Friday, July 16, 2010

Responding to the loss of GSP+

The EU has temporarily suspended the GSP+ concessions. The Government response has been to promise measures to counter this, hinting at a possible devaluation of the currency and to suggest that the factories concerned look to improving productivity.

There is however a fairly simple measure that can help reduce production cost while raising employee satisfaction. What is this measure? A suspension of EPF and ETF payments for a specified period of time.

Employers are required to contribute 12% of salaries paid to the EPF and a further 3% to the ETF, a total of 15% of salaries. Employees are required to contribute 8% towards EPF.

My suggestion is that the Government suspend EPF and ETF payments for a fixed period of time, perhaps a year, until the EU concessions can be renegotiated. Under the arrangement that I propose the company would not have to contribute the 15% while the 8% would no longer be deducted from the salaries of employees. Thus there is an immediate saving of 15% on the ages bill, which is very significant, while the employees get a bonus in the form of an 8% pay hike. The GSP+ concessions reportedly worked out to a 10% saving on cost, I'm not sure how much a 15% saving on payroll costs translates to conversion cost but it is significant.

Food for thought, perhaps?


D said...

I've felt that the main issue was Sri Lanka's apparel industry getting too comfy with the quota era. While that was over a good five years ago, I still think many people haven't quite gotten over it, nor had many prepared for it.

Given the high proportion of raw material costs in apparel, the main thing to do is increasing productivity, while also reducing waste. But that's apparel - which isn't (according to the latest I've heard) too concerned about the EU GSP+.

EPF+EPF adds 15%, which ideally should be a sort of saving for the employee. So yeah, the accountants cringe at every protest for pay hike; since unless that involves a productivity increase, said wage hike involves a minimum additional increase of 15% for EPF+ETF and 5% (monthly) on gratuity alone. So every Rs. 100 increased should add about Rs. 120 (approx) to the cost structure.

Suspending the contributions will be the quickest way to make up for the GSP+ loss, but then at what cost? Almost every Trade Union will flip.

Until the socialist bent in the workforce is countered and everyone is made more aware that increases in pay should correlate to increases in productivity, there's not much hope. Much of Sri Lanka still adopts a cost-plus strategy, believing that everything made will be sold and all such costs should be covered.

Jack Point said...

Thanks for your detailed comment D.

My solution to the Trade Union problem would be to suspend the 8% deducted from the employee as well.

Thus the employees get an immediate cash increment of 8% which should, hopefully, quell any dissenting voices.

I have been very skeptical about the EPF and ETF in general since they offer very poor returns. This could partly be due to bad investment but also inefficiency and fraud.

The record keeping is horrible (they lose records - I was told that some of mine were lost) which means, people's money can simply disappear. Given the long period of time needed to claim the money people lose track of their documents and are then unable to claim. There are billions which have been unclaimed for ages.

There are rumours that people within connive to withdraw the balances of unsuspecting victims.

The lack of transparency-they need to send proper statements, like bank statements, makes me very uneasy.