Following years of steady growth, the ICT sector is embracing a period of fast-paced innovation. While the telecoms and business process outsourcing (BPO) industries in Sri Lanka are reaching maturity, efforts are being focused on developing more innovative and highend products. The sector’s organic growth is benefitting other industries, such as agriculture, manufacturing and tourism, and supporting the emergence of technology-focused small and medium-sized enterprises (SMEs) and start-ups, which in turn are creating jobs and value in the economy. At the same time, government and private sector stakeholders are trying to promote the country as a technology hub for international firms and investors. However, despite the progress made, recent political uncertainty and ongoing regional disparities in ICT infrastructure need to be addressed to ensure the sector’s momentum does not stall.
According to the Sri Lanka Export Development Board (EDB), total exports from the ICT and BPO industries increased more than threefold in value between 2008 and 2017 – from $311m to $968m. Meanwhile, its share of total exports climbed from 1.65% to 6.44%, making it the country’s fifth-largest inflow of foreign currency in 2018.
While other major foreign exchange earners suffered drawbacks in 2016-17, including agriculture, which was impacted by low yields, ICT emerged as a powerful player, supported by ongoing liberalisation of the telecoms industry and the growth of BPO services. In 2017 the country began the process of adopting 5G technology, which should have a profound impact on performance, as well as paving the way for new digital business solutions in every sector of the economy.
Sri Lanka is increasingly positioning itself as a highquality, niche destination for ICT services, leveraging its geographical position as well as its relatively high-skilled, low-cost workforce. Between 2013 and 2017 the number of employees within the IT and BPO industries doubled to around 80,000, according to global management consultancy AT Kearney’s Global Services Location Index (GSLI) 2017. International IT firms, which have invested in the country and aided the development of innovative solutions, have facilitated the development of advanced technology and high-added-value products. Over the coming years the industry is expected to move away from BPO, instead focusing on knowledge process outsourcing solutions, such as data analytics and software engineering.
Structure & Oversight
The ICT sector is currently served by more than 300 companies, which support a large number of key industries across the economy, notably agriculture, financial services, manufacturing and tourism. Local ICT companies export software products and services to markets worldwide, including the US, Europe, Australia, East Asia, the Middle East and Africa. Sri Lanka has also emerged as an offshore centre of development for some Fortune 500 companies, as well as a number of global joint venture firms. As a well established global IT and BPO destination with an increasingly competitive software services industry, the country placed 11th among the top 50 outsourcing destinations included in AT Kearney’s GSLI.
The ministry in charge of sector policy and regulations is the Ministry of Digital Infrastructure and Information Technology (MTDI). There are also a handful of other public bodies charged with oversight, including the Telecommunications Regulatory Commission of Sri Lanka (TRCSL), which was established in 1996 to regulate and monitor the telecoms industry; and the Information and Communication Technology Agency (ICTA), which was established in 2004 to guide sector development and transform Sri Lanka into a knowledge-based, digitally inclusive country. The ICTA is currently the head agency within the sector and is responsible for implementing all industry-related projects initiated by the government.
The ICTA often collaborates with the Sri Lanka Association of Software and Service Companies (SLASSCOM), the industry body representing the interests of private stakeholders. SLASSCOM supports innovation, education and employment, research and development (R&D), and furthering a progressive national policy framework.
The telecoms industry comprises four mobile operators and three fixed-access operators, each competing for market share within a 22m-strong population. Combined, these players contribute 96% to total industry revenue. The remaining 4% is provided by 25 system licensees, whose range of service provisions includes international telecoms services, home satellite broadcasting and cable television.
In 2017 approximately 67% of total industry revenue came from mobile, 29% fixed telephony and 4% other, according to the latest available data from the TRCSL. During that year mobile generated revenues of LKR140.3bn ($883.6m) while fixed line generated LKR59.6bn ($375.4m). The number of mobile subscribers has grown steadily since 2011, from 18.3m to 28.2m, while fixed-line subscribers have declined slightly, from 3.6m to 2.6m. Interestingly, average revenue per user (ARPU) in the fixed-line market increased by 89% over the period to LKR22,911 ($144) in 2017, while the mobile market saw ARPU grow by 9% to LKR4977 ($31.34). While the TRCSL did not state a reason for the strong overall growth in fixed-line revenues, it said the sharpest annual increase – 36% in 2012-13 – was due to a change in the way the subscriber base is defined. Due to strong competition in the segment, mobile operators witnessed a net loss after tax of just under LKR2bn ($12.6m) in 2017. Conversely, fixed-access operators earned a net profit after tax of LKR1.6bn ($10.1m).
The mobile market formerly had five operators until local firm Hutchison Telecommunications Lanka (Hutch) and the UAE’s Etisalat completed their merger in 2018. The leader in terms of market share among mobile operators as of mid-2018 was domestic firm Dialog Axiata, which accounted for 44.2% of subscribers, according to data published by stockbroking firm CT CLSA. Dialog was followed by Mobitel, which accounted for 28%; and Hutch and Etisalat, which had a combined share of 18.6% post merger. Fourth was Airtel with 9.2%. To encourage further growth and competition in the mobile market, in August 2018 the government removed floor rates for call charges.
In order to increase their subscriber bases and improve coverage for existing customers, Sri Lanka’s main telecoms operators are investing significantly in network infrastructure. In the first quarter of 2018 the Board of Investment (BoI) approved more than $200m worth of investment proposals for the upgrade and expansion of 4G mobile and fixed broadband services. These include Sri Lanka Telecom, which aims to invest $79m in network extension, and Mobitel, its subsidiary, which will spend $80m on upgrading its coverage to 4G LTE broadband. Hutch also received approval for a $57m network investment ahead of its merger with Etisalat.
Generally speaking, a large number of opportunities remain in the telecoms market for increased penetration by software and hardware vendors, digitalisation of the government procurement system and the development of software applications.
Under the Sri Lanka Telecommunications (Amendment) Act No. 27 of 1996, the TRCSL was established as the national regulatory agency for telecoms. Its role is to guarantee the supply of efficient telecommunications; sustain effective competition between operators; and protect the interests of the public. Its regulatory functions include processing applications for licences; ensuring compliance with the law; and responding to consumer complaints and conducting investigations. Although the TRCSL has made efforts to improve procedural transparency, some issues remain. For example, in April 2018 Dialog Axiata filed a right to information inquiry which revealed that the TRCSL had allocated a spectrum frequency to Mobitel without a competitive bidding process.
To foster an environment within the ICT industry that is more conducive to innovation, lawmakers have tightened supervision by enacting a series of eLaws. These aim to provide a robust legal framework for the use of electronic data and documents for public officials as well as private individuals.
The Electronic Transactions Act No. 19 of 2006 was established based on the standards initiated by the UN Commission on International Trade Law Model Law on Electronic Commerce (1996) and Model Law on Electronic Signatures (2001). In 2017 the law was amended to bring it in line with the UN Electronic Communications Convention (ECC), which made Sri Lanka the first country in South Asia to legally adopt the ECC. This should boost the prospects for e-commerce and e-governance. The objectives of the act are to facilitate domestic and international e-commerce by eliminating legal barriers and establishing legal certainty; encourage the use of e-commerce; facilitate the electronic filing of documents with the government; and ensure that, overall, electronic communication is officially and legally accepted as a proper means of communication.
In 2017 the government launched the national economic blueprint Vision 2025, which highlights the reforms that must be made to both improve prosperity and reduce inequality between regions. The strategy is particularly focused on developing ICT and instituting regulatory reforms to enhance the digital ecosystem, improve productivity and competitiveness, and raise standards of living. There is an emphasis on empowering SMEs and the self-employed to spur job creation and growth across the country.
The policy represents a shift in the government’s approach to ICT development from driving growth through increased public spending – which historically proved somewhat ineffective – to targeting specific barriers to development. This is exemplified by officials’ recent commitment to initiatives aimed at improving infrastructure and digital literacy. In 2018 the ICTA launched the Public Wi-Fi Initiative, setting up 1176 free internet hotspots across the country. The regulator has also instigated an e-governance scheme, which aims to launch online services across 341 local government bodies. The project is under way but has reportedly experienced some delays, including security issues and difficulties with online registration processes.
To accelerate digital literacy among the population, initiatives are under way to integrate ICT in the education sector. Institutions are being encouraged to partner with the private sector in R&D and knowledge-sharing, and the government is working to include ICT literacy programmes in public school curricula. In 2017 the Ministry of Education launched its first “cloud smart classroom”, aimed at providing digital interactive learning. The pilot project consists of 17 students in one year group participating in lessons conducted in English and delivered from a large computer screen instead of a blackboard. Instead of textbooks, students are provided with tablet computers. If successful in improving performance and attendance rates, the scheme could be rolled out in other areas around the country.
In another significant development, the National Intellectual Property Office is being reformed in order to more efficiently govern procedures relating to the registration, exploitation, regulation and resolution of intellectual property rights and issues. The government wishes to support these reforms by strengthening the legal framework and cybersecurity safeguards surrounding electronic transactions. The goal is to further encourage the transfer of advanced and innovative international technology into the country. Furthermore, the amendment to the Electronic Transactions Act in 2017, which aims to safeguard the evolution of e-commerce, will help strengthen the legislative framework so that it is on a par with such countries as China or Singapore. The legal framework around cybersecurity is also expected to be strengthened.
Another key initiative outlined in Vision 2025 is the creation of a citizen’s digital ID. Developed in conjunction with telecoms providers, the scheme aims to make online transactions easier and envisions a wide range of applications for the digital ID, including use as an electronic signature for documents and for the submission and receipt of payments. According to officials, the storage of biometric data online will enhance security and improve efficiency in terms of managing and monitoring government data.
The project, which was included in the 2016 budget but subsequently stalled for two years, was set to resume in January 2019 with a pilot phase, but as of February 2019 there have been no updates on its progress. The pilot will involve the issuance of digital ID cards to social welfare beneficiaries, which represent around 20% of the population. If this goes well, cards could be issued to all residents the following year. However, conflicts remain regarding ownership of the project, which makes its future uncertain. Funding has been allocated to the MTDI, while ownership of the card lies within the Department for Registration of Persons. Local media reports have indicated that there are lingering tensions between the two government entities.
Major digital policies have also emerged with support from the private sector. Most notably the Island of Ingenuity (IoI) brand was launched in 2018 by SLASSCOM in partnership with a number of government bodies, including the EDB. IoI aims to generate $5bn in ICT export revenue by 2022; create 1000 start-ups; and generate 200,000 jobs (see analysis).
Digitalising government services and processes has been one of the main priorities of the coalition government since it was formed in 2015. Speaking before the onset of the constitutional crisis in late 2018 Prime Minister Ranil Wickremesinghe indicated that introducing a new digital law would be essential for integrating technology within state institutions. In May 2018 the MTDI signed a memorandum of understanding with Microsoft Sri Lanka concerning the implementation of measures that would help facilitate digitalisation nationwide. These include technical assistance to formulate and develop an e-government strategy; a software procurement programme for the public sector; a cybersecurity risk assessment; and skills development for students through the establishment of “smart classrooms” (see Education chapter).
In some areas of government, such as trade and investment, technology is already being used to speed up efficiency. In 2018, for example, the BoI successfully inaugurated a web portal connecting six line agencies under a single one-stop shop platform with the aim of fast-tracking investment processes for foreign companies. The BoI is planning to extend its portal to 18 more agencies that are responsible for the necessary approvals for international firms to establish themselves in Sri Lanka. The BoI has received assistance for the project from the World Bank and Australia’s Department of Foreign Affairs and Trade.
The ICTA has designed a roadmap identifying policy priorities and their timeline for implementation as regards digitalising the economy. According to Rohan Samarajiva, chairman of the ICTA, over the short and medium term efforts should focus on addressing key human resource constraints. First, to meet a shortfall in recruitment to certain specialised roles, Samarajiva told OBG that it was necessary to make it easier to issue short-term work permits to foreign workers with specialised skills, particularly those recruited by home-grown companies, which cannot benefit from BoI assistance in processing permits.
Another priority for the ICTA is to achieve a better geographical balance in terms of IT development by unlocking the growth potential of areas outside of Colombo and its surroundings. For instance, Jaffna in the north has well-developed education facilities as well as the capacity to supply large numbers of skilled ICT and knowledge industry workers. However, because only a few ICT companies are located there most graduates seek work opportunities in Colombo or overseas instead of locally, which hampers development.
A third priority for the ICTA involves tackling the low percentage of women in the job market, as well as increasing the participation of disabled people in the workforce. According to Samarajiva, policies need to be put in place to incentivise women to enter and remain in employment and foster an environment that enables employees to work from home.
The success of policies regarding digitalisation hinge upon ensuring the population has access to the internet. In 2018 this was estimated to be 6.7m people, or around 32% of the total population. According to the TRCSL, as of September 2018 there were approximately 147.9 mobile subscriptions per 100 inhabitants. Out of a total of 32m mobile subscriptions, some 5.7m were mobile broadband connections and 1.5m were fixed broadband connections. Between January and June of that year around 67.5% of internet connections were made through a mobile phone; 27.1% from a laptop or desktop computer; and 3% and 2.4% from a tablet or mobile phone, respectively, according to a report on computer literacy published by the Department of Census and Statistics.
4G & 5G Licences
In order to improve internet access for their users, mobile operators are laying the groundwork for the eventual rollout of 5G technology. At the Techno Sri Lanka 2018 exhibition, which took place in October of that year, Mobitel demonstrated 5G technology using massive multiple-input multiple-output (MIMO) in 64x64 MIMO configuration and in the 3.5 GHz band. This follows earlier trials by telecoms firms operating in the country, including Dialog Axiata, which carried out a trial in August 2017. The eventual deployment of 5G technology in the mass market is expected to facilitate positive changes in many sectors, including education, health, agriculture and manufacturing, as well as the start-up industry. According to local press reports, Dialog has signed an agreement with the MTDI and Swedish multinational telecoms company Ericsson to establish an innovation centre to utilise the download speeds and latency of 5G to develop internet of things (IoT) and ICT technologies, solutions and prototypes.
In another significant move, Dialog and Ericsson are preparing to deploy a large-scale IoT network across Sri Lanka, which will enable the development and deployment of various smart city initiatives. Vinod Samarawickrama, managing director at Ericsson Sri Lanka and Maldives, told OBG that the required infrastructure and ICT towers for the network already exist and the company is ready to roll out 5G commercially. The firm is awaiting a resolution to the delay in spectrum allocation by the government, but Samarawickrama was cautiously optimistic that the rollout could begin in 2020. Ericsson is also transforming street lights in Colombo into radio towers, which will help expand the frequency and make 5G available everywhere in the city.
Voice over internet protocol (VoIP) – the technology which delivers voice communications and multimedia over the internet is currently not permitted in Sri Lanka, and VoIP services are blocked by all operators. However, the TRCSL has established a list of categories of users, customers and clients that are allowed to claim exemption. These include public switched telephone network operators and their affiliates, authorised call centres and BPO operators, customers that deliver international logistics, international banking, IT and software development and support services, and licensed internet service providers.
The ecosystem for technology start-ups has greatly evolved over the past decade through government and private sector support. Rasika Karunatilake, general manager and vice-president of local software firm Sysco Labs, told OBG that seed funding is now widely available through grants and competitions, including hackathons, as well as accelerator programmes and angel investors. In light of high real estate prices, the authorities have supported initiatives from private actors aimed at providing office infrastructure for new businesses. In 2017 the EDB spearheaded a budget proposal to provide funding to entrepreneurs. It put together a committee which subsequently approved more than 26 start-ups for concessionary loans provided by government-owned banks.
Despite these moves, there are still a number of issues that must be addressed if Sri Lanka is to further develop an ecosystem conducive to new business growth. One common challenge is the ability of new firms to scale up. While finding seed capital is relatively easy, a lack of venture capital makes it difficult for entrepreneurs to progress through the rounds of funding and scale their activities locally and regionally. Furthermore, borrowing costs from banks are still high, which may limit sustainable growth. Inadequate sources of funding to grow new businesses also impacts angel investors, since they may not have the means to exit their investment. At the same time, more needs to be done to convince investors that their money is safe in Sri Lanka, and that they can withdraw their funds at any time. The tech industry is pressing the government and the financial sector to undertake reforms and follow the example of countries such as Singapore, where venture capital and private equity funds set up regional offices.
ICT stakeholders are largely optimistic about the future of the sector, even against a backdrop of political uncertainty. The main reason for this is that, historically, the industry has flourished regardless of the degree of public sector support. For example, the same reforms which were so conducive to growth in the BPO industry, including provision of seed funding and removal of monopolies, were not extended to the software industry, yet it succeeded in expanding both in size and productivity. The private sphere within the ICT sector in particular, which has its own export and investment strategies, should remain resilient to headwinds.
In the long term, growth of Sri Lanka’s ICT industry will hinge upon its ability to develop its workforce and infrastructure. Within the telecoms sector, a crowded market could potentially lead to further changes in the industry landscape. Market leaders are currently planning the launch of 5G technology and much of the necessary infrastructure is already in place: 5G is therefore likely to be on the market within the next few years and should considerably boost growth and support the development of advanced technologies.
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