But dependence on the world economy has a downside as well. The recent turmoil in the world economy is bound to affect us adversely. The government is planning to raise a short-term loan of $ 500m from commercial sources. The recent turmoil in the global financial markets is likely to push up the cost of such commercial borrowing. Also if the rupee keeps depreciating as it has done in the past several months repayment of the principal and interest payment will cost more in rupee terms in the coming years. The local tax payer will have to bear that burden.

In the coming months Sri Lanka will also have to contend with the price increase of key food items that we import. World wheat stocks are at an all time low since 1972-74. Wheat prices are up by about 60% since January this year. A below average harvest in Canada, draught in Australia, poor harvest in China and soaring demand from many countries, most notably from China and India, are responsible for this situation. Corn prices have also gone up as more and more corn is diverted to the production of biofuel such as ethanol. Higher corn prices also raise the price of animal feed that in turn impact on food prices. World milk prices have also gone up by about 60% in the past six months. World price for Soya and rice has also gone up in recent months though by smaller margins.

What can Sri Lanka do to fight food price inflation? In the short run not a whole lot. One reason is a very basic economic rule. Unless there is a way to increase productivity more paddy output per hectare or more milk output per cow and so on while holding down the cost of production there is no way that domestic production can make food cheaper. Such productivity gains e.g. higher paddy yields from improved seed varieties take time. New technology, more skilled labour and investment will be required. When politicians talk about self-sufficiency as a means to reduce food prices take it with a pinch of salt. They are empty promises and nothing more.

The way to fight higher food prices is to create more real jobs not government jobs that make little or no contribution to productivity in domestic production and exports and give people an opportunity to earn more income.

Planning for the Expressway

In this edition of The Kandy News we report that there are signs that work may soon commence on the much awaited Colombo-Kandy Expressway. We are still not one hundred percent certain because the government of Sri Lanka and the private investor from Malaysia have yet to agree on the exact terms of the investment. Moreover, feasibility studies suggest that only Phase I from Kadawatha to Ambepussa has enough traffic volume to make it paying as a toll road for a private investor. The second phase from Ambepussa to Katugastota will require a large government subsidy.

However, the current traffic volume between Kandy and Colombo could increase if the Expressway is constructed and make the road more viable economically. But for those of us in Kandy this has both an economic upside and an economic downside. The upside is, hopefully, more industry in Kandy area with more jobs and higher incomes. Kandy can become an attractive holiday resort and a weekend home for the Colombo rich. The downside of this will be, among other things, soaring real estate prices, traffic congestion in the town and more pollution.

If the work on the expressway commences next year as planned we have a few years notice to prepare to reap its benefits and minimize its adverse consequences. The Central Provincial Council, Kandy Municipal Council, other central government and local government agencies, private business and civil society organizations should plan for the change from now. But if the past is any guide to the future a revolutionary change in public sector management culture will be required to make such planning a reality.

Reforming KMC Revenue System

In recent months there have been reliable reports that this newspaper has also quoted that the Kandy Municipal Council is facing a serious financial shortage to meet its budgeted expenditure. The mayor at the last meeting of the Council got approval to cut “non-essential” expenditure to conserve funds. The main immediate reason for this is the inability of the Council to collect the monthly lease payment of Rs 2.8m from the contractor who has been given a lease to manage the KMC car park. The leaseholder also collects the revenue from street parking. It is reported that the total amount in default is now over Rs 40m. Even though the KMC does not get the lease income it has to pay the monthly instalment of Rs 1.2m to settle the car park loan it got from the Asian Development Bank.

If and when the dispute between the KMC and the leaseholder is settled the cash flow of the Council should improve. However, there are other aspects of KMC revenue that should be addressed to make the Council financially more viable and build its capacity to provide a better service to the Kandy community.

Table 1 shows the main revenue sources of the KMC for 2006. About one third comes from taxes, mainly assessment taxes (rates). A similar proportion comes from a grant from the Central Provincial Council. All other revenue sources each accounts for less than 10% of total revenue.

Table 1: Kandy Municipal Council Revenue Sources 2006

Source: KMC

Compared to many other local authorities in the Kandy District the KMC is relatively fortunate to derive as much as one third of its revenue from taxes. For example, the Udunuwara Pradesheeya Sabha collects a large share of its revenue from the stamp duties levied on legal transactions, a source of revenue completely at the mercy of vagaries in the rate of stamp duty.

However, things could be better for the KMC. There are some taxes and levies that are either uncollectible or historical anachronisms that are not worth bothering about. For example, the Vehicle and Animal Tax on animals and vehicles such as bicycles, tricycle, tricycle carts, carts, hand carts and rickshaws is not worth collecting because the collection cost of this tax including issue of receipts and licence plates exceeds the revenue generated by the tax.
The Entertainment Tax was an important source of revenue for the KMC prior to the commencement of television broadcasting. It now brings only a limited income with the reduced numbers of persons patronizing cinema halls.

Trade Licences and Trade Tax potentially could be to be an important source of revenue. However the amounts charged for trade licence and trade tax are in need of revision as they are charged on the basis of rates set out in the different Acts setting up the local authorities and these were drafted many years ago. The solution is to make periodic adjustments to the amounts charged to reflect changes in price and income levels.

Leasing of Market Stalls is an important source of revenue for the KMC. However, recently it was reported that many stallholders in the Manikumbura wholesale market were in default and the KMC was reluctant for various reasons to throw out the defaulters.

As noted earlier, assessment tax is the most important source of revenue for the KMC. However it brings in less than it otherwise should for a number of reasons. The valuation on which the tax is levied is very often out of date. Revision of assessment tax can only take place after an assessment by the Valuation Department. Since that department faces manpower and other constraints of its own, it may take about 3 years for the valuation department to respond to a request by the KMC. The solution is for the KMC to have, like the Colombo Municipal Council, its own valuation officers.

It is also well known that some default on the property taxes. The only weapon the KMC has to enforce the payment of assessment tax under the existing law is the seizure of the property of the tax defaulter. Seizure of property however is an extremely messy procedure. The solution is for the KMC to be empowered to file cases against tax defaulters in the Magistrate’s Courts.

KMC has a tendency to postpone valuation of property for political reasons. When elections are approaching the Council does not want to raise taxes. For example, from 2004 to 2005 KMC total nominal tax and other non-grant revenue increased from Rs 330m to Rs 353m by 6%. But when adjusted for inflation there was no increase in real terms. This undermines its revenue base especially when inflation is high and is in double digits as it is today. More regular valuations will be helpful to augment revenue and prove a better service to the ratepayers.
The Council can also make the assessment process more transparent so that public confidence is increased in the KMC tax system.

CPC Grant

There are two types of grants that the KMC obtains from the CPC. One is for the reimbursement of salaries of officials of the local authority, and the other for development projects. The Provincial Council in turn has to depend on grants from the central government. As the central government’s financial position becomes increasingly difficult, these grants are insufficient. This year the salaries grant of KMC was reduced by 20%.

This article is based on findings of a larger research project on Local Governance that the International Centre for Ethnic Studies, Kandy is undertaking for The Asia Foundation.