nations took advantage of the flexible strengths of SMEs.

Our industrial establishment was not current in their thinking about the best industrial practices, when it came to vertical and horizontal integration and the establishment of backward and forward linkages.

All large companies must as a national responsibility assist the SMEs by purchasing components and inputs from them.

Similarly, Government and the private sector should attempt to purchase goods and services from SMEs against a competing product that is manufactured overseas. Towards this end, this government has already encouraged local textile manufacturers to produce free school uniform material locally.

As a result of this, the industry is now assured a ready-made market for their products, thereby saving foreign exchange. While most of the industrialization activities are concentrated in the urban areas for obvious reasons economic and social imperatives make it necessary that we tap the potential of rural areas.

The rural industrialization process cannot have a life of its own. It must fit in with the local resource base and value addition and be guided by market conditions in order that the produce can be sold at remunerative prices. We need to support our local producers.

That is how we build up spending power and our own economy. Mr. Speaker, it is time that we promoted national minded consumer behaviour.

Investment Strategy

76. Foreign direct investment provides foreign exchange and employment opportunities and catalyzes the development process. FDI flows are around or under 10% of our aggregate investment of around 28% of GDP and still remain small.

We shall therefore plan to attract increased FDIs. Public-Private partnership arrangement will be used to promote large-scale infrastructure projects. Dormant textile mills at Pugoda, Thulhiriya and Mathegoda will be revived to strengthen backward linkages in the apparel industry.

77. Mr. Speaker, for too long our nation has relied on debt finance, to develop our infrastructure and industry, without making a concerted effort to tap the vast private equity capital that is available globally.

These venture capital and private equity funds, are solely focused on return on investment (ROI) and the potential for securing an exit for their investments preferably through a listing on a local or international stock market. These are institutional investors who as equity participants adding value to our economy.

Therefore, Mr. Speaker, Sri Lanka should aggressively target private equity funds, and increase the foreign direct investment flows to the country. We will work directly with commercial banks to secure fund for many of the project that have a revenue model attached to them.

78. Mr. Speaker, to attract the high value financial services industry to Sri Lanka, We need to create the enabling environment to secure the most important input for a thriving financial services industry namely human capital.

It is the investment portfolio managers, brokers, insurance agents, lawyers, accountants and bankers who drive this industry.

Many expatriates working in the region have chosen Sri Lanka as their second home, as most of them find our island attractive place to livein. Many of them are in the financial services sector, and would be motivated enough to develop the off-shore financial services together with Sri Lankan partners, provided the right tax and regulatory incentives are in place.

We would like to tap their expertise by offering incentives that match and indeed exceed other financial centers in the region. Many established companies will be persuaded to relocate their operational headquarters to Sri lanka.

The High local concentration of CIMA graduates and those with IT capabilities will be used to attract investments particularly in outsourcing markets.

Trade and Tariff Policy

79. Government trade and tariff policy will aim at providing a stable and predictable medium term framework. This is the way to generate high growth and employment and thereby reduce poverty.

Given the increasing integration of the Sri Lanka economy with global markets such a policy framework will also be geared to facilitate a fair-trading environment for both export and import sectors.

80. Sri Lanka's bilateral and regional trade initiatives have achieved many significant results. Through Free Trade agreements and broad ranging trade agreements we will assist exporters in maintaining and improving their market share. Such agreements also attract foreign investments, into the country.

The Indo-Sri Lanka Free Trade Agreement and the proposed comprehensive partnership agreement between India and Sri Lanka where both countries seek to go beyond trade in commodities to include services and investment will provide a benchmark for future trade initiatives.

81. In order to enhance a competitive environment, Sri Lanka will also aim to strengthen standards on health, environment, labour and safety to comply with international best practices.

Compliance with such standards will assist Sri Lanka not only to meet the challenges inherent in modern trade initiatives but will also ensure that the rights of consumers are protected.

It is proposed that an institutional mechanism to monitor such obligations be strengthened to ensure effective action against infringements of standards in respect of both locally produced and imported goods.

In addition, a review of Sri Lanka's policy framework for trade remedies will be undertaken with the provisions of the WTO.

Special reference is made to infringements in respect of goods being dumped or subsidized to the extent that local production is threatened. Such a review will ensure that policies and practices are consistent with our objectives of encouraging economic growth through the operation of open and competitive markets.

Transport

82. Mr. Speaker, as much as I want our nation to be prosperous and our people to enjoy all modern conveniences, there is one aspect of development that has inconvenienced everyone - namely the number of vehicles on the road.

Our road capacity is not adequate to accommodate the vehicle population. As a result, we suffer from not only intolerable congestion, but also from intolerable pollution. To add insult to injury, most vehicles are neither fuel efficient, nor passenger efficient.

Our fuel consumption has increased dramatically, forcing us to spend more dollars to import more oil. There is also a productivity loss due to long hours spent on commuting. This is a serious issue that successive Governments have failed to address. We must take bold decisions now or we will face unpalatable consequences of gridlock.

83. Mr. Speaker, I want this house and the country to know that, however dilapidated and disorganized our public and private transport services may be, it is still the backbone of our passenger and cargo transport system, carrying 72 percent of the nation's passenger traffic.

In contrast, private motor vehicles that occupy 80 percent of the roads, only carry 28 percent of passenger volume. Amazingly about 200,000 three-wheeler operators carry 1 million passengers daily occupying the least amount of road space and using the lowest volume of fuel. We need to improve our public transport services, and shift usage towards public vehicles.

The State bus operations which are presently heavily subsidised to cover operating and management inefficiencies must be put on a commercial footing.

In order to improve bus services, the budget will provide subsidies for the introduction of new dedicated school buses, office buses and buses for un-served developing areas. There will be value- added services designed to attract private vehicle users.

In an effort to streamline the management of buses and improve safety and passenger satisfaction, bus routes need to be re-planned.

84. The Railway will be provided with funds for strengthening the track and a level of funding required to ensure good maintenance. New services such as the Airport Express link, the carriage of fuel and containers and fast monorail services would be pursued to increase railway revenue.

The Government will introduce Public Service Obligation Agreements with the management to provide more quantifiable recurrent expenditure. The Railway Authority will not be set up and the SLR will be provided freedom to operate as a commercial enterprise within the departmental structure.

A subsidiary unit would be formed to manage railway lands on commercial lines. Taxes, duties, levies and fees with respect to the use of motor vehicles would be gradually adjusted to represent the User Pay concept.

Plantation Community Infrastructure

85. Mr. Speaker, as you know the plantation community it still suffering from poor housing and health facilities. They lack many other facilities, including electricity and energy for cooking. Fuel wood continues to be used at a great cost to our remaining forest cover.

The only way this could be reversed is by encouraging the reinstallation of alternative energy generating practices with incentives for management companies to provide power to the homes of their workers. We propose that energy efficient homes be signed and built for them, utilising modern technology.

The 2005 Budget provides the initial capital provision to implement an estate sector housing program over a 3 year period to complete 50,000 housing units.

A new Plantation Community Support Program and a Community Development Initiative that will improve their basic education, health and skills standards, as well as basic needs such as housing, drinking water, and electricity are being formulated in order to mobilise greater donor funding over the next three years.

The line ministries will channel Rs. 900 million through their vote for plantation, housing, schools, water supply and sanitation, health and electrification during 2005 out of Rs. 3,000 million earmarked to them for the next 3 years from the Consolidated Fund.

Plantation companies are also expected to contribute towards the development of community infrastructure as part of their corporate social responsibilities.

North-East Reconstruction and Rehabilitation

86. As outlined in our Economic Policy Framework the relief and rehabilitation effort in the North and East has the support of all stakeholders in the peace process.

Her Excellency the President spearheads this effort through the Ministry of Relief, Rehabilitation and Reconstruction and the implementation of many projects through the North- East Provincial Council and district administration based on the Triple "R" Framework.

Government has ensured continuity for development initiatives for the North-East Provinces funded by our development partners.

The total funding available for the development of these provinces is in order of US$ 500 million for the next few years. Since we came into office, we have readily executed many such donor funded development programs.

87. Mr. Speaker, you may note that the World Bank has earmarked US$ 218 million for helping conflict affected communities with rehabilitation of irrigation schemes, agricultural related activities and capacity building for social and economic re-integration. It is targetting nearly 200,000 families.

The World Bank assists in the rehabilitation of internally displaced persons by restoring primary healthcare, water supply and by building institutional capacity of the North-East Provincial Council.

The North-East housing reconstruction projects which were negotiated in October this year will facilitate the reconstruction of 46,000 houses over a four year period. 88. The ADB provides about US$ 160 million for a wide range of water supply and sanitation projects in Batticaloa, Polonnaruwa, Anuradhapura, Hambantota and Trincomalee districts. The North-East Coastal Community Development Project aims at uplifting standards and providing basic needs to the coastal community.

It will provide micro credit for sustainable livelihood activities and resource management in the Trincomalee Bay, Batticaloa Lagoon, Southern Ampara Bio Diversity Zone, coastal resource planning in Batticaloa and Trincomalee districts and fisheries development in Batticaloa, Ampara and Trincomalee.

The Conflict Affected Areas Rehabilitation Project supported by the ADB aims at rehabilitation of 500 km of roads, rehabilitation of power transmission, distribution and rural electrification and small-scale community infrastructure.

89. The Government of Japan under JABIC's lending program provides for improvement of rehabilitation of roads, bridges, irrigation, schools and hospitals. It also provides irrigation facilities and income generating activities through a 7-year development plan.

90. The ADB, OPEC and the Governments of Germany and Netherlands jointly provide assistance for relief and rehabilitation of the North-East on health, education, agriculture, livestock, roads, water supply, irrigation and vocational training.

The targeted beneficiaries are around 572,315 at the cost of US$ 54.3 million. The Government of UK funds rehabilitation of 89 bridges and 2 ferries in the North East at a total cost of US$ 36.9 million.

The Government of Norway provides assistance for water conservation, environment management and road development in the Batticaloa district.

91. Small scale development projects coming under various other sources include the Mannar District Rehabilitation and Reconstruction Projects, provision of quality seed and rehabilitation of schools vacated by Armed Forces, and the rehabilitation of the railway track between Valachenai and Batticaloa.

Consolidating these development efforts, government has made a provisioning of Rs. 80,000 million over a three year medium term framework of which Rs. 20,100 million is to be utilised during 2005.

Initiatives to Strengthen Governance

92. Achieving a sustainable rate of economic growth requires a governance structure that ensures a transparent, accountable and equitable legal and institutional framework. Such a framework in turn minimises corrupt practices, reduces business risks and improves competitiveness.

It is the poor that suffer most from corruption, irregularities, waste, delays and inefficiencies, whether they be in the private sector or the public sector.

Good governance therefore, benefits the poor more than the rich. Recognising that an up-to-date legal framework is essential to create an enabling environment for growth, key legislation including the proposed Companies Act, Information Technology Act, Data Protection Act, Banking (Amendment) Act, Prevention of Money Laundering Act, Debt Recovery (Amendment) Act, Payment Transactions Law, Misrepresentations Act, Electronic Transactions Act, Finance Leasing Act, Bankruptcy Protection Act and Credit Information Bureau (Amendment) Act will be presented to Parliament.

93. This Government has revived the Legal and Judicial Reforms Project (LJRP) with the assistance of the World Bank. As a result, capacity building in institutions responsible for law reform and legal education through a professional development process is being strengthened.

A judicial training program has been launched both for sitting judges as well as new recruits to the judiciary. I am pleased to inform the House that the World Bank has now upgraded this project based on good performance.

94. A comprehensive governance framework within which corporate entities could carry on their business operations has been envisaged in the proposed Companies Act.

Automation of the company Registrar's Office which has been planned to be completed by June next year will enable online access to registered company information, company registration and filling of returns. An effective compliance and surveillance mechanism would evolve through this automation process, which will help reduce corruption.

95. The Auditor General's Department, which has been setup to ensure transparency and accountability in the public sector, is being restructured. A new Audit Act is being finalised for enactment through which it is proposed to grant the AGD greater financial independence and control.

Information Technology at the AGD is being enhanced to facilitate strategic planning, human resource development, communication etc., and to be used as an effective tool to provide more efficient and objective audits.

The aim is to transform the AGD into an agency that promotes governance through high quality audits and objective reporting to Parliament. In order to prove this process, I have also directed my Ministry to extend maximum cooperation to the Oversight Committees of Parliament.

96. A re-orientation effort is in progress at the Board of Investment (BOI) which is the facilitator of foreign investment. The multifaceted functions that the BOI is entrusted with are being revisited to make it more proactive and focused.

In-house capacity building and strategic planning have been given priority. Investment climate monitoring is being improved to safeguard the nation's competitiveness profile. All this is aimed at making the BOI a strong facilitator.

Many investment projects which have been submitted by foreign as well as domestic investors are stuck in various agencies thereby denying an invaluable flow of investment funds to the country. The practice of sending investors from pillar to post has to be stopped forthwith. BOI therefore need to be the only contact point for investment and it should have the authority to clear all approvals.

A high powered Cabinet Sub-Committee bringing inter-ministerial leadership and providing an Investor Assistance Forum has been set up to strengthen the BOI and clear all bottlenecks to ensure speedy clearance of investment approvals. Investors prefer to do business in a country, free from corruption and inefficiency and the ensuring frustration.

97. Revenue institutions are being modernized to make the country's revenue collection mechanism more effective. They must inspire public confidence.

The Department of Inland Revenue is being modernized with the introduction of a corporate structure, to make tax administration more effective and efficient. Measures are being undertaken to exploit the potential of the existing staff through training and motivation.

Information Technology will be used to the fullest capacity towards achieving these goals. A Code of Ethics is being developed targeting a mindset change among tax collectors and taxpayers. A Tax Charter has been developed encompassing rights and obligations pertaining to taxation and to create greater civic awareness.

The Departments of Customs and Excise are also being restructured to strengthen their institutional capacity and skills and to improve enforcement.

National Poverty Reduction and Growth Strategy

98. The principal objective of our economic growth strategy is to increase the income of the poor, which constitutes 50% of our population. The foundation for this strategy is based on the recognition of hard facts revealed in the 2002 household survey conducted by the Department of Census and Statistics.

Growth is necessary. Nevertheless it must be focused on the need for substantial reduction in poverty. For growth to be pro-poor it must stimulate productivity which will attract the unemployed and under employed as well as the new entrants to the labour force.

Therefore, our goal is to ensure productive employment to all who can work and to enable everyone to earn a decent income from work.

99. Poverty in our country is predominantly concentrated in 8 districts in the North-East, 6 districts in the South, including several plantation districts and in a few other small areas.

Therefore, successful poverty reduction must address specific poverty profiles in those areas by either creating productive jobs there or enable people from there to move to productive jobs elsewhere.

The centrepiece of this strategy is massive infrastructure development in neglected areas as the basis for development of agriculture, industry, tourism and other activities in order to provide employment.

To the maximum possible extent, the poor will be involved in rural infrastructure development projects so that they will have work which augments their income.

100. There is a minority of the poor for whom the general availability of jobs provides no solution. They have few or no family members who can together work to support a family. They are too young or too old or physically handicapped.

For this group special income support programs are needed. There is a large group of low-income families who are temporarily pushed into poverty through no fault of their own but through natural disasters like droughts and floods. For them there is the need for a safety net of temporary employment. Welfare payments need to be reserved for those who have only limited or no capacity to work.

101. A major factor affecting the poor is the failure to reduce unemployment. Countries which have grown rapidly together with employment creation have maintained high per capita income growth. They grow at least over 5 percent in GDP over their population growth.

The required rate of investment for such a level of economic growth has been around 30 - 40 percent of GDP and domestic savings of 20 - 25 percent. In Sri Lanka investment has averaged around 25 - 28 percent of GDP and domestic savings has been around 15-18 percent. Foreign investment has been as low as of 1-2 percent of GDP.

102. In the context of our country, a growth rate of less than 5% is not sufficient either to absorb excess labour or to develop our backward regions. In the near term reaching GDP growth rates over 8% is not practical.

The Government has set a growth target of 6-7% for the medium term. It is very necessary to set a sustainable growth path which will be sustainable in the next 3-4 years and ensure over a 5% per capita income growth.

In a nutshell our aim is to increase the income of poor people and poor regions at a far more rapid pace than in the last several years. Our country needs 6-7% rate of economic growth and more labour intensive strategies that create productive work for the unemployed.

We need also to increase the productivity of those already employed. Such a strategy necessitates the following:

a. Mobilizing more investments, private or public; local or foreign, into labour intensive activities and into the less developed regions.

b. Ensuring an economic environment with stable financial conditions, which is conducive to long-term investment decisions by the private sector particularly by SMEs.

c. Providing a wide range of infrastructure facilities such as electricity, road, transport, communications and water supply at competitive prices.

d. Increasing efficiency to lower cost of government enterprises that supply utilities to be private sector.

e. Encouraging the creation of an educated and skilled labour force and better working environment.

f. Increasing Government investments in infrastructure, particularly in less developed regions that have potential for value creation.

g. Mobilizing higher Government revenue so that the public investment is protected and debt financing is reduced.

h. Improving the environment by conserving and developing natural resources namely, land, water, perennial vegetation etc.,

i. Improving production and productivity of crops, animals and environment to improve income and employment opportunities for the people, particularly the landless poor and women.

j. Encouraging the use of technology in agriculture and industry to ensure high volume production.

103. Economic development can promote peace. The conflict in the North and the East have taken a heavy toll on the resources of the country and also weakened investor confidence.

Therefore, promotion of regionally balanced quick economic growth becomes a necessary adjustment to peace and prosperity. As part of the regional development strategy of the Government, a substantial investment on infrastructure development in the North and the East will therefore be reflected in the national growth strategy.

104. Mr. Speaker, the poverty profile in the plantation community also must be addressed. Their health and education standards as well as access to basic sanitation conditions are well below national standards. We see also the adverse effects of heavy alcoholism, which has affected productivity by as much as 50%.

In this context, the national poverty reduction strategy must have well focused initiatives that will improve basic education, health and skills standards, as well as address needs such as housing, drinking water, and electricity of the plantation workers.

105. The pro-poor growth strategy will also require a decentralized level of implementation in order to get the community involved in development. Local roads, irrigation, drainage, drinking water, health centners and primary schools could be developed with greater community participation.

Our strategy therefore would be strengthen the Divisional Secretariats as the coordination center for overall administration relating to poverty reduction programs. Towards this end certain public expenditure items at each Divisional Secretary has been identified and will be expanded further.

This will help the Divisional Secretary to monitor and coordinate the use of resources made available at divisional level. The government, private sector, local government and social organizations, religious leaders, donors and above all the community would be partners in this process of poverty reduction.

106. Mr. Speaker this Budget will provide a basic financial framework and medium term incentive structure to consolidate our development plans. The 2005 Budget is thus built on 7 pillars:

1. Enhancing effectiveness of public financial management and the efficiency of the delivery system to the people.

2. Transforming the economy to knowledge and technology based as a catalyst of economic growth by ensuring to high value added production using domestic resources.

3. Improving access through infrastructure at provincial/national levels to attract public and private investment.

4. The production base that is largely owned by private, small and medium enterprises to be made the nerve center in the production process.

5. Strategic state enterprises and the public sector will play a complementary and proactive role in making development more meaningful to the people.

6. Reduction in poverty through rural sector development and employment creation.

7. Promoting a caring society and respect for cultural and religious values, leading to a stable democratic society.

107. Mr. Speaker, in support of these seven pillars, this Budget which is part of a three year medium term framework provides Rs. 54.428 million for the education sector - an increase of Rs. 12,477 million over the last year. It provides Rs. 40,408 million for health an increase of Rs. 10,113 million.

Therefore total expenditure on human resource development which is one of our key priorities will increase by Rs. 22,590 million in 2005. Infrastructure development will provide access to growth for our people.

Therefore we will allocate Rs. 55,479 million for national and provincial infrastructure development such as roads, electricity, transport, communications, ports and airports.

These include Rs. 14,180 million to improve access to drinking water. Within this three year framework an accelerated development of irrigation facilities covering the 10,000 tank program, Deduru Oya and Manik Ganga diversion, dry zone minor irrigation schemes, Udawalawe Left Bank, Mahaweli Systems upgrading and River Basin Development programs are provided with Rs. 4,418 million.

In support of production sector activities in agriculture, plantation, livestock fisheries, small and medium industries, enterprise development and tourism a sum of Rs. 26,561 million is provided.

108. Overall social welfare and poverty reduction is also one of our main concerns. Therefore, this budget provides Rs. 32,522 million for Samurdhi, Women Empowerment, assistance to displaced persons in conflict areas, assistance to disabled soldiers, social services and community development activities.

The budget provides Rs. 31,145 million as retirement benefits to pensioners and Rs. 7,371 million for widows and orphans. All these activities are supported with the commitment to preserve our social, cultural and religious values and hence Rs. 2,036 million has been allocated under various religious, cultural and youth development programs.

Therefore, Mr. Speaker, this is a budget for islandwide infrastructure development, improvement of human resources, rural development and poverty reduction, incentives for production sectors and promotion of social and cultural values - all essential for durable economic development and value creation in our country.

109. Mr. Speaker, the fiscal policy options before any Government to balance a budget, is to either reduce costs or increase revenues or accept a deficit and increase borrowings.

The UPFA Government chose to increase revenue, as there is much to be collected. We also chose to eliminate hidden subsidies that benefit the rich and not the poor.

Mr. Speaker, the fertilizer subsidy is nothing compared to the diesel subsidy that the vehicle owning population enjoyed for leisure travel.

In fact, tax concessions, customs duty reductions, exemptions VAT rebates, and such other concessions that the business community constantly seeks and secures from the Treasury, are much more than the entire budgeted subsidy Bill!

These are the hidden subsidies, which the more affluent and influential sections of our community enjoy in our country placing a tremendous burden on the country's annual budget.

110. Mr. Speaker, before the tea break, let me now, summarise our budgetary strategy for the next three years.

1. Within a medium term framework, Government revenue will be raised towards 19 per cent of GDP and generate a revenue surplus in the budget equivalent to 3 per cent of GDP.

2. Public investment will be raised towards 8 per cent of GDP to provide the enabling national and provincial infrastructure, as well as North and East rehabilitation and human resource development facilities.

3. Domestic debt financing will be brought down to 2 per cent of GDP to enhance available resources for development of SME led capital formation and income generation activities.

4. The medium term fiscal strategy will support a macro policy environment that will stabilise exchange rate and interest rate regime through reduction of interest differentials between Sri Lanka and her trading partners.

5. Underpinning this strategy is a nationwide thrust towards poverty reduction and economic growth.

I am placing before this Honourable House the underlying Medium Term Macro Economic Framework as well as the Medium Term Macro Fiscal Policy Framework for your information and study.

1. Mr. Speaker, unlike in the past, where the traditional Budget was developed as a short term exercise to cover objectives for a period of 12 months with little or no progressive continuity of policies in consecutive Budgets, this UPFA Budget has been deliberately prepared within a three year Budgetary framework so as to sequence fiscal measures objectively and more importantly to have a sector focused public expenditure management system, that links the output of the economy based on available opportunities and resources.

Mr. Speaker we needed to change the way Budgets are prepared by line ministries, as we need to depart from ad-hoc individual ministry project based Budgeting to targeted, collective sector based Budgeting.

2. In reviewing past Budgets and line ministry votes, I noticed that there are several overlaps in expenditure and consequent duplication of efforts, as well as glaring gaps with zero allocation of funds for vital areas. We made a start this year to reverse all of this, by giving guidance to the line ministries on medium term policy strategies and getting them to focus on collective actions for prioritised sectors.

The Budget will also for the first time, fill the gaps that always go unfilled in the traditional Budgeting exercise, and will reverse the downward trend in Government revenue to ensure a sustainable correction in Budgetary imbalances.

3. Of course, at the same time, we are mindful of the need for continued support of on-going projects, and their relevance to the national economy. One of the key priorities in expenditure allocation is the emphasis on pro-poor growth strategies in the rural sector to reduce poverty.

Complementing these efforts, several line ministries and NCED clusters, have formulated new development initiatives that deserve recognition. Empowering our local enterprises and entrepreneurs to become competitive players in the domestic and export markets is the key to creating a vibrant economy.

A flourishing local enterprise base will result in not only an increase in jobs and incomes, but also profits which can be channelled into even greater growth investment opportunities.

Our country is only tapping a silver of the entire economic value-chain arising from our resources, and this Budget will hopefully unleash the entrepreneurial spirit in all of us to unlock our full value potential.

Therefore this Government will fully back new capacity value creators.

4. Mr. Speaker, I just spoke about our policy on expenditure. Now let me touch on the all important revenue side. Our prime objective is fiscal policy management is the reversal of the declining trend in Government revenue, which has fallen to 15.7% of GDP in 2003, lowest in recent years.

No Government can make successful fiscal reforms unless it addresses the root cause of fiscal instability that shows a steady decline in Government revenue. Our income tax is the lowest in the region, languishing at 2% of GDP.

In the early 90s, Sri Lanka maintained a tax revenue ratio of around 20% of GDP. We had a strong tax base, of which, 5% of GDP was raised from plantation agriculture alone.

However, this revenue source is no longer available with the export activity being made free from export taxes. With the increased reliance on indirect taxes, tax system also has become regressive. in this background our challenge is not only to raise revenue to a level that will sustain our economic stability, but also to improve its progressive characteristics to sustain a viable tax regime.

5. Mr. Speaker, this Government appreciates the contribution made by all taxpayers, especially those who make proper declarations, and we think it is unfair to burden them any more because of the actions of the tax evaders! It is the second group that this Budget will target and not the first.

We will not penalise those who have accumulated wealth by properly accounting for it, and can show that they have paid taxes on the money that was used to purchase those assets.

6. Let me now present my Budget proposals to complete my overall presentation.

National Action Plan for Children

7. On the initiative of Her Excellency the President and with the collaboration of UNICEF, relevant line ministries, provincial authorities and the Department of National Planning of my Ministry, a National Plan for Children (NPC) for the children of Sri Lanka 2004-2008 has been now launched.

The overall objective of the NPC is to ensure universal access for services that children require for their full and free development as well as to provide them with the opportunity to develop their individual capacities in a safe and enabling environment. Some salient targets to be achieved through the implementation of NPC are the following:

* Increase in the enrolment of pre-school children from 60% at present to 80% by 2005.

* Increase in the primary school enrolment from 95% to 100% by 2008.

* Reduction in the infant mortality rate from 12/1,000 live births to 8 per 1,000.

* Reduction in maternal mortality from 42/100,000 to 23/100,000.

* Increase in the access to safe water for 70 - 80% of the child population by 2008.

* Strengthening the enforcement of law pertaining to child labour and reduce domestic child labour by 30% each year during 2004 to 2008.

* Eradicate child sex abuse.

* Protect children from all forms of abuse, neglect, exploitation and violence.

8. Mr. Speaker, this program requires Rs. 14 billion over the planned implementation period. We have already identified Rs. 2.2 billion from the National Budget. We are also seeking donor assistance. But it is also a golden opportunity to show our citizen's social responsibility.

Therefore, Mr. Speaker, I propose to impose 0.25% cess under the Finance Act on all taxes other than VAT, PAL, debit tax and withholding tax on interest income to be earmarked for the National Action Plan for Children.

Although this may not generate a large sum, it would reflect our collective responsibility and partnership towards building a better world for our children. Expenditure under NAP is separately identified in the Budget estimates to ensure better accountability and transparency. I expect to collect Rs. 450 million from this cess.

'Gamata Thaakshanaya' - Supporting Science and Technology for National Development

9. Economic development cannot take place without technological advance. Appropriate technology can be developed only by encouraging local science and technology institutions to provide necessary research and development.

At present Sri Lanka has one of the lowest levels of funding of about 0.18 percent of GDP for R&D in the world. I propose to raise this over the next five years to at least 1 percent of GDP.

The reversal of brain drain, International collaboration in research, the popularization of science, the exploration of the full extent of our natural resources, the promotion of innovation and ICT will therefore need funding.

10. For technology to be transferred effectively to the micro small and medium level entrepreneurs, the Ministry of Science and Technology will establish a computer linked Vidatha resource centre in each of the 320 Divisional Secretary areas.

Each of the Vidatha resource centers will have a science and technology graduate, a computer operator and a link agent. At village level, science & technology societies will be formed to transfer technology to the village and promote SMEs with a view to provide employment and to reduce poverty.

These Resource centers will be linked to the SME Bank and Regional Development Banks to assist in development banking, formulating information to the private sector and the IDB and EDB for technical support. This program will be implemented during a three-year period 2005-2007.

I propose to provide an additional Rs. 300 million in 2005 to the Ministry of Science & Technology in support of its "Gamata Thaakshanaya" - the Vidatha program.

'Pubudamu Wellassa'

11. Badulla - Monaragala Districts remain the poorest and neglected districts in the island. Poverty remains high. School enrolment, access to drinking water, and basic health facilities remain well below national averages. The agricultural base which provides the main livelihood to the people is vulnerable to severe droughts and other climatic conditions.

They have poor infrastructure facilities. In this background a three-year accelerated development program dedicated to these two districts, providing a wide range of infrastructure facilities will be implemented under the 'Pubudamu Wellassa' program.

The total cost of this three-year program is estimated at Rs. 1,200 million. I propose to earmark Rs. 300 million into 2005 to start this program beginning with the poorest villages in all the divisions in Badulla - Monaragala Districts being given priority.

'Rajarata Navodaya'

12. Several villages of the districts of Anuradhapura and Polonnaruwa Districts and border villages have remained poor due to lack of proper maintenance of minor irrigation schemes, feeder roads, basic health facilities, and proper transport.

A 3-year development program has been now formulated to address infrastructure gaps which are not covered under the existing programs of line ministries and Provincial Councils. Total project cost to be implemented during 2005-2007 is estimated at Rs. 1,600 Million of which Rs. 300 Million will be provided in 2005.

'Dayata Sevana' - National Housing Program

13. The Freedom Alliance 'Rata Perata' sets a target of 300,000 housing units to be developed for low and middle income people. The program which has now being finalized to achieve this target through various initiatives will be launched next year.

Having recognized the importance of providing housing as a basic need, and its beneficial impact in creating assets among the poor as well as positive backward and forward linkages, the Government proposes to increase the Budgetary allocation for housing in 2005 by Rs. 500 Million and augment it further in the next 2 years.

Priority will be given to low income housing requirements of shanty dwellers, the plantation community, coastal fishing villages and the rural sector.

14. Further, in order to encourage residential house construction for low and middle income earners, I propose to grant a 7-year tax exemption to an owner of a house on the rental income of that house if the floor area of the house constructed for renting does not exceed 1,500 Sq.ft.

15. With regards to house construction, it is also necessary to simplify the approval procedure which is not only complex and time consuming but also leads to corruption and loss of entrepreneur initiative. Therefore the Construction cluster of the NCED together with the National Housing Development Authority (NHDA) simplify the approval procedure for housing construction.

16. I also propose to allocate identified lands among property developers under BOI incentives for the development of residential houses at affordable prices.

Floriculture Sector Development

17. Mr. Speaker, our country has a higher diversity of exotic flora an ample opportunity for its productive exploitation. It has potentials of generating annual growth of 7 - 10% at present Rs. 1 billion worth of export earnings are brought into the country by large number of small growers as well as large scale exporters engaged in floriculture industry.

This sector requires intensive management and expert advice to meet the quality standards to compete in the international market. Small and medium growers are unable to obtain required technical know how and other facilities.

Most of the abandoned paddy lands in the wet zone areas particularly in the Western province and under utilized coconut lands can be productively used for this industry. It can provide a good source of employment as well.

18. Therefore I propose to allocate Rs. 20 million provide the necessary technical know how and extension services to small and medium growers in the floriculture industry. As a further incentive agricultural seeds and plants will be exempted from VAT.

Dairy Industry

19. Our Government is giving high priority to make the country self-sufficient in local milk production. This will provide an additional income source to rural people in addition to saving foreign exchange spent on the import of milk products.

The Department of Animal Husbandry has been strengthened to provide the required extension services. MILCO has been transformed into a successful business venture. The Livestock Farms are being redeveloped and smallholder farming is being encouraged. Large private sector investments in the development of livestock and its value additions is encouraged.

The Livestock Cluster of the NCED has formulated an integrated action plan and the Government has already increased the producer prices to Rs. 16/Lt. A ten-year national dairy buffalo development project, popularization of the use of herbal veterinary preparations for treatment of animal diseases, reduction in the cost of animal feed ingredients and the importation of diary animals are also now being implemented.

Therefore, in order to make livestock a thriving industry, I propose the following:

a. Increase milk producer price to Rs. 20/Lt

b. Removal of VAT on animal feed

c. Allocate a further Rs. 50 million for the development of Dairy Industry in rural areas.

d. Gradual phasing out of the prevailing duty waiver on milk powder to endure remunerative prices to local dairy farmers.

Assistance for Organic Product Exports

20. Sri Lanka exports a range of organically certified products such as tea, spices, essential oils, herbs, desiccated coconut, oil seeds, pulses, cashew and fresh and dried fruits and vegetables. The local supply base of these products consists of mainly out grower, community and estate plantations.

This system provides for a greater farmer/exporter link which helps small and medium producers. Since the certification is exclusively done by the International certifying agencies accredited to the International Federation for Organic Agriculture Movement (IFOAM), export costs go up.

Therefore I propose to set up a separate fund of Rs. 10 million to share this cost to enable our entrepreneurs to gain a foothold in the growing international market for organically certified products and also declare selected areas as watershed protected organic export zones in the country and to set up Organic Product Zones.

Development of Value Added Cinnamon Export Industry

21. Sri Lanka produces more than 90 percent genuine cinnamon (Cinnamomum Zeylanicum Blume) in the world. Our exports account for 63 percent of all spice exports in the world. Cheap low quality alternatives have begun to enter the global market leading to increased competition.

There is an urgent need for increased investment in research and product development for value addition in cinnamon. Efforts to give "Ceylon Cinnamon" maximum protection under WTO agreement are being intensified. Investments in marketing "Ceylon cinnamon" is essential to combat this competition.

I propose to impose a cess of Rs. 2.50/kg. or 0.5% of the value whichever is higher for the development of this industry. The Government will contribute Rs. 10 million to set up a Cinnamon Development Fund.

Incentives for cultivation and Value Addition of rubber

22. Recently a cess has been levied on the export of raw rubber and import products based on the natural rubber content in order to increase the export of value added products.

I propose to encourage the rubber cultivation by increasing the replanting subsidy to Rs. 100,000 hectares. Expected cess collection of Rs. 475 million will be earmarked to increase the productivity of the rubber sector and expand cultivation.

Incentives for Foundry Industry

23. A cess of 25% will be imposed on export of Ferrous and non-Ferrous in the form of scrap or any other form based on London Exchange Metal Price in order to ensure continuous supply of raw material required by the local industry.

The expected income of Rs. 120 million from this cess will be utilized for upgrading technical skills and improving the productivity of the Foundry industry.

Prawn Farming

24. Sri Lanka's prawn farming has declined rapidly in recent years. This is due to lack of infrastructure investments and the absence of a proper regulatory system for disease control. A new project is now being implemented as a BOI zone in Puttalam - Chilaw area and it is proposed to increase the annual production in 2005 to 5,000 mt. from current levels of 1,500 mt.

It is expected to generate 30,000 jobs and US$ 50 million in export earnings. As an incentive, I propose to allocate Rs. 20 million for immediate infrastructure rehabilitation work and environment protection.

The National Aquaculture Development Authority (NAQDA) will work on the necessary amendments to regulate unauthorized farming practices and promote environment-friendly farming. I also propose to remove VAT on shrimp feed to improve the cash flow of shrimp farmers.

I expect local banks which have shown a keen interest in this export industry to join hands with the Government to exploit the full potential of this industry by extending financial assistance to prawn farming.

Osu Gammana and Reforestation Program

25. Sri Lanka's traditional ayurvedic industry heavily depends on the import of basic raw material for the manufacture of ayurvedic medicine. Annual import cost is over Rs. 200 million (US$ 2 million). These are products that can be cultivated in this country.

Very valuable medicinal and aromatic plants are not grown in adequate quantities. Having recognized the potential of developing ayurvedic plants, the Ministry of Indigenous Medicine has formulated a strategy to develop selected villages to grow medicinal plants.

Several private sector ayurvedic manufacturers have also made similar project proposals. Therefore, I propose to allocate Rs. 100 million for the successful implementation of this program in selected areas in the country.

26. Sri Lanka has more than 3,350 species of plants, about 25 of which occur only in this country. Deforestation is taking place at a dangerous rate.

Approximately 42,000 hectares are being lost each year affecting our biodiversity. We need to preserve this valuable asset through an aggressive re-forestation program. In order to intensify this, I propose to earmark an additional Rs. 50 million to set up a biodiversity and reforestation fund.

Model Farms for Fruits and Vegetables

27. As an integral part of the national export drive, fruits and vegetable producers and exporters the BOI, Export Development Board (EDB) and the Mahaweli Authority, have prepared a new private - public partnership program for Mahaweli areas.

Lands have been identified for long-term leases for prospective investors who are required to set up nucleus farms in identified locations. They will develop outgrower systems to promote high quality fruits and vegetables.

The extent of each nucleus farm will be limited to 20-25 acres. This nucleus would provide seed and planting material and agricultural extension services to outgrowers.

Investors will be responsible for identifying suitable crops for nucleus farms and encourage outgrowers to grow them. Each nucleus will be working with 50 to 100 farmers with forward buying agreements. In terms of this program the Export Development Board proposes to develop 34 such farms in 2005 and 66 in 2006.

Medium Scale Plantation

28. Mr. Speaker, there are a large number of professionals, particularly those who are associated with the plantation sector, who would like to enter production.

We could sell them plantation lands upto 50 acres. They could not only invest their savings but also bring to bear their expertise in growing high yield plantation crops which will give them an adequate monetary return. At the same time their holdings would serve as model production areas, which can spearhead the transformation of small and medium scale land holdings.

I will therefore, with the concurrence of my colleague, the Hon. Minister of Plantation Industries identify estates of upto 50 acres from the lands presently held by JEDB and SPC for the purpose of alienation to these worthy middle class planters and other professionals.

Samurdhi Program

29. Under the Samurdhi program the Government provides Rs. 10 billion to be distributed among poor families which account for about 40% of the population.

While continuing to provide this assistance to Samurdhi beneficiaries our Government proposes to embark on employment creation and income generating programs for Samurdhi recipients to move them out of poverty levels.

Towards this the Ministry of Samurdhi and Poverty Alleviation has now developed a "Suwahas Jana Pubuduwa" program design to empower 100,000 Samurdhi beneficiaries through self-employment and micro enterprises and 50,000 village development activities.

In terms of this program all 50,000 village development activities will be executed in all Gramasevaka divisions through Samurdhi Societies and community participation.

30. The World Bank assisted Gami Diriya program with Rs. 5,000 million will be implemented in Badulla, Moneragala, Hambantota, Matara, Galle and Ratnapura. This program will be extended to 143 villages in these 6 districts.

The program is designed to form savings and investment societies in these villages. The Asian Development Bank (ADB) has activated a program to expand rural finance through the strengthening of Samurdhi banking societies. Micro financing projects will be further extended through the National Development Trust Fund in 2005.

In support of expanding all these new initiatives, I proposes to provide Rs. 450 million to the Ministry of Samurdhi and Poverty Alleviation to develop micro enterprises and self-employment projects for Samurdhi beneficiaries to move them out of poverty.

Off-Shore Export Shopping Village

31. An off-shore export shopping village will be set up to allow all up market, high-value added export manufactures in Sri Lanka to sell their products for foreign currencies.

The Village, which is to be developed and promoted by the BOI and Tourist Board, is expected to be a major tourist shopping centre in the region. This will provide Sri Lanka export industries with an opportunity to establish global links.

National Accreditation Board

32. Demand for quality products is on the rise. Our industries need to be supported by a network of accredited certification bodies to meet this challenge. Credibility and acceptance of test reports and certificates are necessary to support a wide range of Sri Lankan products now ready to enter global markets.

Therefore, in order to fill this gap, I propose to establish a National Accreditation Board for conformity assessment of technical regulations, standards, and other regulatory measures coming under health, safety and environment. A sum of Rs. 10 million is provided in the 2005 Budget to start this work immediately, particularly in the context of the revival of export oriented SMEs.

Construction Industry Revival Initiatives

33. The construction industry is vital for economic development. However, local construction firms often find it difficult to submit bid bonds and raise funds due to lack of proper securities. Therefore to provide guarantees, I propose to increase the capital of the Construction Industry Guarantee Fund, to Rs. 500 million.

A cess of 0.25 from small contractors, 0.5 percent from medium contractors and 1 percent from all large contractors on their contract turnover will be imposed and earmarked for the fund. The Government will also contribute Rs. 250 million towards this fund.

34. The non-availability of required skills is another constraint faced by the local construction industry. Therefore, I propose to set up an Academy for Advanced Construction Training - jointly with the National Construction Association of Sri Lanka. I propose to allocate Rs. 100 million for this joint venture which will be beneficial not only to the local construction industry but will also create a core of construction employees from skilled workers to technical managers.

Housing for Migrant Workers

35. Migrant workers have become the main strength of our foreign exchange earnings. Their annual remittances have now reached US$1,500 million. These migrant workers deserve assistance from the Government. Therefore a new housing loan scheme will be implemented for returning migrant workers.

They will be required to maintain a minimum deposit of US$ 250 in NRFC account with any of the State banks to qualify for a loan upto a maximum of Rs. 250,000 to purchase or construct a house at an interest rate of 5 per cent per annum.

The interest subsidy and the loan guaranteed against the deposit will be provided by the Sri Lanka Foreign Employment Bureau.

Human Resource and Skills Development

36. The nation's workforce, be it the skilled labour, management, or professionals, in both the public and private sectors, are lagging in adopting global best practices.

The need to be familiar with contemporary methods and processes, including the use of technology and other productivity enhancement tools. This defect has negatively impacted on Sri Lanka's competitiveness, it also reduce the employability of the work force.

Therefore, the Government plans to increase the intake to vocational training institutes to 50,000. In order to give added value to the existing vocational training institutes, a new University of Vocational Technology will be set up to provide avenues for middle level persons to go up to technology degree level.

The "Tharuna Aruna" program will be reoriented into Skills Development Fund. It will be a collaborative project with the private sector to coordinate skills needs of the private sector and to facilitate training programs in the Vocational and Technical training institutes in the country.

The private sector will be involved in organizing vocational training programs for those leaving for foreign employment.

The Foreign Employment Bureau will provide the required funding for all skills development needed regarding overseas opportunities. In order to make this partnership project a success, I propose to allocate Rs. 100 million. Private sector and NGO are expected to also contribute towards this venture.

Fuel Subsidy

37. There are approximately 200,000 three-wheeler operators in Sri Lanka. They have generated self-employment while providing affordable transport for a million people daily. I am well aware that they are faced with hardships due to recent fuel price increases.

The Government has decided to mitigate their burden from future price increases. In addition, I propose to exempt leasing of three-wheelers from VAT to reduce their cash flow problems.

Moreover, I propose to offer confessional funding for those three-wheeler operators who are willing to convert three-wheelers from Petrol to Gas.

Similar concessions will also be extended to small fishermen with the assistance of the Ministry of Fisheries. A suitable subsidy mechanism will also be considered for the public transport to insulate the providers from the impact of large price increases. Our aim is to limit the fuel subsidy to the most deserving people.

Incentives for Advance Technology

38. With emphasis on SME based private investment, I propose to implement a new incentive scheme to encourage small and medium industries to acquire advanced technology in order to raise productivity and improve competitiveness.

Under this scheme, new companies investing over Rs. 5 million and existing companies investing over Rs. 2 million will be given duty free import of new machinery. The SME Bank will provide the necessary financial support for this venture.

Software Exports and Business Process Outsourcing

39. The software industry has considerable potential to penetrate export markets. There are about 100 small and medium scale enterprises together with 5-6 large companies now in operation in this country with foreign exchange earnings around US$ 75 million.

This industry has targeted US$ 1 billion export earning by 2012 with a total workforce of 40,000 taking advantage of the skills available in Sri Lanka.

In order to support this industry, the public sector will be required to give preference to locally produced software and services.

Further public sector agencies will ensure that a minimum of 50% of value addition from a local partner in Sri Lanka if the software is bought from a foreign supplier. As an incentive to our private sector to use local software, I propose a 100% depreciation in the year of purchase of all locally produced software.

The SMEs will be provided with concessional funding for the purchase of local software products and services. The BOI will target Business Process Outsourcing Operators to locate in Sri Lanka under its incentive package.

SME Bank - Jathika Vivasayaka Bankuwa

40. As mentioned earlier, the Government has already taken steps to set up a new SME Bank with a capital base of Rs. 5,000 million. It will provide direct funds, credit guarantee schemes, equity and debt capital, restructuring aid etc. to the SME sector.

I propose to transfer Rs. 5,000 million held in various Government Accounts as capital contribution of the Government. A provision will be created in the Budget estimate. The SME Bank will commence operations in January 2005.

41. In addition to the SME Bank, the Government will establish a SME authority-modeled on the lines of EDB and BOI to function as the apex body for SME development. I propose to allocate Rs. 100 million for this authority to commence work in January 2005.

A New University for Uva-Wellassa

42. There are twelve conventional universities and the Open University conducting various degree programs in the country. These universities with about 80,000 students operate in their full capacity but can absorb only 2.3 percent of eligible students.

This is grossly inadequate to support the country's long-term development needs. Any meaningful increase in the university intake would require a systematic creation of new ventures.

For many years, the public in the Uva Wellassa Province have been asking for a center for higher learning. For this province which is incidentally the only province without a university, Her Excellency the President in her capacity as Minister of Education has proposed the establishment of an University at Badulla.

The new university will cater to modern demands of science, Mathematics, Information Technology, Business Management, Agricultural Engineering and Animal Science.

Student admission to this university would commence from the 2005 Advanced Level Examination intake. A fully residential university will be developed and completed by April 2006 at a cost of Rs. 350 million.

Hostel Facilities for the Rajarata University

43. The Rajarata University, which is targeted to have a student population of around 1,800, provides accommodation facilities only for 586 students. Provision of a fully-fledged high learning environment is the priority of the Government and it is expected to develop these facilities at Mihintale and Pulliankulame areas. The Government proposes to allocate Rs. 78 Million for this project.

Building Facilities for the Eastern University

44. The Trincomalee Campus of the Eastern University, which was established in June 2001, is handicapped due to insufficient building space for both lecture rooms as well as for residential facilities.

As the existing location cannot be further developed, the Trincomalee Campus will be relocated in a land area of 250 acres at Konesapuri in Trincomalee. I propose to provide Rs. 91 million for phase I, which will develop hostel and lecture room facilities as well as an administrative complex.

Youth Employment

45. Mr. Speaker one of the first priorities of this Government was to provide employment to unemployed graduates. We have selected about 42,000 such graduates to the Government service.

They are now going through their orientation program in the public service. The orientation program covers communication skill, English as a working language, awareness to IT, economic policy and management.

We have made a provision of Rs. 2,885 million in the 2005 Budget estimates to place them on permanent positions in the public service in January/February next year. In addition a further provision of Rs. 1,100 million has been made to recruit 30,000 Advanced Level qualified youth to vacant positions in the public service.

Mr. Speaker the recruitment of these graduates and non-graduates youth will add new blood to the public service with training in languages like Tamil and English, software usage and variety of other modern skills required to provide an efficient and modern public delivery system.

Film Academy

46. Our Government has taken special steps to improve the local film industry. There has been a demand by the industry that a film academy should be set up for the benefit particulary of young professionals. Today, TV and film productions engage a large number of young people.

Many of them have been associated with productions, which have even received international recognition. I, therefore, propose to set up a film academy for which premises have already been found within the film complex in Colombo.

Fortunately, this land adjoins the Film and Television Institute which was set up with funding from the Republic of Germany. I propose to set up a film and TV Academy which could draw on the resources of the TV Training Institute as well. It will be possible to obtain foreign funding particularly from UNESCO for this project.

I propose to include a token contribution of Rs. 1 million in the vote of the Ministry of Cultural Affairs, which will be supplemented with foreign funding during the course of 2005.

Assistance to Develop Craft Products for Export Markets

47. There is considerable export potential for crafts products such as handloom, soft-toys, handloom fabrics, giftware, curtaining and linen manufactured by a large number of small entrepreneurs in most parts of the country.

Core group of SMEs manufacturing craft products targeting niche markets will be assisted with designs and a better range of products, external market access, concessionary micro credit schemes and development grants.

Having seen the strengths of the entrepreneurs in recent industrial exhibitions at the BMICH, I propose to set up a large shopping complex cum exhibition center in Colombo to provide a permanent marketing infrastructure to craft product manufactures.

This will be jointly developed by the Board of Investment, Export Development Board, Tourist Board, National Craft Council and Laksala using EDB and Tourist Board cess funds.

Export Development Incentive Schemes

48. Recently the Government imposed a cess on selected products with a view to providing incentives to local value added production with export potential. These industries require initial support by way of technology infusion and product development.

In order to promote such diversified export activities, an incentive scheme will be implemented for non-traditional exports than primary products and apparels with a minimum 35 percent local value addition. A cash grant will be made annually on the incremental value of exports.

Branding of unique Sri Lanka products with an image differentiate in the international markets will be promoted. Selection criteria will be gazetted soon to make it a transparent process.

Showroom space will be provided at the arrival and departure lounges at the Bandaranaike International Airport, and the exemption from VAT applicable to imported goods at duty free shops for payment in foreign currency will be extended to locally supplied goods as a means of popularizing Sri Lankan products.

Apparel Industry

49. The apparel industry which employees 300,000 people directly and has become US$ 2.5 billion export industry is entering a decisive stage with the elimination of quotas from 2005 onwards.

However the industry together with the NCED cluster have formulated a strategy to consolidate its investment and export potential in a competitive global environment. Towards promoting the apparel industry, I propose to give priorities to the following;

a. Financial Assistance to Technology Improvements

A large number of apparel industry manufactures fall into the SME category in terms of the international standard. The urgent need for them is to improve competitiveness. This requires upgrading of infrastructure and technology to comply with quality standards.

Some of such manufactures do not have access to long-term financial assistance. Therefore I propose to provide a guarantee through the proposed SME Bank to enable banking and financial institutions to provide required working capital and investment needs of the apparel industry to modernize their factories.

A total sum earmarked for the issuance of this guarantee will be Rs. 600 million so that the industry will be able to raise Rs. 2,000 million from the banking system and other financial institutions.

b. Simplified VAT application

The application of Value Added Tax to the apparel industry causes considerable administrative and procedural difficulties. By definition export being zero rated, the apparel industry is eligible for a full input credit.

This industry being dependent heavily on a large volume of raw material, the present deferral mechanism imposes heavy administrative work on the Department of Inland Revenue as well as to the industry.

I therefore propose that all apparel manufactures who are registered with the Textile Quota Board be exempted from the payment of VAT on the import of textiles and the ancillary inputs on condition that each manufacturer both BOI and Non BOI does file quarterly returns and accounts certified by the Textile Quota Board with a statement showing input and output to the Commissioner General of Inland Revenue.

I expect a considerable efficiency gain in the industry as well as in the Department of Inland Revenue from this change.

c. Incentives for Garment Buying Offices

Garment buying offices in Sri Lanka render an extremely valuable service in facilitating overseas buyers to place their orders with Sri Lankan manufacturers. Their services need to be encouraged. When quotas are removed they would become trade representatives who could support sourcing from Sri Lanka.

Hence I propose to include the services provided by such companies in the Zero rated category for VAT so that they will be able to maintain their international competitiveness.

d. Incentives for Productivity Improvement

Productivity improvement is essential for a successful transition towards the post 2005 trade regime. Therefore, I propose a grant of Rs. 100 million for productivity improvement measures in the apparel industry. A further Rs. 50 million will be granted for international image building campaigns to project the high quality corporate image of the apparel industry in Sri Lanka.

e. Incentives for Product Design

A fashion Design Degree Program is offered by the University of Moratuwa with consultancy assistance from the London School of fashion.

However, this program is not functioning at an efficient level due to lack of funds for staffing and infrastructure requirement. Therefore I propose to provide Rs. 100 million to improve the designer degree program at the University of Moratuwa in support of promoting up market apparel exports products from Sri Lanka.

f. Backward Linkage

BOI will set up an Industrial Park with a waste and effluent treatment plant at Biyagama Zone to facilitate fabric manufacturing in Sri Lanka for the use of the Apparel industry.

Incentives for Small Exporters

50. Sri Lanka's success in creating intermediate supply sources heavily depend on the recognition that such products are supplied to the exporters by small and medium manufacturers.

The integration of this sector into our export industry therefore is essential to increase value added export from this country and promote backward integration.

However, these supplies are not recognized in the Value Added Tax legislation as zero-rated supplies. As a result, the value added tax system has become a major barrier to promoting backward integration in our export development strategy.

Therefore, to keep in line with our development objectives for the creation of domestically sourced export industry, local suppliers of exportable products to an export company registered with the Textile Quota Board and finished goods supplied to BOI registered trading houses for export by a registered manufacturer will be recognized for the purpose of input credit under the Value Added Tax.

Alternative Energy Development

51. The small hydropower sector which began as a 1 MW power plant commissioned in 1996 has now emerged as a reliable player in the energy field. 28 small hydropower projects have been commissioned with 65 MW of install capacity. 30 projects with 143 MW of capacity projects are in the pipeline, of the World Bank funded Renewable Energy Program.

The CEB has issued letters of intent for 210 MW small hydropower projects for future development. This will raise the supply of around 300MW only from small hydropower units of less than 10 MW. There are also a large number of sites in Mahaweli regulated waterways with a large investment potential.

All these projects can be commissioned before 2008. In order to provide incentives for these investments by local investors I propose to guarantee an all inclusive tariff rate of US $ 0.06 cts. per unit for such projects.

The Treasury will support the Ceylon Electricity Board by sharing such expenditure. I propose to encourage local SMEs to develop hydropower projects of upto 50MW, through public-private partnership arrangement.

In order to exploit the full potential of Dendro power and solar energy the standard power purchase agreements will be modified.

52. As renewable energy sources have gathered momentum in rural areas, I propose to exempt the supply of such energy sources providing electricity to rural areas from VAT.

The Government owned Private Sector Infrastructure Development Company Ltd (PSIDC) therefore would be reoriented to perform as a public private infrastructure financing facility, to fund small and medium infrastructure projects and alternative energy projects, Mini hydro, Dandro power etc. will be given top priority.

Incentives for the Textile Industry

53. With the complete liberalization of the global textile industry, our manufacturers have gone through a difficult transition.

However they have admirable resilience in a competitive market environment. Recognizing the value addition contribution made by this sector, the Government has encouraged the local textile industry to manufacture quality products to satisfy a large local requirement.

With this objective this Government decided to source school uniform material which are distributed among 4.5 million children in this country to the local textile industry. The local textile industry successfully took up this challenge. It has now produced all of the next year's requirement on time.

Mr. Speaker, I am proud to state that free school uniform material that will be distributed among schoolchildren in 2005 were manufactured within a short period of time in this country.

Taking this process forward the President has directed that all textile requirements of armed forces, police, health services, prisons and other Government agencies must also be procured from local textile manufacturers.

In order to facilitate this operation the Government will use the expertise of the Textile Quota Board to make in a transparent manner. Priority will be given to the manufacturers who have successfully supplied school uniform material for 2005.

The potential of the local textile industry, if successfully managed is over US $ 100 million. This process over the medium term will also help the local textile industry to appropriately integrate itself with the apparel industry whose requirements are very large.

Such textile manufacturers will be assisted through the new SME Bank to restructure and modernize their factories.

Incentives for Fishermen

54. Small and medium fishermen need assistance to enable them to purchase their fishing nets, equipment and also to replace them on a regular basis to sustain their income.

I therefore, propose to implement a special loan scheme enabling them to purchase fishing boats and equipment at concessionary interest rates. These lending schemes will be formulated by the new SME Bank to promote a comprehensive micro enterprise-lending program.

Modernization of Small and Medium Paddy Mills

55. Small and medium paddy millers scattered primarily in rice producing areas play a significant contribution in the value change in rice processing, storage and marketing. Our Government having recognized their important role restructured their loans with the assistance of the State Banks.

The Government will share part of the non-performing debt as a measure of relief to Paddy Millers. The State Banks have already arranged working capital requirements of these mills to be prepared for the forthcoming Maha harvest. I also see a strong need to modernize these mills to improve quality of their milling. Therefore, special credit line will be implemented through the SME bank for this sector in 2005.

Gem and Jewellery Industry

56. We have to build up our gem and jewellery industry from the bottom up. I am advised by the relevant trade chambers that the establishment of modern, well equipped lapidaries is a pre-requisite for such a re-generation.

Accordingly, the new SME Bank that we propose to establish will be instructed to fund the setting up of 10 lapidaries spread out in the gem producing areas which will be able to add value to the raw stones.

This approach to modern cutting and polishing of precious stones should not only raise the quality of our product in the local and international markets, but also create employment opportunities in the manufacturing field.

Such skilled workers can easily find employment both in the local industry as well as in the gem centers in the region.

Development of Religious Activities

57. All temple funds are deposited, managed and controlled by the Public Trustee/Buddhist Commissioner under the Buddhist Temporalities Ordinance introduced in 1931.

It has become necessary to amend this Ordinance to recognize the Sangha Council comprising all Nickayas together with sub councils and advisory councils to control and manage funds and utilize the same for the development of Buddhist activities, restoration of Buddhist Temples including those in the North and East and for the furtherance of Buddhism in Sri Lanka and abroad. Therefore I propose that this ordinance be amended to utilize these funds in a more desirable manner.

Our Government deeply appreciates the leadership given by religious leaders to uplift poor rural families and develop their religious values through community empowerment programs. I propose to allocate an additional sum of Rs. 100 million in support of such programs.

58. Mr. Speaker, the religious Sunday Schools play a very vital role not only in religious education, but also in transferring traditional ethics and values. It is my intention to encourage such religious Institutions.

Therefore, under the special grant of Rs. 100 million, free uniform materials will be provided to all teachers of Sunday Schools, irrespective of their religious denomination. I am also exploring the possibility of setting up of a training college for Sunday school teachers.

These teachers who have a high moral commitment to creating an ethical and peaceful environment in the country need to be supported to improve their pedagogical skills.

Revenue Proposals

Value Added Tax (VAT)

59. Mr. Speaker, the single rate VAT reflects regressive characteristics in our tax system. The taxing luxury motor vehicles and an essential commodity like Dhal at the same rate of 15% while exempting precious Gem and Gold is not socially reasonable, however strong the argument may be for a single rate tax.

Therefore, I propose to create a basic commodity rate of 5%, for essential food items and a luxury rate of 18% for selected consumer items. The standard rate of 15% will apply for general items.

60. Accordingly I propose to reduce VAT on sugar, dhal, potatoes, onions, dry fish, milk powder, vegetables and chillies from 15% to 5%. Input tax credit under items taxed at basic rate of 5 per cent will not be allowed other than VAT paid on the purchase of vehicles for transport and machinery for production.

61. Further I propose to increase the VAT rate from 15 per cent to 18 per cent on any kind of liquor, air-conditioners, refrigerators, washing machines, TV sets, TV antennas, cameras, jewellery, motor vehicles other than three-wheelers and passenger buses and service such as hotel services for wedding receptions and such other kinds of receptions including hiring of halls. Input credit will be restricted to 15 per cent. Further gem and gold which is currently exempt will be taxed at the rate of 15 per cent.

62. I also propose that the valuation at the Customs point on goods imported will be uplifted by a 5 per cent mark up on the CIF for charging VAT in order to capture trading margins. Further the Port and Airport levy will be part of the VAT base to ensure consistency.

63. Mr. Speaker, with these modifications I anticipate to mobilise additional revenue in addition to bringing about a more equitable distribution in the tax burden.

Vat on large investments

64. Application of Value Added Tax on large investment projects imposes upfront cash flow problems to investors engaged in investments of that scale.

Therefore, I propose that import of project related capital goods other than the items in the negative list of a new venture during the project implementation period not exceeding three years from the date of commencement of the project will be free from VAT, if such projects involve an investment exceeding Rs. 100 million and liable to VAT once the project is completed.

Income tax exemption to agriculture

65. Our government is committed to develop agriculture. In order to encourage investment in agriculture I propose to exempt income/profit arising from cultivation of land with plants of any description and sale of such unprocessed products for a period of 5 years effective from 1.4.2005.

This should provide incentives for the local private sector to move onto high value agricultural crops including fruits, vegetables, floriculture etc.

Removal of income tax exemption from the sale of Gold, Gem and Jewellery

66. This is an area where considerable amount of revenue is earned without paying taxes except VAT by a few jewellery manufacturers. It is necessary to bring them in to the tax net. Therefore, I propose to remove the exemption of tax on income earned from the sale of Gem, Gold or Jewellery.

However in order to encourage export earnings the income earned from export of Gold Gem and Jewellery will be exempt from income tax.

Concession to senior citizens

67. Our senior citizens deserve special attention and respect. We need to increase saving for them in addition to assisting them in their retirement.

I therefore propose to exempt interest income from special saving schemes offered by the National Savings Bank and the two State banks for a citizens over 60 years of age from withholding tax on interest income up to a limit. Interest income not withdrawn up to age 60 years will also be permitted to qualify for this concession in order to promote long-term savings.

An additional 1 per cent interest over and above the normal interest income from fixed deposit accounts will be granted to fixed deposit accounts held by senior citizens.

I also propose to exempted interest income up to maximum of Rs. 100,000 per annum for senior citizens on deposits made in State banks. This is in addition to normal tax-free threshold income of Rs. 300,000 available on interest income.

Incentive for foreign currency holders

68. I propose to provide the following incentives to attract foreign currency deposits into our banking system.

i. Introduce a Resident Guest Scheme to attract business migrants having net assets of not less than US $ 250,000 and invested in Sri Lanka before submission of his application for emigration to residential status

ii. There are large numbers of Sri Lankans who are living abroad particularly after 1983 riots and holding dual citizenship. Many of these Sri Lankans like to maintain this status but are reluctant to work in Sri Lanka due to the concern that local tax authorities will impose tax on their global income.

In order to encourage Sri Lankans living abroad who have dual citizenship to come back to Sri Lanka, I propose to exempt their income from sources outside Sri Lanka from taxation in Sri Lanka.

Employment income of public servants

69. At present any resident in Sri Lanka earning up to Rs. 25,000 per month or Rs. 300,000 per annum is exempt from income tax. In terms of the low salary structure in the public service about 80 per cent of the public servants, therefore are not liable to pay taxes.

Nevertheless, exemption of salary income of public servants made out of consolidated fund payments has created a perception that they are a privileged class. It has also diminished the dignity and respect of the public service.

Beginning from April 2003 this was partially corrected by introducing a tax credit mechanism but the method of computation has resulted in high tax burden particularly on certain professional categories. We have to recognise the fact that public servants if they earn as much as their private sector counterparts in salaries and if they have private incomes, should pay normal tax as a citizen of this country.

70. It must also be appreciated that public service salaries are exceptionally low in this country. Therefore taxing public servants should be done in a manner that will not reduce the already poor income of public servants. Taxation should also not be a disincentive for professionals to work in the public service.

Therefore, I propose that public servant's be brought under the PAYE scheme but the income will be assumed to be half of the gross salary of the public servant. On this basis public servants will get a relief and pay tax only if they have a private income.

In case of exceptional categories, where even half of the public service salary become liable for PAYE, the Government will provide a tax allowance like in the case of public corporation and State banks.

The payment of tax by the employer on behalf of the employees will be treated as final tax if that is the only sources of income.

However, deduction will be given on interest payments on housing loans, capital repayment of housing loans and contribution to provident funds. Tax systems will not be extended to pensions in the Government service.

Personal income tax

71. When we encourage all socially responsible citizens to come into the tax net we must also make sure that the tax system itself is affordable for people.

Therefore, our Government is strongly of the view that the present personal income tax structure should be simplified in such a manner that maximum tax rate will not exceed 15 per cent until income exceed Rs. 1 million. Therefore, I propose the following:

i. Tax free allowance for any individual to remain at Rs. 300,000.

ii. The next Rs. 300,000 to be taxed at 5 per cent the next Rs. 200,000 at 10 per cent, the next Rs. 200,000 at 15 per cent, the next Rs. 200,000 at 20 per cent, the next Rs. 200,000 25 per cent and the balance income to be taxed at 30%.

Taxation of employment benefits

72. Mr. Speaker, I propose to make several changes in updating the computation of various non-cash benefits from employment. Rental value of a house at present is restricted to Rs. 120,000 per annum. This is not a realistic value.

Therefore the value to housing benefits will be increased to Rs. 180,000 per annum in cases where such facilities are enjoyed by executives officers whose salaries exceed Rs. 150,000 per month.73. I propose the following amendments to the application of taxes on terminal benefit.

The present exemption of Rs. 2 million applicable to terminal benefits such as Provident Fund, ETF etc. will now be available only if the period of contribution to such fund is more than 20 years. If the period of contribution is less than 20 years the applicable exemption will be limited to Rs. 1 million and the balance will be subject to the following concessionary rates.

* On the first Rs. 500,000 5%

* On the next Rs. 500,000 10%

* Balance at 15%

Compensation paid under VRS or Retrenchment Scheme

74. In the 1998 Budget an exemption was introduced for compensation paid under Voluntary Retirement Scheme (VRS).

However it has been observed that there are many irregularities in the implementation of this provision. Therefore I propose to limit the tax-free allowance under VRS/Retrenchment to Rs. 2 million. This is over and above the concession offered under terminal benefits.

Grant received by NGOs

75. There are many Non-Governmental Organizations (NGO) carrying out activities which are not monitored adequately. It is necessary to adopt a proper system of monitoring of such organizations particulary in areas of activities carried out and funds utilized by them. Those institutions are now required to be registered with the Registrar of Companies and open tax files.

I propose to impose a presumptive tax at the rate of 30% by taking 6% of the funds received as income of the institution, other than the institution carrying out activities solely related to rehabilitation work of North & East and any other activities which are approved by the Minister on humanitarian grounds.

Withholding Tax on Interest

76. Growth of corporate debt market is constrained by the current withholding tax system. For instance commercial paper, which was a popular source of financing in the past has lost popularity due to an unequal tax status when compared with other sources of financing. This is due to the upfront deduction of withholding tax from the difference between the face value and issue price of commercial paper.

As a result commercial paper has now become more expensive compared to bank borrowing. Commercial Papers are a cheaper source of financing as the banks that arrange the commercial paper does not have to maintain liquid asset ratio with the Central Bank.

Due to not having to provide extensive collateral as in the case of loan funds, this type of financing provides considerable support to SMEs as well as to those whose ability to secure debt finance from traditional sources is limited.

Therefore to revitalize corporate debt market withholding tax on corporate debt will be removed and only the final tax is retained.

77. In terms of the amendment made to the Inland Revenue Act trading profits of secondary market transactions of Treasury Bills have been made liable to income tax. Consequently, the dealers have expressed some concern as to whether the trading profit of secondary market transactions consist of capital gain and interest as well.

As the Department of Inland Revenue already clarified and in line with international practice I must reaffirm that there is no distinction between interest and capital gain made, if a person is in the business of buying and selling Treasury Bills and bonds.

However, I propose to give relief by implementing this measure effective from the year of assessment 2003/2004 and exempt the year 2002/2003 from this tax.

78. In the case of individuals where 10% withholding tax is deducted, the withholding tax will become final tax. Therefore, such income will not become part of their assessable income.

Corporate taxation

79. Mr. Speaker, in order to consolidate a lower tax regime it is necessary that we consolidate our tax base effectively to make higher yield from present tax rates. Therefore, I propose to impose restrictions on various deductions which are applicable to both corporate and non-corporate sectors.

a. At present if a company does not distribute dividend, action can be taken only if such company is controlled by 5 persons or less. I propose to remove this restriction in order to tax dividend not distributed by such companies.

b. At present 25% of the VAT on financial services paid is deducted as an expenditure. However, this is a tax calculated after arriving at net profit. Since, it is not an expenditure incurred in the production of income it will be disallowed in full.

c. The claims on travelling outside Sri Lanka will be restricted to expenses incurred solely in connection with the promotion of export trade of any article or provision of any services for payment in foreign currency.

d. Entertainment expenditure and entertainment allowances paid to executives.

e. Allowances paid on fuel or expenditure incurred on the provision of vehicles will be restricted to 75% such expenditure.

f. Advertisement expenditure will be restricted to 50%.

g. Head Office expenses or management fees paid to head office will be restricted to 10% of taxable income or actual expenses whichever is less. If there is no taxable income the average of the aggregated taxable income of 3 proceeding years of assessment to be taken.

80. Mr. Speaker in certain countries only a percentage of total interest incurred by a company is deductible in computing the taxable income of that company. However this is done to overcome many difficulties by tax administrators particularly to deal with related party transactions.

Such a practice may also not be unfair when considered the benefits of debt financing as oppose to equity financing. In this context promoting debt equity balance in enterprise financing there is a justification to limit interest expenditure for tax deductions.

However considering the heavy reliance of SMEs on debt financing this may still hurt the development of SME sector. Nevertheless, it is time that our corporate sector gives some consideration as to whether it is desirable to move on to such advance practices in corporate taxation.

I do not propose such a change immediately but invite the corporate leaders and the tax professionals to debate this issue seriously for our future benefits.

Capital market

81. The capital market though small, must be transformed into a vehicle for capital formation to our enterprises. In the context of promoting a low interest policy regime, we need to maintain a buoyant stock market and attractive shares so that people will have more income earning opportunities than keeping money in fixed deposits.

This is made worse when the interest rates come down. This deliberate shift to creating a capital market environment that was driven on fundamentals instead of sentiments, led to local investors picking sectors like hotel stocks, instead of the past practice of following market rumours.

With the low interest regime we expect dividend income also to go up, as companies will have lower borrowing costs. We also expect export companies as well as domestic manufacturers of consumer goods and food products to perform well under our economic policy.

We are assuring a level playing field for them with importers. Local producers will become more competitive. This will obviously lead to greater profits which will translate to higher dividends.

This combined with our aggressive SME empowering program, the potential pipeline of Initial Public Offerings (IPO) of local companies waiting to get listed in the Stock Market should move up local market capitalization.

82. In this context I will also simplify the application of VAT on financial services on stock market transactions and income tax imposed on the profit on sale of shares introduced by the previous Government by replacing a simple 0.2 per cent tax on transaction value on each side of the transaction of the stock market.

83. Further, in order to deepen stock market activities I propose to offer Government stocks in hospitality industry to make attractive gains for the Treasury.

Economic Service Charge (ESC)

84. The Economic Service Charge of 1 per cent is too high for certain categories including wholesale and retail trade. Therefore I propose to reduce ESC rate to 0.5 per cent to the wholesale or retail trade whether they are trading in local or imported goods.

In the case of such trade, 3 years exemption from the commencement of business will not be applicable. There are also some ambiguities in the interpretation of turnover in certain types of activities.

Therefore the law will be amended to permit the Minister to issue regulations clarifying these definitions in categories of trade business, profession or vocation other than areas already defined in the Act. The regulations will be published in the gazette and later placed before the Parliament.

85. In case of partnerships in an excess of any ESC paid over the partnership income tax, it will be distributed to the partners and the partners are entitled to claim credit against their income tax payable on the share of profit.

Tax administration

86. Our tax administration remains outdated. It has been neglected for the past 25 years without any attempts of modernisation. My predecessor attempted to create an enclave Revenue Authority without realising that the Department of Inland Revenue is the Revenue Authority in Sri Lanka.

We are now in the process of introducing a modern administrative structure supported by technology and human resource development to modernise the Inland Revenue Department. Towards improving the tax administration, I propose the following additional measures as well:

* Establishment of an appeals unit under a separate Commissioner to deal with settlements of appeals made by tax payers against assessment sent by assessors. This unit will be supported by at least two deputy commissioners and four experienced senior assessors.

* Implement a Tax Charter clearly explaining tax payer rights and obligations and a code of conduct for officials of the Inland Revenue Department.

* Set up an information centre to collect and analyse information on tax evaders and strengthen the surveillance mechanism.

* Codify the Income Tax law to make it simple and clear.

* Appoint a three member committee of tax commissioners to certify every refund made by the Department of Inland Revenue. The committee should clear every such refund within one week of receipt.

* Inaugurate dedicated Tax Courts in Colombo, Gampaha, Kandy, Galle to deal with tax recovery cases and offences relating to tax compliance enforcement and other disputes connected to tax administration. They will dedicate at least two days per week on tax related matters.

87. The Tax administration is confronted with certain difficulties in issuing assessments etc. due to the application of provisions of the controversial tax amnesty law.

In order to strengthen the recoveries with the amendment to that Act it has become necessary to relax the time bar provision applicable in respect of issue of assessments settlements of appeal and collection of taxes. Therefore, I propose to introduce necessary amendments to the relevant Acts.

Tax Ombudsman

88. Due to arbitrary, inequitable and ill-considered actions of the revenue administration it is a true but a sad fact that even compliant tax payers have been driven to a state of non compliance due to a break down of trust and confidence.

In many instances there is no action that provides comfort to the tax payer that his issue is being dealt in a fair and equitable manner. To provide this assurance and to bring about greater transparency in the system, I propose to appoint an independent revenue ombudsman to facilitate fair and expeditious settlement of tax payer grievances.

A consultative process to prepare regulations and tax laws

89. Absence of a proper consultative process has resulted in misinformation regarding tax laws and regulations. Lack of interaction by the relevant authorities and by the relevant professional bodies have created serious doubts among tax payers regarding proper interpretation of tax laws.

A taxation cluster comprising tax professionals, private sector representatives, officials from the Revenue Department and various other regulatory agencies has been set up to bridge this gap.

Relevant regulations and amendments to tax laws will be made by the Ministry of Finance and Planning only after going through this consultative process in order to ensure wide acceptability.

Tax compliance

90. Tax compliance remains unsatisfactory. The number of tax files are as low as 200,000 in a country where 4 million people are in the work force. In this background we propose to take several measures to improve tax compliance.

a. Impose a withholding tax of Rs. 5,000 on each motor vehicle imported or newly registered in the case of vehicles added into the new fleet and Rs. 1,000 at the time of registration for already registered vehicles other than three wheelers, lorries and public transport buses. This can be set off against income tax.

b. Any individual having four out of five of the following will be required to declare his/her income to the Commissioner General of Inland Revenue each year before the end of the tax year.

i. Has paid a monthly residential electricity bill exceeding Rs. 10,000 (net)

ii. Has incurred a monthly credit card bill exceeding Rs. 25,000

iii. Has paid a monthly residential telephone bill exceeding Rs. 10,000 (net)

iv. Has purchased an air-ticket to travel abroad (other than official travel)

v. Owns a car

Non compliance to file a return will be liable to a penalty of Rs. 50,000.

c. Reward honest tax payers by issuing them a Gold Card with the following benefits:

i. Qualify for a lottery conducted by the Department of Inland Revenue

ii. Special treatment from Government Agencies

iii. Discount prices at national parks, museum, paying wards etc.

iv. Special lounge at the airport to facilitate their travel.

d. Tax clearance certificate will be made a mandatory requirement for bidding for Government tenders. In case of large transactions the bidders are required to declare the income tax file number as well as VAT file number.

e. Provision will be made in the Act to make all tax returns to include the wealth declaration on the last day of the year of assessment and a declaration on income from tax exempted sources.

These measures are designed to develop a database to be used for the expansion of the tax base.

Advance Ruling for Income Tax and VAT

91. The prevailing Income Tax and VAT laws in Sri Lanka do not provide authority to the Commissioner General of Inland Revenue to issue advance rulings that are binding in law. As a result certain business transactions cannot be carried out with certainty as tax consequence of such transactions are not known in advance.

In such circumstance the taxpayers need to be given the opportunity to place the full facts before Revenue Authorities and obtain confirmation as to the tax implications.

In order to encourage business transactions and simultaneously protect the tax base as well as to provide complaint tax payers with more certainty and confidence in the tax system, I propose that a legally binding system of issuing advance rulings be introduced into the tax laws. This would render tax administration more efficient and effective while promoting tax payer confidence in the system.

92. The proposed changes with regard to income taxes will be effective from 1.4.2005. The changes proposed with regard to VAT will be effective from 1.1.2005. However, relevant amendments will be introduced to the Statute to make the Tax deduction proposed in respect of food items to be made with immediate effective.

Transfer tax on land

93. As promised in our 'Rata Perata' the election manifesto of the UPFA, our Government reintroduced the 100% transfer tax on land on non-citizens with a view to developing a proper regulatory mechanism to utilize our limited land in the best interest of the country.

The provisions of the Finance Act permits the Minister to issue regulations governing the application of this tax. I propose to issue regulations in order to exclude the purchase of condominium premises and apartments above a 3rd floor of a building or acquisition of a land which will be developed as a residential housing in excess of 100 units, hospitals, or large-scale public infrastructure facilities from the application of this tax.

I also propose that non-citizens purchasing land in Sri Lanka and maintaining a foreign currency deposit in long-term Sri Lanka Government issued securities to the value of US $ 150,000 will also be given concessional treatment. The restricted areas for purchase of land for foreign residents will also be gazetted shortly.

Customs tariff

94. Consistent with our overall policy strategy towards facilitating a fair trading environment for both export and import sectors it is necessary to rationalize the Custom tariff structure. As suggested by the Trade and Tariff Cluster of the NCED, our Governments considers that duty on basic raw material should be maintained at the lowest rate band and work out intermediate bands depending on domestic value addition.

On this basis I propose to implement a 5 band rate structure for the application of custom tariff as opposed to the prevailing 6 rate bands.

Accordingly, I propose to reduce custom duties on basic raw material to 2.5% and maintain the semi processed raw material duty at 6%. To a best possible extent all intermediate products, spare parts etc. will be brought under the 15% rate and items such as motor vehicles and other finished products will be classified under 28% rate band.

95. Items which are not manufactured locally or are considered absolutely essential remain under exemption categories. The exemptions will be strictly in accordance with the regulations published in the gazette.

Anomalies and other trade related issues will be constantly reviewed by the Trade & Tariff Cluster of the NCED with necessary recommendations for periodic corrections. The new Revenue Protection Order (RPO) giving effect to these changes has been already gazetted and will come into immediate effect.

96. While rationalizing Customs tariffs, I have also take several steps to deal with undervaluation and mis-description of goods by importers. In many cases we have found that importers and exporters continue to defraud by resorting to various illegal practices.

In this background in the interest of the national economy we have to use some trade defensive measures. One such option is to take over such imported goods by the Government and reimburse the declared value by the importer if the custom is of the view that goods are grossly undervalued. I am seriously considering to resort to such measures if gross undervaluations continue.

In fact prior to 1988 there was a provision in the Customs Ordinance making provisions to take measures of this nature. In many of our neighbouring countries such measures are being practiced. I will reintroduce similar amendments to the Customs Ordinance if the situation does not improve.

97. In the meantime, the Customs Intelligence and surveillance unit will be strengthened and post audit investigation on selected items which are generally liable to under valuations will be intensified. As a trade defensive measure I also propose to introduce anti dumping legislation to the Parliament shortly.

In addition to under-invoicing there are also sub standard products that are being dumped into this country by various traders. Sri Lanka Customs is working very closely with the Sri Lanka Standard Institute and has recognized standards for 84 items to be applied for both locally manufactured as well as imported products to prevent substandard products being traded in this country.

Through a wide consultative process standards for other important products will also be developed. In addition to strict application of quality standards the Customs will also ensure that products entering into Sri Lanka comply with ILO regulations on labour standards and environmental regulations applicable in Sri Lanka. Products manufactured using child labour will not be permitted to be imported to Sri Lanka.

98. In order to strengthen Customs surveillance, the Government welcomes the container security initiative of the US and as a first step US bound cargo will be brought under this arrangement during 2005. As part of the Customs modernization program, the cargo clearance process will be fully automated in 2005 and the construction of a modern Customs complex will commence in early January next year.

Port and Airport levy

99. As a revenue measure, I propose to increase the Port and Aviation levy from 1% to 1.5% with immediate effect. However, the Port and Aviation Levy applicable to exports will be reduced to 0.25% as an incentive for exports.

Excise tax on liquor

100. The Presidential Task Force on alcohol, tobacco and illicit drugs has prepared a national policy to reduce alcohol and tobacco use with a view to improving health decreasing poverty and improving productivity of the labour force.

The task force recommends that taxation on alcohol and tobacco should be increased annually. I have already increased Excise Tax on cigarettes for this year. I now propose to increase Excise Duty on hard liquor by Rs. 15 proof Lt. and Rs. 5 proof Lt. for Beer. This will come into effect from midnight today.

101. Customs have made considerable progress in curtailing smuggling of cigarettes with the enforcement of the Tobacco Tax Act as amended in 2004. I have instructed Customs to intensify the enforcement of these measures to curtail smuggling.

Excise (Special Provisions) Duty

102. Excise (Special Provisions) tax is now confined to cigarettes, petroleum products, aerated water and motor vehicles. A large number of consumer durables remain outside this tax and even some of the imported products enjoy only 3% duties. This is not fair.

Therefore I propose to include air-conditioners, refrigerators, washing machines, Televisions, TV antennas and electrical items under this tax. I also propose to increase the Excise (Special Provisions) Duty from Rs. 5.50 per Lt. to Rs. 6.00 per Lt. for aerated water. These will come into effect from midnight today.

103. The recent revision in Excise (Special Provisions) Duty on motor vehicles has been already operationalized in view of the national importance of securing Government revenue.

Betting and Gaming Levy

104. There are many betting and gaming centers operating under registration from local authorities. These are not regulated or supervised effectively.

Most of these operators escape from law enforcement authorities by simply producing some of their tax receipts to establish their credentials. These taxes are recovered in terms of Betting and Gaming Levy Act No. 40 of 1988 which requires the payment of taxes whether they are legal or illegal operations.

All these operators should understand that payment of taxes will not prove their bona fides as legally valid operations. I propose that prohibitive taxes should be imposed in addition to combating these through appropriate law enforcement authorities.

Therefore, I propose to increase the annual levy from Rs. 10,000 per center to Rs. 25,000 per center on all betting businesses. The levy on betting business done through agents will be raised to Rs. 1 million while betting business done with live telecast will be liable to an annual levy of Rs. 500,000 per centre.

The levy on casino centers will be raised from the Rs. 12 million to Rs. 50 million per center with effect from January 2005. Rugino Centres will be treated on par with Casino Centers.

The Fines and Penalties that I have proposed hereunder will capture many other illegal activities to ensure strict law enforcement towards combating such operations. Amendment to the Betting and Gaming Levy Act will be introduced to strengthen the application of tax in respect of related operations.

Administrative Fees and Charges

105. The fees and charges imposed by various Government institutions for the provision of services remain unrealistic in comparison to related costs. Therefore, I propose that prices of all Government publications issued by the Publications Bureau will be increased subject to the minimum price being fixed at Rs. 50.

106. There are various statutory bodies and agencies which will also require to adjust their charges to reflect the present cost. I expect to recover Rs. 250 million from these changes.

107. At present only Rs. 150/month is charged on officials assigned to use official vehicle for private use. I propose to increase this to Rs. 500/month.

108. Rent on Government properties will be increased by 25%.

Fines and Penalties

109. In keeping with the Government commitment to make law enforcement more effective, it has become vital to review fines and penalties currently in operation through various Statutes. While imprisonment or sentences are imposed on more serious offences a large number of offences are dealt with by imposing fines and penalties.

However, Mr. Speaker, most of our laws have not been revised for many years. The fine and penalty structures in respect of criminal offences have remained unchanged for 25 years.

Therefore, fine and penalty structure in many of our statutes should be amended and I have attached a schedule indicating the proposed changes. As several statues come within the purview of provincial Councils, I also urge them to adopt appropriate resolutions as well.

110. Mr. Speaker, in terms of the Government commitment towards crime prevention, Her Excellency the President has set up an advisory council comprising the clergy, civil society representatives, law enforcement Officer and business community representatives.

The council has come up with a series of measures to prevent crime including special incentives to police officers who are genuine in their effort to prevent crime.

Therefore, I propose to apportion part of this money to provide necessary incentives and welfare measures to the law enforcement officers and upgrading the Judiciary. In order to improve law and order it is also necessary to equip our Police force which has been neglected for several years.

In order to improve their effective deployment, I propose to allocate Rs. 200 million to provide communication equipment and Motor Bicycles to them on a priority basis. A reward cum compensation mechanism will be implemented for law enforcement officers and the general public sharing information.

Dividend from Strategic Enterprises

111. Strategic State Enterprises have formulated business development plans with the assistance of SEMA. Development plans for State Banks include productivity improvement, loan portfolio improvements, promotion of international market links and improvement in geographical coverage and customer services, complete automation of core banking and further strengthening the balance sheet to improve credit ratings of banks.

In case of People's Bank a further capitalization by the Government will be implemented in a phased manner based on its quarterly performance. These business development plans will be presented to the Cabinet shortly.

112. The business development plan of the National Water Supplies and Drainage Board focus on the operations efficiency improvement in the operation efficiency through the reduction of non-revenue water and better Treasury management.

In respect of Ceylon Petroleum Corporation, financial viability and operational efficiency is to be assured by promoting CPC brands and improving its image to compete in the market as a public enterprise. The business development plan also includes the upgrading of the refinery, introducing additives for fuel and a comprehensive human resources development program.

The development strategy of the Ceylon Electricity Board is based on the, a least cost power generation plan in the medium to long term, decentralize operational units within the CEB structure, adoption of commercial procurement procedures and a reliable tariff policy. A complete balance sheet restructuring is being formulated to reduce the present debt burden.

113. The Business development strategy of the Sri Lanka Port Authority is to increase terminal productivity through improved terminal management. The Airport and Aviation Ltd. aims at promoting BIA as a passenger transit hub and increase the traffic volume to 6 million passengers by 2007. Its plan also includes the development of a cargo transshipment hub.

The public transport enterprises namely Sri Lanka Railways and the Cluster Bus Companies aim at reducing their revenue gap to reach break even operations. The Government will provide the cost of schoolchildren transportation and uneconomical routs. Two enterprises will adopt tariff formulas to ensure their operational viability.

Incentive to Public Servants

114. Mr. Speaker, in the context of the enormous responsibilities assigned to public service and its expected contribution towards promoting a balanced and efficient public-private sector economy, it is necessary to develop a proper incentive structure to encourage public servant to play a pivotal role in the society.

It is the public servants who are performing responsible tasks such as the provision of all island teaching, health services, wide range of field level extension services, law enforcement, and civil administration. In this background I consider it is necessary that the public servants be given sufficient incentives to give their best to the society.

115. Therefore Mr. Speaker, I propose to offer a comprehensive medical insurance scheme to all Government servants with a ceiling of Rs. 150,000. This medical insurance policy will provide indoor and outdoor treatment.

The Government will provide Rs. 500 million for this scheme and deduct Rs. 75 per month from each employee. All employees will be given the same benefits regardless of whether they are low salary employees or high salary executives.

116. Housing is a basic need. Many of the public servants with their low salaries struggle to build a house often spending their entire savings in the process. In order to create a valuable asset to each public servant, I propose to implement a scheme through the banking system to provide a housing loan up to Rs. 1 million with a interest rate of 4% per annum payable over a period of 25 years. The entire loan is guaranteed by the Government against their salaries and retirement benefits.

In implementing this facility, priority will be given to all those public servants who do not possess a house at present and also those who are in the process of constructing houses. In order to ensure that this guarantee will not impose a burden on the Government, I propose to set up a separate Guarantee Fund in the Central Bank of Sri Lanka to which the treasury will transfer Rs. 1 billion each year.

Accordingly, out of Rs. 3,000 million provided under the advance account Rs. 1,000 million will be transferred in 2005 to this fund. Provision of block of a land to public servants at a low and concessionary rate to build a house will also be made depending on the availability of such lands.

117. Public servants should also be provided with skills training and other opportunities for career development and productivity improvements.

Unfortunately provision of training has been confined to a regular group of public servants and not to those who really need such training. I propose to change this practice and encourage professional training, skills development and productivity improvement programs among public servants.

A wide range of technical assistance provided by various donors will be exploited to make available the required resources for such training. A new scheme will be formulated to make it mandatory for every public servant to follows at least a 2 weeks training program in the relevant field each year. Retiring professionals will be invited to develop and conduct training models for public servants.

Relief for widows

118. There are a large number of young widows who are unable to plan their future due to the fact that they are denied the W&OP allowance from the Government if they re-marry. I think this is unfair and outrageous in the context of social justice. Therefore, I propose that those who like to re-marry be given 50% of the allowance that they are drawing as widows.

Child Care

119. Mr. Speaker, nation need to pay serious attention to children. The requires in terms of our cultural and social values to have close attention of mothers. Presently 84 days (4 months) are granted for working women as full pay maternity leave. I consider this is inadequate.

Therefore I propose that a further 84 days should be granted on half-pay-leave and the further 84 days on no pay leave so that those infants who deserve full year attention of a mother is given the flexibility to take a decision to spend time with the child on these concessions.

Salaries of Public Servants

120. Salaries of public servants are grossly inadequate. The basic salary of a lower rank employee is only Rs. 4,620 per month while at the Secretaries level it is only Rs. 22,910. These amounts are under any definition not decent.

Therefore I propose to make a decisive change in this structure despite the very difficult times that we are going through. I am taking this bold step because my expectation is that a greatly motivated public sector could bring many benefits far in excess of the cost that will be reflected in the Budget.

Therefore, I propose to grant a 40% increase of the current basic salaries subject to a minimum of Rs. 3,250 per month and a maximum Rs. 9,000 per month plus allowances already granted. This increase is 70% over the basic salary of a lower rank employee.

The proposed increase will also correct the prevailing anomalies in the public service salary structure. In view of the current financial constraint to implement this in full immediately, I propose to give Rs. 2,500 or 50% of the proposed increase whichever is higher with effect from December 2004 and the balance from January 2006.

121. Mr. Speaker, salaries of some of the firms in the organized private sector have collective agreement process to adjust salaries inline with cost of living as well as productivity considerations. There are sectors that comes under the Wages Board which adjust salaries according to market conditions.

However, certain sectors remain passive when it comes to periodic salary revisions. I request such sectors to fall in line with the salary increase recommended to public servants.

122. I also propose an increase in pension payment by 15% of the basic pension subject to minimum of Rs. 750 per month and maximum of Rs. 1,500 per month with effect from December 2004.

123. The public Sector also needs to consider some measures to improve productivity towards this end. I wish to make two further proposals.

i. As an incentive to discourage public servants from using their full quota of Annual Leave, I propose that unutilized Annual Leave of any public servant be permitted to be carried forward with the ability to en-cash at the time of retirement for a lump sum based on the last drawn salary.

ii. In view of the large number of public holidays and the new incentive structure I have proposed, I also like to see slightly longer working hours in the public service. Therefore I propose that working hours in the public service be extended by 1 hour per day. Suitable adjustment could be made by starting office half an hour earlier and closing half an a hour late.

Management of Surplus Funds of State institutions

124. Several Government agencies including those which depend on Treasury grants maintain various funds collected through statutory provisions and invest them mostly in Government securities or bank deposits in an ad hoc manner.

The Treasury has undertaken a survey which reveals that the total value of this sum is in excess of Rs. 15 billion. While recognizing the fact that transfer of such funds to the Consolidated Fund will not bring about much value, it seems necessary to ensure that these funds are managed by professional fund managers on behalf of the Government in a most productive manner while ensuring the flow of income to respective agencies to perform their operations.

Therefore, I propose to set up a Trust under the Trust Ordinance and appoint a Board of Trustees to manage this fund. The Central Bank will be appointed as a custodian bank for this purpose. All surplus funds will be transferred to this trust and the Trustees will assign the fund management to a professional fund manager's.

The Trustees will appoint an internationally reputed Audit Firms to maintain, and audit the accounts of the trust on a regular basis. This will enable the Government to reduce Budgetary allocations made in the annual estimates.

Strengthening Public Expenditure Control and Management

125. Two oversight committees of Parliament namely the Public Accounts Committee and the Committee on Public enterprises can play a pivotal role in ensuring public accountability and productive use of Government expenditure.

It has been brought to my notice that the capacity of the two oversight committees both in terms of human resources as well in terms of technology application requires considerable improvement.

At a recent meeting held by the two oversight committees with my officials, it has been agreed to setup a three years capacity building program to develop a well equipped, professionally managed secretariat to facilitate the effective functioning of these two committees. My ministry has recommended a dedicated provision of Rs. 100 Million over a three-year period for this purpose.

Accordingly I now propose Rs. 100 Million for this project, to be specifically managed by a project management team directly accountable to a Steering Committee co-chaired by the Chairman of the two committees, and consisting of officials from the Parliament, my ministry and the Auditor General.

Savings in Public expenditure

126. The Ministry of Finance and planning has developed a technology driven monitoring system of public expenditure and has set up a Treasury Operation Department to streamline public expenditure management.

The release of funds will be made on the basis of performance monitoring. procurement systems have been streamlined to prevent market manipulations. I must mention here that the recent intervention by the Government on a fertilizer tender has reduced the bidding price by US$ 150/mt. which will allow us to continue with the confessional prices we have offered to our farmers for fertilizer.

This clearly shows that we have to be vigilant in Government procurements. Therefore, I am hopeful to generate savings from locally funded capital expenditure programs provided for in the estimates.

Interest payments on Public Debt

127. Within our domestic debt portfolio, Rs. 68 billion of Rupee loans carry interest rates in the range of 11 - 13%. I propose to convert these laons into relatively low cost medium to long-term debt instruments which in my opinion could save Rs. 4.3 billion over the medium term. I expect Rs. 1.1 billion saving next year alone. The relevant amendments to the Appropriation Bill will be made at the committee stage.

A summary of the Budgetary implications of my proposals are given in Annex II and III.

Budget outlook

Mr. Speaker, table 1 of the annexed document provides details relating to Budgetary Projections for 2004 and 2005.

The proposals that I have outlined in my presentation will increase Government expenditure by Rs. 19,463 Million and Government revenue by Rs. 27,935 Million. I also anticipate Rs. 7,500 million from capital revenue and the sale of Government stocks in hospitality industry which are offering good values. Consequently, total Government revenue in 2005 will be Rs. 389.5 billion - 17.2% of GDP compared to 15.6% in 2004. In view of the fact that full annual impact of the revenue measures implemented towards the end of 2004 and the new measures that I have announced will be reflected in 2005, this level of revenue is realizable.

As regards expenditure, the current expenditure will be Rs. 419 billion - 18.5% of GDP. despite the wage increase, recurrent expenditure is lower from 19.3% of GDP in 2004. Thus the revenue deficit is reduced from Rs. 74 billion - 3.7% of GDP to Rs. 29 billion - 1.3% of GDP, a solid 2% of GDP improvement in the revenue account.

Mr. Speaker, public investment is projected at Rs. 144 billion - 6.4% of GDP an increase from Rs. 101 billion - 5% of GDP in 2004. This is after making provision for usual under expenditure and for the proposed new expenditure programs.

The 2005 Budget counts on Rs. 69 billion from net foreign loans and grants, after making adjustment for debt repayments.

In gross terms that is Rs. 101 billion (approximately US$ 980 million) without counting Budget supports. This help us to keep our domestic finance at Rs. 105 billion - 4.6% of GDP for next year as compared to 6.8% GDP this year.

The level of domestic financing is not only lower than this year but is also considerably below the total available resources in the economy, of which Rs. 115 billion available from non-bank sources.

This in economic terms means that the market has excess funds which the Central Bank can mop up to keep monetary growth in check and thereby lower inflation to ensure a positive rate of interest. In conclusion, the salient feature of this Budget outcome is that the consumption expenditure of the Government is phased out to allow increased revenue to support public investments and to reduce domestic borrowings.

Conclusion

Mr. Speaker, let me now summarise the benefits cascading from this Budget and our economic policy. Let me begin first by recapping the pre-Budget economy policy initiatives that have already achieved success.

As soon as our Government came into office, we realised that markets were driven by sentiment and that various speculators were manipulating the share market, the Treasury Bills and bonds market, as well as the foreign currency market through rumours and false promises.

The first task of the Government was to break this sentiment based activity and shift to a economic fundamentals driven market activity, so that the investor public and stakeholders are protected from ill-motivated speculators.

Mr. Speaker, the Government saw benefits in continuing with the policy of low interest rates. This was not an easy task, as we had to overcome the pressures and obstacles planned by interest rate speculators.

Except for occasional inter-bank borrowing pressures, the Treasury Bills and bond market has stabilised at around an average interest rate of 7-8%. This also meant that the local stock market benefited, too. It is far more attractive to invest in shares than keep the money in fixed deposits, when the interest rates come down.

Equally we are confident that we will maintain the stability in the exchange rate as well. During the first nine months additional burden on account of the import of fuel and motor vehicle was in excess of US$ 300 million. This cannot be cleared simply by letting exchange rate changes. The current exchange rate is in fact under valued and favour exports.

The Government of India, in addition to extending about US$ 150 million on project financing has also extended as a credit line to the value of US$ 150 million to finance our petroleum imports. Government of Iran and Malaysia have also agreed to provide nearly US$ 200 million credit on our crude oil financing.

The expected foreign exchange inflows through aid disbursement towards the end of the year will also strengthen market conditions. Therefore pre-Budget speculative pressures are unwarranted.

Mr. Speaker, on that note, let me now summarise the benefits of this Budget.

* 41,305 graduates will be employed in permanent positions in the Government services from January 2005. In addition to providing opportunities to the qualified youth to contribute towards nation building, an equal number of families see relief from being able to see their sons and daughters, finally in employment.

* 30,000 Advanced Level qualified persons will see similar openings in Government vacancies in 2005.

* The 10,000 -irrigation tank and watershed rehabilitation program will support 560,000 beneficiaries on farm income. Each tank will support at a minimum 10 farmer families, who on average have 5 family members to support, and have the potential to earn, minimally Rs. 60,000 a year.

* The proposed SME Bank with a Rs. 5,000 million capital base to revive the SME sector, will create at a minimum, 25,000 new jobs either through existing enterprises that expand, or from entrepreneurs launching new enterprises.

* The 10,000 Entrepreneur Village Program will target cluster economic activities in various parts of the country, providing gainful employment for 30,000 people.

* Our integrated rural infrastructure development program, known as the Sanwardhana Sangramaya, targeting urban, provincial and rural renewal, including the housing program will create 300,000 new houses, 300 Vidatha resource centres, 260 new school buildings, 1,000 new hospital buildings, 1,000 public libraries, 25,000 miles of new roads covering 360 AGA areas, electricity to 100,000 new homes and 50,000 existing homes, pipe borne water to 100,000 homes and 5 new export zones and supply chain centers throughout the country.

These projects translate into work for 120,000 skilled and semi-skilled persons, suppliers of building materials and other construction inputs.

* Skills development and foreign employment program will raise the current level of foreign employment of around 1.2 million to 1.5 million - 300,000 additional employment towards the next 3 years.

* As enunciated in our overall policy vision, we will aim at the final outcome that will reflect in the medium term growth target of 6-7% of GDP.

* We expect to maintain the inflation rate at around 7-9% with the overall National Savings Rates at 24% of GDP.

* We expect quoted companies in the stock markets to increase their shareholder value by a further 50% from the present 262 billion market capitalisation to 400 billion in 3 years. The creation of 3,400 new entrepreneur owned enterprises in the SME sector will lead to the unemployment rate been kept at 6%.

* The foreign commercial borrowings and short-term domestic borrowings will be maintained at prudential levels.

* The Human Development Index (HDI) and Human Well Being Index (HWI) are also other valid barometers, as they reflect social progress such as the literacy rate, life expectancy and the environment that provides us our food, water and natural resources. Therefore our target is to achieve Millennium Development Goals well in advance.

Mr. Speaker, I have deliberately departed from tradition and included measurable output targets in this Budget, so that the country has objective targets to aim for, and of all, be they politicians, public servants, or the private sector are made to realize that we must come together to achieve the targets and development goals set therein. It is only through such a partnership that we could achieve national goals.

This Government, as you can see from the Budget proposals, if firmly committed to greatly enhance the export competitiveness and to level the playing field for local market producers, with the obvious objective of increasing our domestic earning capacity.

That is the only way we can fight the cost of living pressures arising out of the oil price hike that is beyond our control. No responsible Government could bring the cost of living down on imported items, without a ballooning subsidy scheme that is funded through borrowing or taxes. That is not a sustainable path.

Equally, our public service has a special responsibility to increase their efficiency and productivity. They have to ensure that the tax payer's money is spent properly without wastage and corruption.

The UPFA Government has faith in the public service, and believes that they can deliver, which is why we have stopped privatization, stopped retrenchment, stopped creating independent agencies, stopped cutting salaries, stopped cutting recruitment, and stopped freezing benefits. Therefore all public servants have a duty to deliver this year, and to convert our public service to a quality service.

This is our last chance, to maintain our dignity. I myself was a civil servant, and I know how much more we can all contribute to our motherland. We must stop treating a Government job as a job with no accountability. We are being paid by the hard earned income of the working population of this nation.

Thus, it is only reasonable that they expect us to perform much better than we do today. We can and we must. Our Government has taken steps to fulfil your wishers and now we expect you to do your part honestly and efficiently.

I would be failing in my duty, if I, as a fellow politician, also to not turn the lamp inwards, as there is much we can also do to create exemplary standards, particularly with regard to our expenditure.

After all, our costs too are met by tax payers. If we continue the way we spend public funds, there will come a day when they will say, enough is enough. In closing, I would like to reiterate the essence of our economic policy as setforth in our vision statement published in June this year.

This statement captures the spirit of this Government's Budget:

"The strength of this nations lies uniquely within. The policies we develop will take advantage of our competitive strengths and proactively plan the development path based on our culture, resources and regional dynamics. It is time to look ahead and convert strategies into action and make genuine progress towards sustainability for the benefit of society, the environment and creation of wealth in Sri Lanka".

Thank you.

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