• In conversation with Ceylon Motor Traders' Association Chairman Charaka Perera 

The Ministry of Finance, recently reiterated its firm decision to not resume the ban on vehicle imports in the foreseeable future, even though the import ban will be lifted for many other items except vehicles by September. Amidst this decision by the Government, The Daily Morning Business sat down with Ceylon Motor Traders' Association Chairman Charaka Perera to discuss this in detail.

In conversation with The Daily Morning Business, Perera highlights the various challenges the motor vehicle industry in Sri Lanka has been going through, along with the import ban that was in effect from 2020.

Moreover, the Government comes up with trivial reasons for the import ban, such as the dollar outflow and the high fuel consumption of the vehicles. However, he emphasises the importance of bringing down brand new vehicles as they are less fuel-consuming. The country has a fleet of 8 million vehicles, and 50% are nearly 15 years of age or older.

Following are the excerpts from the interview:

One of the allegations from the vehicle industry is that the Government is not providing an opportunity to hear out the suggestions of stakeholders. They are not even having a meeting with the stakeholders, but are planning alternatives or plans relevant to the sector on their own. Is it true that the Government is not hearing any of the suggestions that you are making or allocating time for a productive discussion?

When you say “Government”, it is a bit of a broader section. There are various ministries which are involved with the motor industry like the Ministry of Transport, Ministry of Industry, Ministry of Finance, Industrial Development Board (IDB), Public Utilities Commission of Sri Lanka (PUCSL) and likewise. Lately, we have found that while many ministries have been supportive of discussions about the growth of the industry and other issues, we have not been able to properly communicate with or meet with the Ministry of Finance and the Central Bank, who make the final decisions regarding imports.

Is there an update to the quota system? Since the industry has been requesting for a quota system and the government did not really say anything about that. Do you think there will be an improvement in the quota system maybe once the Forex situation improves?

Previously, as an association, the Ceylon Motor Traders' Association (CMTA) had also requested a quota system. Although we requested for a quota system considering that the industry is not regulated and the government cannot pinpoint the vehicle importers, because prior to COVID, anybody could import a vehicle, which was one of the causes of the unwanted outflow of foreign currency in certain years and the sharp ups and downs in the outflow of US dollars. Now when it comes to the quota system, that was the biggest problem. How can a quota be given? They may have determined an allocation of perhaps 40%, 50%, or something similar by looking at the import history. If the government had a list of pre-registered importers stating down these permitted companies because they have invested in the industry, the number of employees working under them and so forth. They may also be allowed because they hold franchises or other similar reasons. But it was not doable.

In May, the CMTA proposed a different scheme to the government, which is to open imports on a staggered basis. First stage should be for  two and three-wheelers, which is actually for the masses of this country, because the masses are suffering from inadequate mobility. Second stage should be for commercial vehicles, because businesses are suffering with improper trucks and vehicles to distribute the goods. The final stage should be for passenger cars and SUVs and so forth.

In addition, to open up these specific categories with a 130% tax rise on top of the existing excise duty and then to lower it by 15% every three months. The rationale is that in a situation like this, there are three possible outcomes. Firstly, no one will import cars simply because they have a car sale. Every importer would know that if they don't sell it by the next quarter, the cost of the next quarter shipment for somebody else will be lower and that person can sell it at a lesser rate. Therefore, nobody will rush to import, whether it's bikes or trucks or cars, whichever and it will be almost a self-regulation, without the government intervening.

On a typical scooter, the reduction, as I recall, was around Rs. 20,000 every quarter. On a scooter, Rs. 20,000 is a significant sum in that market. Every three months, it decreases. In other words, the scooter's price has decreased by around Rs. 60,000 in the last three quarters. Therefore, it stands to reason that no one would import unwanted bulk stock.

Secondly, the government's revenue per vehicle will be significantly higher than it is now. Prior to Covid, the government received 6.8% of its income from autos and stands as the highest revenue provider for the country. Even though there would be fewer imports, the government revenue per vehicle, and the chunk of government revenue will be higher.

Thirdly, the used vehicle market will quickly decline. When the country begins importing brand new vehicles, the brand new vehicles set the price for the used vehicles. The used vehicle market will decline once the brand new car prices reach a particular point and everyone is aware that every quarter the price is going to go down, faster than that rate. The used vehicle market is currently bloated, and some people are actively manipulating the market by asserting the market price is rising since the country is not bringing down vehicles any sooner. They engage in high rates trading. It is mainly due to the covid factor and the lack of available automobiles. However, if we do this, the cost of used vehicles will decrease.

We emphasised to the government that this will be the best scheme for reopening imports rather than going for a quota system since a quota system is not yet feasible in practice. We have addressed this with the Ministry of Finance and a number of other ministries. In addition, we have spoken about it with a few other government-related organisations. We have received a lot of positive responses from the other ministries except from the Finance Ministry.

Why is the Government so hesitant to regulate this industry? And, if you have to suggest a few things to regulate the industry, what would they be, coming from the perspective of the CMTA?

In terms of regulation, early this year we submitted a proposal to the Ministry of Transport which was well accepted by the Ministry of Transport, and they are looking at implementing it. When it comes to regulation, the party or entity that imports vehicles, should have the responsibility, be held liable for the vehicles that they import, and ensure that the vehicles they import suit our country, our environment and  our climate, as well as providing safety for both the users and the road users.

Some of the imported automobiles aren't made for our climate or the country's roads. Additionally, the vehicle's features could endanger other road users, which is another concern. For instance, the automated braking system, which was introduced to the country with some cars, owing to our road conditions, where there is a lot of traffic and certain unruly driving on the roads, will lead to accidents, when this automatic braking kicks in, without pre-warning, to the driver. Therefore, by the time the vehicle stops, the rear vehicle comes and hits you. Things like this creates additional problems.

The regulation should happen in such a way that the vehicle should be recommended by the manufacturer, to at least this region, if not for this country. The importer of the vehicle should be held responsible for the warranty of that particular vehicle for a reasonable period of time, and a comprehensive warranty. Since we have seen customers being misled by importers, who just import and say there's a warranty, but then, when there's a problem, they're not looked after.

Further, the importer should be held responsible for any particular recall, which happens on that vehicle. Because we have seen that, I think last year, there was the death of a scientist in Sri Lanka, which occurred due to the airbag blowing up, and this was a  vehicle which was supposed to be recalled in Japan. Unfortunately, the vehicle had been imported by somebody and sold without any responsibility at all. So, the recall should be looked after by the importer.

Moreover, we propose that any company that is operating in this business should be a company that adds value to the economy or the GDP of the country by creating employment opportunities. There should be tax paid by that company, and not just an individual who imports and sells it off his backyard and keeps the profits they make. There should be taxes which go to the government as a proper entity. Likewise, we have covered several areas which are included in the proposal. If all those criterions are covered, then entities that are really adding value to the country and the industry, would come in. Those are some of the key areas that should be covered under import regulations.

A number of economists believe that there are too many vehicles on the road in Sri Lanka. What do you have to say about that? We don't even have a proper public transportation system. Are we even qualified to say that there are too many vehicles on the road?

Actually, that comment we have heard quite a lot from various parties. When you compare the number of vehicles on our road system, we have about 8 million vehicles registered currently. Out of that, operationally, I believe it would be in the range of 7 million or so that are running on the roads. Out of the registered 8 million, about 4 million of these are two-wheelers. About one million are passenger vehicles like cars and SUVs. And then we have another 1.2 million, that might be three-wheelers. The remaining are trucks, buses, and these prime movers, and all the other categories put together. That's how the structure is at the moment. So, when you look at four-wheelers, although there are 4 million two-wheelers, anybody would think that for a 22 million population, 4 million is a big amount. But when you take, say, 1,000 people, that would be about 250 two-wheelers. And if you take a South Asian country, like Malaysia, Thailand, Vietnam, for a 1,000 people in those countries, there are about 500 to 600 two-wheelers and where the two-wheeler market has now matured.

When you compare with that, Sri Lanka has another long way to go, in terms of the two-wheeler market. And that means, if it can go up to about 500 units at least, that means there's a potential market of doubling the number of two-wheelers. That’s another 4 million vehicles yet to come in. But, of course, that depends on the public transport development. If the public transport system is much more developed within the next couple of years, if everybody can easily get into public transport and go to wherever they want to go, whether it's office or other purposes, then the requirement might be lesser. But at the moment, there is a potential like that.

When you look at the cars, they are in a similar situation. In Sri Lanka, we have about 50 cars for 1,000 people. And if you take households, we have about 5 million households in the country and 1 million cars. That means only 20% of the households can afford a car at the moment. If you take a developed country like America, there are about 900 vehicles for 1000 people. Whereas, we have 50. If you take Japan, it's about 500 cars for 1000 people. Western Europe would be about 600 cars for 1000 people. If our economy is to grow, and if the people are to be made, affordability has to be created to own a vehicle at least for a large portion, then we could at least go for 100 cars for 1000 people. Given that fact, there's another potential of doubling the number of cars that we have, from 1 million to about 2 million at least. My counter argument for that is, for the people who say that there are too many vehicles, when you look at the numbers, there is definitely potential to have more vehicles coming in if we compare the situation of other countries. But, unfortunately, some of the people who quote saying that there are too many cars and bikes on the road, themselves have vehicles. So, if you ask a person who can't even afford a car or a bike at least, then they would know that there is a need to buy a bike at least for the family. To be able to take a loved one to the hospital or their kids to their classes etc. they should be able to at least afford it. Some say that a developed country is where the rich people go on public transport. If that's the case, places like America and Europe will not have cars because their public transport system is so good. What I would say is that a developed country should be a country where a rich person finds public transport comfortable enough and efficient enough to get into it, to do their work, to go wherever they want. But at the same time, the country should make vehicles affordable for the masses to be able to buy one. The usage would be different. Affordability is different. Masses should be able to buy a scooter or a small car at least for the family, but then public transport should be efficient and comfortable enough for them to use public transport regularly. Those are two things which have to happen. If you do that, then people will be able to afford a vehicle but they might not need to buy a vehicle. They might not see the need. At the moment, our problem with the people is in Sri Lanka, their dream is to eventually buy a house and a vehicle. Both dreams are very difficult to achieve right now. In that sense, when somebody says that there are too many vehicles, it's really unfair. Those people should be going on public transport.  Unfortunately, the decision makers do not go on public transport.

Why are vehicles so unaffordable in a developing country like Sri Lanka? It is a very big deal for somebody to afford it and they should reach some affluent status in society to be able to afford one. Why does it have to be like this? 

Obviously, it's because of taxes. If you take a two-wheeler or a scooter pre-Covid, say, the FOB (free-on-board shipping) price of a fast-moving scooter would have been Rs. 150,000. The tax was about Rs. 130,000. Almost 100% of the vehicles’ market prices were at about Rs. 300,000. Out of that, nearly half of it was taxes. So, for cars, it was worse. It was over 100%. Sometimes, it went up to about 250% on taxes. So, the affordability is not there mainly because of government taxes. Pre-Covid, this was the same scenario. Why are government taxes so high? This is because the government wants to earn revenue to cover government expenses. As I mentioned earlier, 6.8% of the government revenue was from vehicle imports, which is a big chunk. Rs. 130 billion came into the government’s kitty through vehicle imports. When government expenses keep growing, they have to find ways to impose taxes. The easiest taxing methods are on vehicles, liquor, cigarettes etc. If you take the 2019 figures on the Ministry of Finance’s report, the excise duty was Rs. 399 billion. Out of that, Rs. 130 billion was from vehicles, Rs. 115 billion was from liquor, Rs. 87 billion from cigarettes, and Rs. 61 billion from petroleum products. All the other products put together, only brought in Rs. 4 billion. So, the government taxes sectors which are easy to tax and nobody would say anything else when it comes to liquor and cigarettes. The successive governments have created the impression that taxing vehicles means taxing the rich. But that is not the case. You are actually taxing the masses. Taxes make it unaffordable. The same car in Japan or any other country will be much cheaper. One thing the government has to figure out is how to manage their expenses or find ways to curtail it, and I am not an expert on that topic. Taxing the vehicles of the masses is really what is making it unaffordable. Because the salaries of the masses and other sectors are not going up like that and it's hurting the economy. If you look at a person who wants to start a small business or a shop and bring goods to the shop on a bike, he or she might find it very difficult to do that. Because starting a business is also a big investment. And then for a scooter, at the moment, you have to spend about Rs. 600,000 for a 5-year-old scooter. It's very unreasonable. The economy cannot be kick-started because mobility is a key factor for any economic progression and mobility in Sri Lanka happens mainly on private vehicles. In urban and outstation areas, you’ll find a majority being private vehicles. Goods transport is also an area which has to be developed. Now, assume there are goods coming from a Colombo factory or warehouse for Anuradhapura. At the moment, trucks would be taking it there. But if we can figure out a way where the rail system carries commercial goods to Anuradhapura and then from Anuradhapura, it's a hub and spoke operation. Then small vehicles would be needed to distribute that. But the bulk will be going from here to there. So, just imagine the reduction of traffic on the main roads, connecting cities. Imagine the savings on fuel for vehicles which are going on. Imagine the traffic accidents reduction. I've seen tipper trucks coming from Manampitiya to Colombo carrying sand those days. I don't know whether it's still happening. Every day, you see about at least 40 to 50 tipper trucks on the road or maybe more and so many accidents have happened. But the rail system goes from Polonnaruwa right here. So, as I remember, it goes up to Polonnaruwa. Yeah, it goes past there. So, if the sand was loaded on a train and sent here, it would have been much easier.

Now that the Government has firmly stated they will not permit vehicle imports any time soon, will vehicle prices go up again like it did when the Government imposed the ban? Or will it come down because there's less demand? Is there a demand at all right now?

Now, the Government has mentioned that the vehicles will not be imported. So, when you make statements like that, what happens is, it creates confusion. It creates uncertainty in the market. That is exactly what should not happen as a Government. People might panic and think that, before the prices go up, they should make the purchase. Then there will be a huge rush to buy these vehicles. It is manipulative. But if the Government at least gives a kind of direction as to when they will be opening up the imports, things will flow smoother. Because as businesses, all of us have to plan. We know wh

our current cash flows have been. We know what the predicted cash flows are. And we would know what our expenses are. Then we try to manage what we can buy, what we can purchase as capital goods, what we can do as recurring expenditure. We all plan out as businesses. 

Similarly, a Government managing income and expenditure. So, the Government should at least be able to provide an indication when this could be opened. Even if the indication of opening the market is months ahead, this will create stability in the market. Then everybody can plan out. Then, I will wait for that time because the prices might come down and then make the purchase. That kind of stability is what we expect from the Government. Not to indefinitely say that you can't import vehicles. So, when the Government says this, there is definitely a possibility that the prices could further go up. To answer your question, yes, it could go up which should not happen. Because already the prices are almost double the price of what was there during pre-Covid.

How did the prices go up during Covid?

In March 2020, when the vehicle imports were suspended where we were at the beginning of Covid situation, whatever stocks which were there in the market were sold out. Then the import suspension which was supposed to be for six months continued indefinitely. At that point, due to Covid, people were reluctant to use public transport for health-related reasons. Public transport could have been one of the biggest spreading platforms because of the virus. For this reason, many people clamoured to buy a scooter or a motorcycle or a three-wheeler or even a small car. At that point, imports were limited. When there is a higher demand and the supply is limited, obviously, the product prices go up. That's an eventual situation. In most of the other countries, in the South-East Asian region – especially developing countries – the importing of bikes or three-wheelers or small cars were not halted because that was the need of the time, and their vehicle sales went up.  

However, in our country it went the other way around and the prices doubled. At that point, the brand new scooter which we sold at Rs. 300,000 in the market, in 2019,  went up to Rs. 500,000-600,000 during that time. And that was like a watermark now. Now, that price is sustaining. The price is not coming down. Initially, it was a dollar crisis. In 2019, our total outflow for the country for imports was $ 19.9 billion with all these import restrictions, still in 2021, still the country spent $ 20 billion, more than 2019, on imports. And 2022 also, we spent about $ 20 billion. So, then, what have we saved?

According to what we were proposing, the whole country could have managed with about $ 400 million for vehicles. Two-wheelers or three-wheelers, trucks. But, unfortunately, the country spent $ 200 million on fish imports, $ 300 million on finished garment imports, another maybe $ 300 million on electronic goods and furniture and fittings. If the country had money for those things, why not spend on vehicles which could have helped the economy as well as the people, to save themselves from the spread of the virus.These are decisions which we feel could have changed the situation.

The IMF staff-level report on Sri Lanka, which was done in the first half of this year, specifically mentioned the vehicle import ban. They suggest it to be removed and we have the first review coming in September. Do you anticipate this so-called firmness has to go away and the Government has to make a decision?

Yes, I believe so. We actually wrote to the IMF also regarding our proposal and their proposal is also to manage open imports, but manage it with a taxing system, which is exactly what we are proposing here. It's a unique system that we are proposing, which has not been tried earlier, but it's practical. Not only the IMF, most of the foreign missions are also indicating that we can't ban something and expect other countries to import your goods. Now, of course, we see the Government lifting import bans on many goods, but vehicles. Even by last week, they were defending the decision. But we feel that the pressure, the request from IMF, as well as all the other foreign parties will have to be adhered to, will have to be allowed and the Government would have to look at some sort of relaxation on the imports.

State Minister of Finance Ranjith Siyambalapitiya responded, stating that the vehicles will not be imported for two reasons. Namely, the dollar issue, that there's a lot of dollar outflow for the vehicles, and the Government income for that particular quantum of dollar outflow being low.

The amount of dollar outflow for the vehicles, for two wheelers, for example, was only $ 200 million pre-Covid. At the moment, if you open up in the method that we are proposing, it will be less than $ 100 million, when the country is spending $ 200 million on seafood imports and many other non-essentials. With regard to the concern on the lack of government revenue, if you take the 2015 customs report, basically, this is the customs report for 2015, the grid shows significant revenue earning commodities in descending order. The highest earning was from motor vehicles in 2015, that is 244 billion, that was 39% of the total revenue of the customs.Next in line is minerals and mineral oils, taxes on that, 89 billion, that is 14%. Anything below that is machinery. All the others put together is about 25%. All these other non-essentials that are being imported are not even in this category. If the vehicle revenue was not enough, then surely all the other revenues were not enough which the Government got from other non-essential imports.Then why are we opening up other non-essential imports, where the government revenue is much lesser, maybe 10%, maybe 15% or 30%, whereas you have a product which is needed by the people, and giving 100% minimum government revenue, and still you are holding it. We don't understand what the reason is behind this.We are waiting to get a proper answer from the Finance Ministry. At one point, they were quoting fuel requirements, saying that vehicles need fuel, usage of fuel is high for cars. So, if you import more vehicles, cars and bikes, fuel outflow is high. However, the newer vehicles will be much more fuel efficient. At the moment, the country has a fleet of 8 million vehicles, 50% are nearly 15 years and over. They can't see that issue, that people have to upgrade. As a country, otherwise we are relying on old vehicles. Then the demand for spares is going high. The country has to spend more on spare parts, because older vehicles are being used more now to run.

How could the spare parts market be regulated?

No, unfortunately not. You can import any type of spare parts into the country. Anybody can import any inferior quality spare parts and put them to the market since nobody is held reliable. A simple example is, if you take the original brake cable of a motorcycle. It has a certain thickness. You’ll probably see half of the market filled with non-genuine spare parts. So, when riding a bike and you brake, suddenly there is a possibility that the cable could snap. If that happens, the rider and the pillion rider could really end up in a critical situation, even in death. In Sri Lanka, every year 3000 people die on the roads, due to road accidents. I don't know whether there is a study being done, or whether there are causes of non-genuine or inferior quality spare parts for these.

Would the government benefit from regulating the industry more than it is benefiting right now?

If you take spare parts, many people bring them down through illegal means. The spare parts are coming into the country in boats where the tax is not paid and they put it to the market slightly below other spare parts. Thus, those people will have a good gain. However the government is losing a lot of revenue in the process. With regard to regulations, one positive thing we see now is with regard to local value addition. For electric vehicles there are now regulations which are being developed within the Ministry of Transport, Ministry of Industries, Industrial Development Board, Ministry of Environment, PUCSL, and other institutions who have come up with certain regulations which are in the pipeline now which is a very positive thing which we had not seen for 5-6 years ago. As an industry, we hope it will come out soon, and once it is out, many of the issues will be sorted.