Does SL need investment law?

PRIME Minister Ranil Wickremesinghe’s five-year plan is eagerly awaited by the private sector to understand the direction of the Government and what measures it would have to attract crucial foreign investment to deal with unsustainable debt. At such a critical point would Sri Lanka benefit from stronger investment law?

The Government’s trade initiatives have been largely limited to discussions with several countries on trade agreements but economists have pointed out this would have limited results unless the Free Trade Agreements (FTAs) are underscored by a strong push to liberalise Sri Lanka’s economy so that it is easier for international companies to invest.

Revising or enacting investment laws is one of the first steps that many developing countries take to achieve its objectives for Foreign Direct Investment (FDI). In some cases, the purpose is to signal political will to reform; in other cases, changes are more substantial and seek to profoundly increase legal certainty and improve the value proposition for investors. Reforms may also arise from obligations that countries adopt under international investment agreements.

Investors can certainly bring substantial payoffs to host countries. Foreign investors want to be clear, among other things, about market access, the requirements for business operation, their rights and obligations, and the accessibility and enforcement of dispute resolution.

Lack of certainty can have dire consequences. According to the 2013 Political Risk Survey by the Multilateral Investment Guarantee Agency (MIGA), almost 10% of investment plans were cancelled or existing investments were withdrawn due to various adverse regulatory changes in the preceding year. The value of such lost investment, coupled with the cost of international disputes that may arise from it, could climb to tens of millions of dollars for a single case. Sri Lanka has already had a taste of this with the Government having to deal with demands of compensation on suspended projects.

But, this does not mean that enacting an FDI law is a guarantee of more investment. Effective reform requires, first, policy based on good practice and, second, implementation (legal, regulatory and administrative) through institutions that are up to the task. An investment framework should be implementable locally while remaining consistent with good practice.

Ideally, an investment law should be a part of a broader set of reforms dedicated to achieving specific objectives, such as more exports, jobs, productivity and other forms of value addition. All stages of investment should be addressed, including attraction, retention and linkage to the local economy.

A bespoke approach is a must. Many OECD countries do not have a stand-alone investment law, yet they account for the majority of FDI flows. The reason, however, is that these countries, by definition, have high-quality commercial environments. By contrast, in many developing countries, the investment climate tends to be very complex.

An investment law is a useful tool to organise policy in such environments; however, much depends on the political will to reform. The major upside of a legal review is that it can open the door to a high-level discussion on the investment agenda, and that it can result in an agreement on a broader set of reforms by multiple stakeholders. The solution is not simply to introduce a developed-country investment framework into a developing country. Rather, the process is all-important as it needs to look at the development goals and competitive advantages of each country to play to their strengths.