Economic Development and Employment

Economic Policy and Private Sector Development

Asia Regional Consultative Conference

Donor Committee for Enterprise Development

Bangkok, 29 November to 1 December 2006

Value Chain Promotion and Business

Environment Reforms
Experiences from Sri Lanka

2006

Dr. Peter Richter, GTZ-INTEGRATION

Value Chain Promotion Component

Vocational Training and Private Sector Promotion Programme

Colombo, Sri Lanka

 Table of contents

Table of contents

Table of contents ........................................................................................................ 1

Executive Summary.................................................................................................... 2

1. Introduction......................................................................................................... 3

2. Characteristics of the Value Chain Approach ..................................................... 5

3. VC Cycle and its Stages..................................................................................... 6

4. The Core Group Concept ................................................................................... 8

5. Value Chain Reform Agenda ............................................................................ 10

6. Establishing a favourable sector specific business environment ...................... 13

7. Three short case studies of reform processes.................................................. 16

8. A step ahead: Role of the Value Chain Approach for the national strategy and
policy level ........................................................................................................ 20

9. Conclusions...................................................................................................... 21

Annexes.................................................................................................................... 22

1
Executive Summary

Executive Summary

The objective of the paper is to lay out what the Value Chain Approach can contribute to
business environment reforms, with particular emphasis to the sector specific frameworks
and the role of the private sector in the reform process, using the experiences of a Private
Sector Development Project in Sri Lanka (under the title “Value Chain Promotion”) sponsored
by the official German Development Cooperation. Thus the paper addresses the issue of
regional priorities for business environment reforms as well as the issue of reforms of the
business environment in specific industry sectors.

In Sri Lanka a “bottom-up” approach to reforms has been selected by using the Value Chain
methodology with the objective to improve competitiveness and framework conditions of the
SME sector in a sustainable way. Presently the Approach is being applied to 7 sectors:
Spices, Rubber Products, Organic Produce, Alternative Tourism, Mould and Die-Making,
Construction (“Tsunami” driven) and most recently the Packaging Industry. After going
through certain stages of the VC cycle, specifically the so called “mapping exercise” a large
amount of critical issues have been identified as well as response activities to regain
competitiveness and market positions. In dealing with these issues three categories or levels
can be distinguished: Issues directly related to enterprises in a sector or value chain (micro
level) and therefore to implement in a flexible way, creation of a sector specific conducive
business environment (meso level) and framework conditions suitable for the entire business
community (macro level). As the latter specifically under the present political situation in Sri
Lanka constitute a long and complex process, often involving high costs the paper
concentrates on reforms of the sector specific frameworks.

The next question arising is: Who is doing what? Are these issues falling mostly in the
responsibility of the Government or/and of public sector institutions or what would be the role
of the private sector? Using a matrix of various reform issues addressed and their
implementation scheme as well as some case studies the result may come to many as a
surprise: A great deal of the reforms with regard to sector specific framework conditions is
auto-set or heavily influenced by the private sector. The Value Chain Approach with its
inherent investigative, participatory and democratic elements unleashes knowledge,
ownership and commitment, specifically among private sector representatives which
specially drove the processes. At the same time, representatives of the public sector from
very beginning participated in the “Value Chain Initiative” and they could develop a better
understanding of the sectors’ situation and bottlenecks. All that led to a much improved
business friendly attitude. It could be observed that decision makers in touch with the
“Initiative” were much more open for well justified reforms. As a result also reforms with
regard to regulations and policies could be reached, complementing private sector initiatives.

In conclusion, the Value Chain Approach which is based very much on the contributions of
the private sector, leads through its participatory methodology to valuable recommendations
to the policy makers on business environment reforms as well as it promotes speedy and
effective implementation processes.

2
 I. Introduction

1. Introduction

Ideally there are two ways in addressing business environment reforms: a “top-down”
approach and a “bottom-up” approach. The first one is often experienced in the case of
countries with competent and well-organized governments, which have clear cut visions,
which dispose of financial resources, are properly informed on international good practices
and have close links with the local private sector and are acquainted with their needs and
reform proposals. The Government should be able then to formulate and implement the
necessary reform policies with the aim to create an effective environment to confront stiff
international competition and advancing globalization. The second pattern is more often seen
in countries with weaker Governments which lack visions and resources as well as a good
organization of public administration and sometimes they also don’t have a trustful
cooperation with the private sector. In this case the private sector must take the initiative and
with regard to certain framework topics play even a substitutive role.

In Sri Lanka we find today the following set-up: The public sector is very fragmented; there
are more than 60 Ministries in existence, not counting a large number of secondary public
institutions with different promotional tasks and serving different segments of the economy.
Additionally, financial and human resource endowment is much limited. Just for illustration
reasons, with regard to SME policies presently at least 5 “power centers” exist with diverse
perspectives and responsibilities, but with little coordination among each other and only few
reform initiatives on the way.

In a similar way private sector organization in Sri Lanka is rather fragmented: there are at
least 3 “umbrella organizations” in place with an innumerable amount of sectorial and
regional associations in existence. But as well it has to be mentioned that certain
organizations and enterprises in the country are professionally very well managed,
economically very successful and motivated to participate in the improvement of framework
conditions for further expanding and globalizing business, also in order to create additional
scope for a further inclusion of marginalized parts of the population.1

Within this frame the German Technical Cooperation (GTZ) on behalf of the Federal Ministry
for Economic Cooperation and Development jointly with its Sri Lankan partners from the
public and private sector initiated a “bottom-up” approach by using the Value Chain
methodology with the objective to improve competitiveness and framework conditions
of the SME sector in a sustainable way and to contribute to a significant raise in
income-generating employment. This initiative was spearheaded in the context of a
broader Programme for “Capacity Building for Competitiveness and Qualified Employment”.
Presently the Approach is being applied to 7 sectors or more precisely sub-sectors of the Sri
Lankan economy, mostly the so-called “emerging sectors”: Spices, Rubber Products,
Organic Produce, Alternative Tourism, Mould and Die-Making, Construction
(“Tsunami” driven) and most recently the Packaging Industry. The leading idea behind

1
For more information on socio-economic aggregates see “Sri Lanka at a glace” in the annex.

3
I. Introduction

the chosen approach is that through a close interaction of stakeholders from different sectors
of the society and of different segments of the supply chain important contributions can be
expected first to solve the immediate problems in selected value chains or sub-sectors,
secondly to influence strongly on the right sector specific environment and thirdly to raise
macro issues that are clear impediments and bottlenecks for further development of the
sectors which are critical for accelerated economic development.

The main focus of this text lies on the question what the Value Chain Approach can
contribute to business environment reforms, specifically with regard to the sector
specific frameworks and the role of the private sector in the reform process.

4
 II. Characteristics of the Value Chain Approach

2. Characteristics of the Value Chain Approach

Still many perceive the VC Approach as a mere analytical tool, useful in revealing complex
global networking with regard to production and commerce with often rigid and unilateral
governance structures. The perception of an analytical tool is deeply rooted in the long
academic tradition of the methodology dating back to the times of A.O. Hirschman, the 1950s
and his famous concept of unbalanced growth based on “backward and forward linkages”, as
it was recalled by A. Stamm2 in a recently published Concept Study. Other important
milestones have been the use of the concept by Michael Porter to develop the individual
supply chain for firms and the French “filière” concept of the 70’s with regard to the links
between different production stages. More recent studies, much influenced by the Institute of
Development Studies in Brighton (IDS), concentrate more on the governance structure of
Value Chains which is seen as a form of value chain coordination, mostly organized by lead
firms from industrialized countries.3 Between market and hierarchy, different forms of
dominance in value chains, in particular modular, relational and captive value chains, are
highlighted.

Conversely with much reason, one can also perceive the Approach as an intervention
tool for shaping sectors as well as economies as it systematically takes all steps of a
production process into consideration, analyses the links and information flows,
reveals strengths and weaknesses, even the losses in the process, the boundaries
between the national and the international chain, the buyer’s requirements,
international standards and allows international benchmarking, etc. The way business
is done today on a global scale finds in the VC Approach a perfect methodological
match. Doesn’t that all speak strongly in favour of a constructive and operational use of the
globally oriented Value Chain Approach and to turn it into a powerful policy tool? On a micro
level it can be used to find solutions to the so-called critical success factors, which determine
if a product meets the requirements with regard to quality, price, costs, dependability,
volume, design and speed of delivery and thereby improve competitiveness. Furthermore it
can be used to identify weaknesses and contradictions in the sector specific framework
conditions as well as the overall macro conditions and to develop solutions. We will come
back to these issues in later chapters.

2
Andreas Stamm, Value Chains for Development Policy, Concept Study, commissioned by the
Bundesminsterium fuer wirtschaftliche Zusammenarbeit, 2005
3
Only to mention 2 studies: Hubert Schmitz, Understanding and enhancing the opportunities of
local producers in the global and footwear industry: What does the value chain approach offer?
IDS June 2005; John Humphrey, Global Value Chains in Agribusiness, IDS 2005

5
III. VC Cycle and its Stages

3. VC Cycle and its Stages

What in the following might appear as a clearly structured process has in reality been a
learning process derived through trial and error. At the time of the start of the VCP
Component in 2004, neither proven “good practices” existed, nor an elaborated GTZ
Approach. Some ideas could be obtained from the ITC methodology, which later had been
published under the heading SHAPE.4 Though, the VCPC (or “Project”) had to find mainly its
own way to implement a development oriented VC Approach which was adapted to the
philosophy and the resource structure of a technical assistance (TA) project.

After going through a complete cycle we would distinguish 4 stages:

1. Selection of the value chains to be promoted and collection of corresponding baseline

data;

2. “Mapping” of the selected value chains, performance requirements & gaps, responses
to critical issues;

3. Intervention strategy, elaboration of milestones and action plans;

4. Implementation, technical assistance & monitoring, re-planning.

Some short explanations on these stages may be appropriate:

1) As the Project is not in a position to promote all important sectors of the national
economy, consequently a selection of the value chains that should be up-graded had to
be done. Of course, other circumstances are imaginable, e.g. a country has decided on
its priority sectors and wants to go ahead. Or the adverse case as it had emerged some
time ago in Sri Lanka that in the process of designing a new National Export Strategy5
practically all sectors of the economy underwent a VC analysis. Obviously, such a
selection process can never be a totally rational process but an optimization
process, based on certain pre-agreed criteria and eventually some strategic
considerations. In the Sri Lankan case jointly with our main partners we agreed on
basically 6 criteria which are shown below:

Potential for growth and value addition

Current participation of SMEs in the VC

Own initiatives within the VC

4
For a detailed presentation of the ITC approach see: SHAPE Handbook, International Trade
Center, Geneva 2004
5
VCPC and ITC had supported that process. Compare: National Export Strategy 2004-2008,
prepared by the Core Team, Sri Lanka August 2004

6
 III. VC Cycle and its Stages

Existing ecological and social standards

Experiences of German Technical Assistance

Involvement of other donors (as negative criteria).

As a rule of thumb, for a well prepared selection process reliable information regarding the
size of a sector, present employment, local and international demand figures, demand
projections and competitor countries, number of SMEs in the sub-sector and role of small
producers (specifically in the case of agricultural sectors), status of links and governance
structure should be available.

2) The VCPC deliberately did not opt for very extensive follow-up studies of the selected
sectors, studies which could be very expensive and would have taken most probably
months for being concluded. We trusted more in the expertise of the entrepreneurs
and sector specialists which was activated in the “mapping” exercise. The main
tangible results of that exercise had been a comprehensive diagram of the different
steps of the value chain for the selected sub-sector or for prioritized products from the
sector, enriched by time and value/losses estimations as well as strengths and
weaknesses in the value addition process, and a second chart on the challenging, the
competitiveness affecting issues (“critical success factors”) and potential responses.

3) At that stage three questions arose: a) Who should be the partner body, b) who would
finally decide on the intervention strategy and c) who would participate in the
implementation of the identified VC activities? Here the concept of the “Core Group”
was born:6 The stakeholders of each value chain, the ones really interested in progress
and development and ready to participate in the implementation of the up-grading
activities (obviously with the support of the German Technical Cooperation) would
constitute the partner and decision making body. So the originally invited group of
entrepreneurs, representatives of the public sector and sector specialists were
gradually transformed into a Core Group.

4) The result of discussion and decision making processes in the previous stage have been
so-called “Prioritized Implementation Plans” for each of the selected value chains.
Virtually none of the activities is being exclusively implemented through German
contributions. For each issue exists a partner group, a sub-committee of the Core Group,
which actively participates in the execution of the agreed and planned activities! The
VCP supports with regard to coordination, to international, regional or local know-how
and with some funding for promotional and training activities.

6
See for more in-depth presentation the next chapter!

7
IV. The Core Group Concept

4. The Core Group Concept

As just mentioned, the Project cooperates in each selected value chain with a “Core Group”
and facilitates their activities. A Core Group can be defined as on a voluntary and
temporary base functioning group of important stakeholders of the value chain that
pursues shared goals and follows up on jointly developed intervention strategies
assuming responsibility for their implementation. The following diagram gives an
indication of the composition such a stakeholder group ideally should have:

Figure 1: Generic Model of the Core Group

Consultants Govt.
Ministries
&Institutes
Industry
Bodies
Large
Enterprises

VC Core
Accreditation Group
Agencies SMEs

Govt.
Donor Initiatives
Agencies
Foreign
Banks
Buyers

In our view, indispensable for a well established Core Group are the “lead firms”, in the Sri
Lankan case mostly exporters and their organizations,7 then representatives of the sector
SMEs and of the suppliers of raw materials, the Ministry responsible for the sector, sector
specific promotional institutions, and finally key government bodies (in the Sri Lankan case
the Export Development Board and the Industry Development Board). Other institutions and
associations can occasionally be invited with regard to specific issues that come under their
responsibility. In conclusion, Core Groups can conceptually be considered as a voluntary and
informal Private-Public-Partnership.

7
In the Sri Lankan case we work much with local exporters; in more advanced cases, e.g. Vietnam
and Thailand, international enterprises play an important role as “value chain leaders” by
providing modern expertise and shaping a modern supply and distribution network, even advising
the Government in order to improve laws and regulations. With few exceptions such a situation in
a country that for obvious reasons (e.g. conflict situation) presently is very little attractive for
foreign investment is not been given.

8
 IV. The Core Group Concept

Still, Core Groups can be either public sector or private sector led. What initially appeared to
be a weakness of the Sri Lankan case resulting from the relative weak participation of the
public sector actually developed into the strength of a private sector led Approach. Because
of who really participated actively in the implementation process were some very motivated
and keen leaders of the private sector from both large as well as from small scale
enterprises. They turned out to be the “change agents”, by which a win-win-situation has
been created: These private sector leaders contributed with know-how and own
resources, matched by the GTZ through considerable technical and also in some
minor dimensions financial support, in exchange for sector wide gains naturally also
some individual ones.

There have been also experiences in Sri Lanka with public sector led stakeholder
groups, where a higher degree of priority and political support can be expected. However,
due to the lack of organizational know-how among the public sector institutions as well as the
lack of ownership from the private sector side, these groups (they were called Task Forces)
with a few exceptions never passed the strategy development stage. This example may not
be sufficient to draw relevant general conclusions, but with reference to international
experiences we tend to think that private sector led stakeholder groups are more
adequate for instable circumstances where public policies are subject to permanent
changes and the institutional set-up is fragmented and weak.

To recap, advantage of the presented Core Group model is the ownership exercised
by the private sector, its active participation and its own contributions, as well as the
flexibility and speed of decisions.

9
V. Value Chain Reform Agenda

5. Value Chain Reform Agenda

As one can imagine, a large amount of critical issues in a surrounding as in Sri Lanka, which
in the “Growth Competitiveness Index” for 2005, elaborated by the renown World Economic
Forum, plummeted from position 73 to now 98 (from a total of 100 countries), have been
identified by the Core Group and corresponding response activities. As just mentioned, if one
clusters these issues, three categories8 can be distinguished and some examples will be
included:

Issues directly related to enterprises in a sector or value chain (micro level)

One could submit under this category all short- and medium-term measures which are
directed to single enterprises or a “cluster” of enterprises with the objective to increase their
competitiveness or their inclusion in a value chain. Examples from “our” value chains:
dissemination of information on international markets, awareness seminars on sector
potentials, participation in international trade fairs, elaboration and distribution of sector
directories, research activities about advanced technologies for single sectors and products,
training activities, promotion of linkage between large and small enterprises in single sectors,
foundation of a people’s company for bulk purchase and out-sourcing (rubber products), etc.
The list could be further extended. This type of activities will undoubtedly create positive
impacts for the participating enterprises and the higher the number of enterprises in one
value chain that can be reached and included the broader the impacts are. Additionally, good
examples are created that can be replicated by other companies and stakeholders. On the
other hand, impacts are limited as only a certain amount of enterprises benefit from that type
of activities and it is not secured that they will be kept on in the future. That takes us to the
following level.

Creation of a sector specific conducive business environment (meso level)

First of all, how can we define the scope of issues and related activities that fall into this
second category? We would define them as activities which aim at policies, regulations and
also institutions and are of immediate importance for the conditions under which enterprises
in one selected sector or value chain will do businesses. Deliberately included in this
category are organizational matters and related development services, in particular with
regard to standards and certification, as we think these issues are part of frameworks which
strongly influence and decide on the competitiveness of the sector’s enterprises. The Asia
Development Bank used once the expression “immediate environment”, containing
regulations and bureaucracy, process and product standards, markets as well as financial
and development services.9 The Bank wanted to hint with that expression to conditions which
have a direct influence on business operations in one sector. We have to distinguish them

8
These follow the concept of “systemic competitiveness” which was developed by the German
Development Institute (GDI) some time ago.
9
Asian Development Bank, Best practice in creating a conducive environment for SME, discussion
paper, June 2001. Please check the corresponding diagram in the annex!

10
 V. Value Chain Reform Agenda

from macro issues, which the Bank assumes under the term “wider environment” and which
include macro-economic policies, the political and legal system as well as basic government
services (“public goods”), e.g. very prominently security, infrastructure and energy.

A great number of issues related to the immediate sector enabling environment had been
brought up during the formerly described “mapping stage” of the VC cycle, which can be
taken as an indicator for the supreme importance these factors have for the gaining of
competitiveness and assuring sustainable development. The examples from the VCP Project
are:

Areas Issues identified and addressed

Sector specific strategies Key elements of the National Export Strategy

and policies
Laws, regulations
Standards and certification
Sector organizations
Sector specific services (incl.
linkage promotion)
2004 - 2008
Introduction of a new focus for the tourism sector (now:
“Beyond Beaches”)
Establishment of Sector Advisory Committees under
the Ministry of Industrial Development
Change of tariffs for imported intermediate goods
Subsidies for the organic certification
Law for the organic production
Change of customs regulations for organic products
Introduction of “Eurocodes” in the construction sector
National organic certification programme
(in collaboration with the EU)
“Green labelling” for eco-tourism
GMP/GAP and HACCP standards for spices and other
sectors
Strengthening of the National Accreditation Board
Start-up of a new Association in the tourism sector
(ASMET)
Strengthening and capacity building of existing sector
organizations (e.g. the Spice Council, the Chamber of
Construction Industry and the Rubber Product SME
Association)
Set-up of a Cinnamon Training Academy
Establishing Business Linkage Programmes in different
chambers and sector associations
GMP/GAP Demonstration Centre for Cinnamon
Improvements of the business service portfolio of
different private and public sector institutions
SME Help Desk in the Ceylon Chamber of Commerce

11
V. Value Chain Reform Agenda

Framework conditions suitable for the entire business community (macro level)

This category refers to all issues which are of more general importance for the enterprises
and which basically constitute the frame conditions for the entire business community. As
mentioned, ADB summarize them under the term “wider environment”. In Sri Lanka, during
the analysing part of the VC cycle (“mapping” exercise) issues like lack of good governance,
high interest rates, excessive cost of energy, obsolete labour laws, inadequate land policies
and access, as well as a deficient infrastructure were frequently mentioned. Without any
doubt, these issues are of utmost importance for the competitiveness of Sri Lankan products
and services, and have to be addressed and definitely improved, but reforms here
constitute a much longer process, often involving high costs and are from the
perspective of an enterprise or a sector only very indirectly to influence. In their daily
business enterprises have to accept and cope with these issues and that is maybe, why ADB
categorize them as “wider environment”. In any case, it is positive that these issues came
clearly on the table and now constitute important inputs for corresponding reform activities
undertaken by private sector umbrella organizations or by the public sector.

12
 VI. Establishing a favourable sector specific business environment

6. Establishing a favourable sector specific business

environment

The next question arising, once the issues that have to be tackled in order to improve the
competitiveness of the enterprises active in a value chain and to put a favourable business
environment in place, would be: Who is doing what? Are these issues falling mostly in
the responsibility of the Government or/and of public sector institutions or what would
be the role of the private sector? In the case of enterprise related measures (micro level),
the answer is quite clear that they can nearly exclusively be implemented by the enterprises
and their organisations themselves. And with regard to the macro issues it is also quite
obvious that they fall into the category of “public goods” and therefore have to be taken up by
the Government.10 The interesting question is what happens with the sector specific
“meso” issues? Who is in the driver’s seat? .We would like to find an answer by
complementing the former matrix with the implementation responsible:

Issues identified and addressed Implementation responsible

National Export Strategy (+)11 Public-Private Core Team

New focus for the tourism sector (+) Tourist Board, advised by the VC-CG12
Sector Advisory Committees under the Mostly private sector representatives
Ministry of Industrial Development (+) advise the Government
Tariffs for imported intermediate goods Finance Ministry on proposals from
(packaging material, accessories, etc.) (+) different VC-CGs
Subsidies for the organic certification (+) Finance Ministry on proposal of the
VC-CG
Law for the organic Ministry for Agriculture, closely
Production (-)13 advised by the VC-CG
Change of customs regulations for organic Finance Ministry/Customs on proposal
products (+) of the VC-CG

“Eurocodes” in the construction sector (-) Chamber of Construction Industry

National organic certification programme (in
collaboration with the EU) (-)
“Green labelling” for eco-tourism (-)
GMP/GAP and HACCP standards for
spices and other sectors (-)
Strengthening of the National Accreditation
Board (-)
Partnership between public sector
institutions, private sector stake-
holders and GTZ
ASMET14
Spice Council (sector Apex body)
Public sector, supported by the
industry

10
Still an important condition is the existence of a permanent dialogue between the government and
the business community to discuss and agree on the right alignment of “business friendly macro
policies”.
11
(+) = successfully implemented
12
Core Group of the corresponding Value Chain
13
(-) = in the process

13
VI. Establishing a favourable sector specific business environment

Issues identified and addressed Implementation responsible

Start-up of a new Association in the tourism

sector (+)
All private sector
Strengthening and capacity building of
sector organizations (e.g. the Spice
Council, the Chamber of construction
Industry and the Rubber Product SME
Association) (-)
Set-up of a Cinnamon Training Academy Spice Council
(-)
Business Linkage Programmes in different Private sector
chambers and sector associations (-)
GMP/GAP Demonstration Centre for Spice Council
Cinnamon (+)
Improvements of the business service Private and public sector
portfolio of different private and public
sector institutions (-)
Private sector
SME Help Desk in the Ceylon Chamber of
Commerce (-)

Maybe it comes to many as a surprise: A great deal of the reforms with regard to sector
specific framework conditions is auto-set or heavily influenced by the private sector. It
has to be emphasized that these initiatives and reforms have been achieved under the
formerly described complex and difficult circumstances in Sri Lanka. As we could observe,
the Value Chain Approach with its inherent investigative, participatory and democratic
elements unleashes knowledge, ownership and commitment, specifically among private
sector representatives which are also the prime beneficiaries of business environment
reforms. Derived from the experiences of the Value Chain Approach the role of the private
sector with regard to business environment reforms seems threefold:

The private sector as advisor (particularly in the process of identification of issues and
potential solutions)

The private sector as implementer (specifically with regard to matters of standards and
certification, of sector organizations and of business services)

The private sector as lobbyist (mostly with regard to policies and regulations).

At the same time, representatives of the public sector have been present from the beginning
of the “Value Chain Initiative”, they participated in the “mapping exercises”, they are
members of the Core Groups and they could develop a better understanding of the sectors’
situation and bottlenecks. All that led to a much improved business friendly attitude. It could
be observed that decision makers in touch with the “Initiative” were much more open for well

14
Association of SMEs in the Tourism Sector

14
 VI. Establishing a favourable sector specific business environment

justified reforms. As a result the above mentioned reforms with regard to regulations and
policies could be reached.

The “Project” tried to maintain the position of a facilitator through the following contributions:

Transfer of the VC methodology and international “good practices” (e.g. steps of VC

cycle, mapping exercise, concept of systemic competitiveness)

Organization of dialogue platforms and networks (e.g. Core Groups)

Infusion of advanced sector and development know-how via international and regional
expertise (e.g. standards for organic production, GAP/GMP, “green labelling”, linkage
promotion)

Visits to interesting programmes and institutions in other countries as well as

participation in international conferences (e.g. linkage programmes in Thailand and
Singapore)

Use of local know-how (e.g. capacity building of local sector organizations)

Provision of access to Government institutions, decision makers and other donors.

15
VII. Three short case studies of reform processes

7. Three short case studies of reform processes

In the following we will present some examples with regard to reforms of the sector specific
business environment, how these reforms had been achieved and which role the Project had
played in the process. It should be noted that in particular two conditions have been
important for the success: the identification as a key issue during the Value Chain Mapping
or Analysis workshops that the GTZ had organized at the beginning of the VC cycle as well
as technical inputs to lay out the necessary policy changes or measures. The first condition
has served to secure ownership and support for the changes, including the one received
from the public sector. The second condition was imperative to include regional as well as
international know-how and give the measures the right shape up to competitive standards.

In some other countries of the region high level and structured Public Private Dialogue
forums may exist and be very successful.15 In Sri Lanka presently such forms of close
cooperation between the pubic and the private sector does not exist because of different
reason. One reason surely is the lack of a clear vision of policy makers towards international
competitiveness; another is a deep rooted distrust towards the private sector which may
stem from the socialist past, which finds its present expression in a mostly populist policy
approach. The private sector in the country, on the contrary, is very much open for more
permanent and more binding cooperation.16

A Value Chain Core Group Success Story: Import Duties and Industrial Policy

It was May 2004 and the forum was the GTZ Value Chain Mapping Workshop for Organic
Products Sector. During the Value Chain Mapping for canned organic products a critical
problem faced by the industry was brought to the attention of the Value Chain Core Group –
shortage of cans for exports. This was due to that the major local manufacturer of cans was
experiencing liquidity problems and the production had almost come to a standstill. Under the
circumstances the exporters had no choice but to either loose their orders or to import cans
at 28% duty and high freight cost, mostly from India. The second option meant that the
exporters had to work on thin or no margins just to keep the operations alive expecting a
more permanent solution.

The discussion continued at the Value Chain Mapping Forum between the industry
representatives and the representatives of the Ministry of Industrial Development. Both
parties agreed something needed to be done and done fast. Follow-up discussions,
facilitated by the GTZ “Value Chain Promotion Component”, lead to a proposal to bring down

15
The case of Vietnam has to be mentioned here where under the guidance of the GTZ “SME
Promotion Programme” the Ministry of Trade, international companies like the Metro Cash&Carry
meet regularly to discuss and improve laws and regulation as well as long term sector strategies
and policies.
16
Only recently “Advisory Committees” with private sector representatives under the “Ministry of
Industrial Development” have been (re-)created: They serve to advise the Ministry on business
friendly policies, without up to now reaching the level of a permanent public private dialogue.

16
 VII. Three short case studies of reform processes

the duty from 28% to 12% for the year 2005 onwards (being included in the National Budget
for 2004) and integrated with other incentives such as duty free import of machinery for
packaging sector etc.

Under the “Temporary Import for Export Purposes” (TIEP) Scheme cans could be imported
and the duty could be deferred. Then based on the value addition and export records duty
could be written off.

While the problem of the exporters now provided with a temporary solution as the lead times
and freight costs were still affecting their competitiveness, a more permanent solution was
needed for the can supply. As a publicly supported solution the can manufacturer was
bought over by Watawala Plantations Ltd – a public listed company - and restructured and
named as Sunshine Packaging (Pvt) Ltd, saving the jobs and enhancing the competitiveness
of the local export industry.

Now the exporters have the choice of cans being imported at 12% duty or having them made
by Sunshine Packaging (Pvt) Ltd and other local manufacturers. Further recommendations
have been made to reduce the duty for the imported cans to 6% and make the export
industry even more competitive.

A problem highlighted, fallen in the right ears, responsive action taken and the industry made
more competitive – a chain reaction started at the Value Chain Core Group!

A Cinnamon Training Center to Promote the Sri Lankan Spice Industry

Cinnamon is the Sri Lanka’s principle spice product in terms of foreign exchange earning and
employment generation. Sri Lanka commands over 80% of the world’s true cinnamon
production and exports close to 13000MT per year in the form of quills in different grades,
mainly in bulk form. Major markets are in Central and South America. Sri Lankan Cinnamon,
with its distinctive taste has a captive market. In 2005 total value of foreign exchange
earnings generated by the cinnamon exports was approx. US$ 50 million, which is about
60% of the total earning from the spice sector.

Although the industry export performance is significant, all the stakeholders were of the view
that this export performance is very much below its potential. This is mainly due to the
difficultly in harvesting of the plantations. It is estimated that only 25% of the cultivations are
harvested twice a year, and out of the balance most are harvested only once a year, some
are not harvested at all on a regular basis. The main reason for this irregular harvesting is
the scarcity of “cinnamon peelers”. Cinnamon peeling is a process, which starts from the
cultivation and goes up to the final processing i.e. preparation of cinnamon quills for export.

The scarcity of labor is due to the social stigma on the cinnamon industry. This was
highlighted by the stakeholders at a Sector Strategy Development Workshop organized by
the GTZ- Value Chain Promotion Component (VCPC) as one of the priority issues of the
spice sector. Consequently developing a proper training facility for the cinnamon peeling was
identified as one of the most important immediate interventions.

17
VII. Three short case studies of reform processes

VCPC assisted and facilitated The Spice Council (TSC) of Sri Lanka to plan and establish a
properly constituted training facility based on the “Good Agricultural Practices”(GAP) and
“Good Manufacturing Practices” (GMP). Training manuals were developed by the VCPC in
collaboration with the TSC and the “Sri Lanka Standards Institution” (SLSI). Accordingly the
private sector Training Facility was established under the name of “Cinnamon Training
Academy (CTA) of Sri Lanka” and registered as a non- profit organization.

The TSC is a young organization with limited financial resources. As the TSC was not in a
position to meet the total investment for the CTA of approx. US$ 400,000, VCPC
successfully intervened to obtain the necessary finances from other donors including the
GTZ- “Promotion of Micro, Small and Medium Enterprises Project” and the USAID as well
some public sector contributions. Presently the Training Center is in its final planning stage
and its construction will begin in January of 2007. The opening of the center is planned for
mid 2007.

Certification Standards for the Tourism Industry of Sri Lanka – The “Green Isle”
Certification

The tourism sector of Sri Lanka is among the top five earners of foreign currencies in the
country. The Sri Lanka Tourist Board has stated earlier this year to make the tourism sector
become the No. 1 by the year 2010. To achieve this, the tourism industry has to be able to
meet international expectations and international standards. The niche market of “Alternative
Tourism”, i.e. not mass but individual tourism, becomes more and more important in this
aspect as it caters for this worldwide trend. As Sri Lanka has experienced more than 20
years of civil war and the devastation of the tsunami on 26.12.2004, the tourism industry
stands on fragile ground when competing in the mass tourism market with other Asian and/or
developing countries.

The Core Group of Alternative Tourism that was established in spring of 2004 and consists of
stakeholders from the public and private sector, is very conscious of the fact that Sri Lanka
lacks international renown standards when competing with other countries. The Sri Lanka
Tourist Board, also a member of the Core Group of Alternative Tourism, approached the
GTZ in the summer of 2005 and asked for support in organizing a workshop on green
certification standards.

Mr. Dick Sisman of Dick Sisman & Associates/UK, the “father” of the internationally known
“Green Globe 21” standards for the tourism industry, was chosen to do a one day workshop
in September 2005. The outcome of this workshop was his recommendation to develop
national standards based on “Green Globe 2” to which he had kept the copyrights.

The Tourist Board agreed to his recommendation and the Core Group of Alternative Tourism
– especially those members representing small and medium enterprises – decided then to
continue with the initiative. Mr. Sisman, again contracted by the GTZ, returned to Sri Lanka in
January/February 2006 and May/June 2006 in order to meet and interview small and
medium entrepreneurs in the tourism sector (accommodation providers, restaurant owners,

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 VII. Three short case studies of reform processes

tour operators, service providers). He analyzed their way of doing business as well as areas
of potential improvements to reach expected international standards.

The private entrepreneurs were very keen in helping to develop national standards and to put
them into place. When Mr. Sisman presented his methodology, i.e. a 3-phase-approach of
certification specifically developed for Sri Lanka and called “Green Isle” in July 2006, more
than 20 entrepreneurs volunteered to become the first pilots to test the system.

Early September 2006 these pilots were given the necessary documents to follow the
outlined procedure. It is planned to have Mr. Sisman or one of his associates come back to
Sri Lanka end of October 2006 to meet the pilots, discuss their experiences, assist them to
achieve the different “Green Isle” levels and to do a train-the-trainer programme for those
selected people who will become the certifying agents in the future.

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VIII. A step ahead: Role of the Value Chain Approach for the national strategy and policy level

8. A step ahead: Role of the Value Chain Approach for

the national strategy and policy level

Another consideration would be, of course, using the VC Approach in an even broader
strategic context, e.g. for designing a national development or export strategy.17 Again a
“bottom-up” advance seems to be a good option, where issues are identified starting with the
screening of economic sectors with regard to their potential and also the degree of
competitiveness and existing development bottlenecks. A strategy then emerges by
prioritizing issues and sectors. The VC Approach can be used for various tasks in this
respect: to evaluate the potential of sectors, to up-grade prioritized sectors and to identify
urgent meso and macro issues. The VC Approach reveals these issues in the already
explained “mapping” exercise where strengths and weaknesses are being detected. These
analyses are normally used to formulate responses on the sector level, although it would be
even more effective if a national response can be found, specifically when certain issues
appear repeatedly in the different sectors. Some examples are: access to financing, support
to branding strategies, provision of packaging at an international competitive level, promotion
of e-commerce, etc.18

The same is valid for the macro economic management. We firmly believe that the private
sector knows best the conditions –on different levels- it needs to fully develop its capacities.
As the Value Chain Approach is based very much on the contributions of the private sector, it
can be expected that the application of the Approach, the “mapping” of the links in sectors
and the bottlenecks, leads to valuable recommendations to the policy makers about what has
to be done in order to improve the competitiveness of the national economy.

Development can only take place if the different action levels - the enterprise level
issues, the sector specific business environment and macro framework - are being
seen in a systemic relation.

17
One example for such an approach is the “National Export Strategy Template” - A Process Tool,
developed by the International Trade Center, last version, march 2005
18
Some of these “crosscutting” issues are presently addressed by the VCPC “Project”.

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 IX. Conclusions

9. Conclusions

Our experience has clearly demonstrated what the Value Chain Approach could accomplish
for the development of a favourable sector specific business environment, especially by
strengthening the role of the private sector as adviser, implementer and lobbyist. In this
respect we would like to emphasise one more time the following issues or better said
advantages of the Approach:

A comprehensive view of all production stages and correspondingly of all related issues
from the buyers’ perspective till the making of inputs;

A hands-on approach by including the stakeholders, specifically from the private sector –
the owners of the production process - into analysis and implementation;

Stimulation of the know-how and commitment of the private sector and creation of
ownership;

The private sector recognizes that he himself can contribute to an enabling business
environment or even create it;

The public sector is participant and understands better the needs of the private sector
and shows a higher readiness for quick reforms, specifically with regard to sector
specific changes in the business environment.

In Sri Lanka, although many of the macro issues still await lasting solutions, in the last years
many improvements on the micro and meso level in the supported sectors could be
expeditiously achieved; but to emphasize it again the process kicked off in the first place
through private sector contribution and commitment. Today mainly spices, rubber products
and organic farming show impressive and higher than average growth rates in turnover and
exports,19 even under the situation of a once again intensifying conflict. That affirms our
hypothesis that change activities on these two levels seem to be most effective for the
development of selected sectors.

Refining our statement in the introduction on the two ways to approach business
environment reforms (“top-down” and “bottom-up”) we would conclude that it will be in any
case very helpful to integrate appropriately the views and the contributions of the private
sector to forge reform policies and to set up a business environment that is capable of
meeting the many challenges of today.

19
Compare export statistics in the annexes.

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Annexes

Annexes

22
Annexes

23
Annexes

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