by Burhanudheen Thassim, Project Intern – IPS
“We are very excited and bullish with the possible developments taking place in the logistics sector. I’ve always been saying that the time for Sri Lanka’s logistics sector will come, and this budget has brought it, with a stroke of a pen”. These were the comments shared by the Group CEO of Expolanka at the DailyFT post-budget seminar recently. The transport and logistics sector is important in any economy as it impacts much of a country’s economic activity, whether it is for an individual – accessing agricultural produce from farm-gate to retail shop, or for a firm – the entire process of materials and products moving into, through, and out of it. The efficiency and effectiveness of this sector can translate into an increase in productivity of the economy and facilitate faster economic growth.
Sri Lanka is ranked poorly in the World Bank’s ‘Logistics Performance Index’ (LPI), falling consistently on the rankings from 92 out of 150 in 2007 to 137 out of 155 countries in 2010. The LPI is a perception-based index that takes into account six indicators to determine the logistics ‘friendliness’ of a country. Here, Sri Lanka has been ranked even below that of some less developed countries like Bangladesh and Kenya. So, will the new budget proposals be a shot in the arm for this sector to be put on a stronger footing? This article reviews the budget proposals relevant to this, takes a first look at how it would impact the sector, and what other issues need to be borne in mind. Several key persons in the sector were interviewed to obtain better insights.
Budget 2012: What is in it for the domestic logistics sector?
The Budget 2012 announced last month introduced several proposals in favour of the logistics sector, particularly in terms of tax reductions.
A direct incentive in terms of taxation is on the importation of lorries, trucks and new lorry engines where it is proposed to remove VAT which was at 12% and Customs Duty which was at 5%. Currently, the bulk of domestic transportation is undertaken using trucks and lorries. Here it should also be noted that the majority of truck owners are individuals. The removal of these taxes will naturally reduce the cost of purchasing new vehicles for transport operators who run small fleets of trucks as well as larger logistics operators. This will also help re-fleet ageing truck and lorry fleets of smaller operators – having spillover positive externalities in terms of enhanced safety and reduced pollution.
The budget also proposed reducing by 50% the import duties on specific tyres used for buses and lorries. A General Manager of a transport and logistics company noted that tyres amount to around 20% of the costs and therefore the reduction in import duty on tyres is likely to be a substantial cost saving and will certainly help achieve higher standards in the sector.
Indirectly, this and previous budgets benefit the logistics sector through continued efforts to improve roads and building new highways. Moreover, budget 2012 further incentivizes small and medium enterprises, the backbone of the country’s Provincial economies, by offering various tax benefits. For these provincial enterprises to thrive, an efficient, reliable, and affordable transport and logistics services will be integral. As private enterprise growth in the Provinces increases in the coming years, the demand for logistics is likely to receive a substantial boost.
Apart from direct beneficiaries of lower costs of acquiring vehicles for domestic logistics, users of these services would also benefit. Supermarket chains like Cargills Food City which have a strong collection and distribution network, and have grown to become an integral part of most urban and sub-urban households, may see a reduction in their operational costs and could in turn pass these on to consumers in the form of lower prices. Improving domestic logistics and supply chain will be particularly important for agricultural produce and agri-business. At the post-budget seminar, the Expolanka CEO noted that “45% of perishables are lost in transit”.
Taking a closer look…
Although these budget proposals appear quite favorable for the logistics sector, there are other key issues that impact the sector that need to be considered. Stakeholders in the sector observed that the recent increase in fuel prices causes significant cost increases as around 30% of the costs are on fuel. This resulted in many operators feeling less optimistic about the positive budget proposals, and remarked that the impact of the higher fuel prices would offset the tax benefits introduced through the budget. However, what is important to bear in mind is that operators must not take a myopic view – while the fuel increase does raise operating costs in the short term, the fiscal benefits proposed in the budget would help strengthen the sector in the medium to longer term.
Another area that needs to be considered is whether the tax cuts on imported trucks and lorries and their tyres will translate into lower prices for logistics firms and in turn for consumers. Many formal logistics firms tend to outsource their transportation. There were two views that were brought out by them. The majority of transportation in this sector is undertaken by individuals who run small fleets of trucks, and logistics firms that outsource to them remarked that they were doubtful that these smaller players would reduce prices even if their costs reduce as a result of the tax cuts proposed in the budget. Logistics firms observed that it will be likely that the marginal benefits will be retained by truck and lorry owners as well as being passed on to their drivers who constantly agitate for wage increases or a bigger proportion of earnings in the case of a profit-sharing scheme. However, another operator was of a different view. Currently, the transport and logistics market has heavy competition with a large number of trucks and lorries in operation. Therefore, in order to remain competitive, some operators may reduce prices charged to logistics firms, accruing from the tax savings.
However, much of these arguments are on the basis that transport operators – whether large or small – will take advantage of the tax relief to invest in expanding or renewing their fleets. For this, a key consideration is the ability to raise capital to do this, especially as most of the truck and lorry owners are individuals. If they do not have access to sufficient funds, the desired effect of the tax relief may not materialize. Therefore, an important add-on to the tax relief proposed in Budget 2012 would be a scheme to assist these operators raise capital – for example, through concessionary loan facilities.
Meanwhile, the depreciation of the rupee would have an overall effect as well. An official at the Container Transport Owners’ Union noted that the benefits stemming from the Budget 2012 would be mixed – while tax relief on vehicles and tyres was a good thing, they noted that as a result of the depreciation, the cost of spare parts and the imports of tyres, etc., have increased. It remains to be analyzed whether the benefit of the former outweighs the impact of the latter.
At first glance it appears that it is only a few large logistics companies that can afford to own a large fleet of trucks and lorries, and may have the capacity to raise capital to re-invest in new fleets, etc., utilizing the proposed tax benefits. Meanwhile, the majority of transportation in the sector is by smaller players – individual truck and lorry owners as well as owners of small fleets. They may in fact need assistance the most in terms of re-fleeting and becoming modern, competitive, and efficient. Yet, the critical factor would be ensuring that they have the requisite financing facilities to take full advantage of the tax cuts offered.
With stimulated economic activity in post-war Sri Lanka and the heightened investment in connective infrastructure islandwide there is no doubt that the logistics sector will have a key role to play in supporting growth. Budget 2012 has indeed brought in proposals that give the logistics sector a ‘shot in the arm’. But it is just the beginning.