Making Hambantota mega development a success

Ravi RANDENIYA BScEng MScE MBA

As the first phase of construction of the Hambantota harbour is nearing completion, it is mandatory that entire spectrum of reinforcing infrastructure and all support mechanisms are aligned with the scheduled completion to make the project a complete success.

Once completed, the harbour that is geared to facilitate 33 vessels to berth at any given time, should be fully capitalized in order to enjoy the return on investment.

What undoubtedly favours the new harbour is the geographic proximity to one of the busiest international sea routes. Consequently, some believe that Hambantota might be the "second biggest" city in Sri Lanka at some time in the future IF all goes according to plan.

Not only the highways, new townships that are springing up, the addition of a new oil refinery costing US $1 billion and the new airport in Wirawila in the Southern Province which is designed to bring more airlines and tourists will come to Sri Lanka, would add to the importance of the mega project.

However, to service all facets of the Southern development agenda there has to be a deliberate plan of action to employ a highly skilled workforce to deliver the intended services to all sectors.

For example, to merge sea and air cargo as a single service facility it will require considerable coordinated effort to provide functionality and efficiency.

These operations are not only IT depended but placing highly skilled humans behind stations and wheels, and that will be the greatest challenge the government has to face today.

First, to bring about speedy development of the southern country, the government ought to single out Hambantota as the top investment destination promoting the region as an investor opportunity of unlimited potential.

These "investors" need not necessarily be of the foreign kind, local entrepreneurs must fall into the same category and receive the same incentives as the foreign investors as explained later.

Drawing investors will cause a chain-reaction in migration of skilled labour to key investor-driven industries. This creates investor-inspired challenges and if we haven't ever learnt the past we will fail to meet the needs of investors-then we become irrelevant in the regional economy.

In Sri Lanka, unforeseen handicaps abound and they can slow or derail ambitions of investors who are key to making the Hambantota development flourish.

While acknowledging that we have to capture these experiences and convert the knowledge into solutions, they must be home grown for economic prosperity. In addition, the government is compelled to construct a range of service solutions that cover the range and breath of investor needs, from point of contact and beyond.

They include human capital solutions, technical assistance and planning, facilitation of access to government incentives, facilitation of access to local business support etc.

It appears that we are not the only ones with grand strategies for port facilities to lure shippers aiming to tap the growing Asia- Europe trade and rising intra-Asia traffic.

Dubai World's DP World is reportedly seeking to invest in a new deep-water terminal in Kochi to transform Indian ports to handle the largest container ships. When it becomes a reality it will be Colombo's dominance as the South Asian container transshipment hub, which currently handle as much as 40 percent of India's transshipment trade.

If the Hambantota port development fails to deliver the potential services we have additional competition from South Africa's new deep-water harbour, the port of Ngqura near Port Elizabeth, which launched operations recently, is the country's eighth and latest commercial port development.

They insist that the old shipping route via the Southern tip of Africa to avoid Somali pirates as a good choice. The port is an integral part of the Coega Industrial Development Zone, a new initiative that aims to boost the regional economy of the Eastern Cape Province. It has an advantage over other ports in Africa in that it is a deep-water port with a depth of between 16 and 18 metres.

This means it can accommodate new generation container vessels and will allow Transnet to increase capacity for container volumes and link with the national transport infrastructure in cargo shipment.

Economic development and trade

The Hambantota harbour and Southern development will not only boost the local economy; it will also become an important gateway for trade for Sri Lanka.

The promotion of industrial development in regional economic zones would have a considerable impact on the underdeveloped region and likely to boost the gross regional product of the province and significantly increase growth.

A major outcome would be that the development will require a permanent increase in skills in the economy, particularly in local skilled migrant community thus creating a lasting sprawling urban settlement.

The port development will directly create employment in the region, even though there are no projected figures available.

There would be a demand for operators' skills in off loading and handling containers, this certainly should not happen at the expense of the existing skilled operators in Colombo port. What it means is that new recruits need to be hired and trained.

Hambantota is ideally located to kick-start local and regional economic development. The port development also holds positive secondary benefits for other industries such as agriculture, fishing, construction, transport (including storage), financial and business services, electricity and gas as well as wholesale and retail business.

This will result in an inflow of skilled people to the region and substantial education, training, upgrading of skills and development of small businesses which will become paramount, if we understand early enough we can address these issues.

The economic transformation will contribute to population growth and wealth generation, the benefits of which flow down to the less skilled population.

The fundamental economic development dictates that it will also cause an increase in purchasing power in the region, as the average income per employee within a trade will rise; there will be growth in the service sector, increasing population will exert pressure on public utilities and services such as schools and hospitals.

This gives an indication of the type of expansion that can take place once the key industries are in place and act as a nucleus or a magnet, which can attract other upstream and downstream industries.

An economic growth rate higher than the average for the country can be expected if the right ingredients are in place for the Southern province to enjoy.

Case for Local Enterprises in Economic Development

For too many years we have banked on FDI to help save our economy. I ask, what's wrong with supporting our local entrepreneurs with same enthusiasm as afforded to foreign investors? Increasingly, economic development experts are abandoning traditional approaches to economic development that relies on recruiting foreign enterprises with tax breaks, financial incentives and other inducements.

Instead they are relying on building businesses from the ground up and supporting the growth of existing local enterprises.

If we are to follow that path, the first step is to develop and support local entrepreneurs and small businesses. Second is to improve infrastructure and to develop or recruit highly skilled and educated workforce. Both efforts depend on improving the quality of life in communities and creating an attractive business climate.

The reason for insisting this shift is that economic development strategies aimed at attracting large firms are unlikely to succeed or be successful at a cost (incentives vs. employment ratio) as demonstrated by the performance of the BOI in the last 15 years.

More importantly for a nation like ours that can boast about its literacy rate, the potential job creation role and innovation prowess of local entrepreneurs and small business, creating an environment conducive to many small businesses may produce more jobs than attempting to lure few foreign firms.

Small businesses are potent job creators, but so are the large ones. The problem is, while the BOI is waiting for the elusive big fish to prove that point many small local enterprises can flourish with the same incentives given to foreign firms.

We not only hope the new businesses will create jobs in the local communities, but through our innovation, some new businesses will grow into rapid-growth firms, which may spawn hundreds of jobs and become industry leaders tomorrow.

The facts support the view that cost of incentives and competition, economic development strategies aimed at attracting large firms are unlikely to be successful or are likely to succeed only at the cost.

It is argued that indirect benefits or spillovers, of new large investments are linked to suppliers, increased consumer spending, and the transfer of knowledge from one firm to another, and sharing of pools of workers.

However, constraints on the supply of labour and infrastructure and budget pressures from increased public spending without increases in public revenues.

Yet the expansion of existing local firms tends to have multiplicative positive impact on employment and supports the notion that internal business generation and growth has better prospects as a strategy than large firm recruitment.

The measure is the cost per job of incentives packages, that is gross new jobs created at new firms-dollar incentives divided by the number of jobs created.

Recruitment of foreign investment is also costly because it had endangered a competitive economic development landscape for local entrepreneurs who do not get the same incentives as them.

Moreover, from the notion at large, aggressive courting of foreign firms can distort rational behaviour, causing wasteful economic resources, such as the creation of "free-trade or industrial zones" which are underutilized and out of bounds for local small enterprises to make full utility.

The alternative to recruiting foreign firms with tax incentives and other inducements is to focus on the development of small business sector.

The worldwide evidence suggests that small businesses indeed create a substantial majority of net new jobs in an average year if the right conditions prevail. They have the capacity to migrate into large firms increasing their share of job creation.

The net employment impact from firm expansion tends to be much greater than those associated with new-firm recruitment. What this proposition suggests is that concentrating on organic growth, or the growth of existing or "home grown" businesses, is likely to be a much more successful strategy than the recruitment of new foreign firms.

Given the role of small businesses in employment growth, supporting local entrepreneurs and developing businesses is likely to be an effective strategy for the government to pursue.

Southern development is a perfect opportunity to give a helping hand to local entrepreneurship. Recognizing this inconsistency is the responsibility of today's policy makers.

The key to successful strategy is to get the policies right as I have made abundantly clear in previous writings.

Evidence increasingly suggests that the right approach is usually to focus on developing an attractive and supportive environment that enables any business, whether local or foreign, to flourish and allow the market to sort out which businesses succeed.

In doing so, we can develop a high quality workforce through life-long learning opportunities, invest in quality institutions, maintain infrastructure and create resilient business environment with fair tax systems that would create regional communities where highly educated and skilled want to live.

That will be the legacy of an economically optimal location such as Hambantota.

(The writer is a former Senior Policy Analyst of the Trade and Economic Development Ministry, British Columbia Government Canada)