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Some FDI is like taking Panadol


Comments / {{hitsCtrl.values.hits}} Views / Friday, 18 March 2016 00:00


Untitled-9The Panadol pack says it provides relief from the symptoms of pain and fever. It does not claim to cure the cause of these symptoms. A tranche of Foreign Direct Investment to buy land, to build apartments or to buy shares is very similar in its impact. It will provide temporary relief by increasing foreign reserves. If the underlying causes that are creating a drain of foreign reserves is not addressed, the outflow will continue. 

Taking action

If a country does not have the determination and will to take tough measures to cure the ills of the economy, the best solution to the problem is to go to the IMF for a loan or facility. This would be like abandoning Panadol and going for a ‘kasaya’. It’s bitter, has to be taken for a prolonged period, but will ultimately cure the disease.

The IMF loan will always come with conditions. These reforms are intended to resolve the underlying economic problems. If you take a loan from the IMF you have to accept the stipulated reforms, as they are a part of the package!

The IMF

Some of the conditions could be difficult. Often, curbing subsidies, increasing taxation, reducing Government expenditure, and devaluation, are components of the package of reforms.

When you borrow from the IMF, it is important to manage the relationship. The IMF is said to have a softer approach now, but during the days when the IMF was very demanding, the Treasury and Dr. PBJ did a good job in managing the relationship. When I was the Senior Advisor to the Ministry, I had a ringside view of this successful dialogue.

The bottom line was to accept the IMF view of the problem, and the solution. This created good vibes with the IMF. From this platform of mutual respect, it was possible to get them to appreciate local sensitivities and to soften the demands and pace of reforms. Never fight with the IMF. They have the money and we want it.

A soft landing

Reforms can hurt and are not popular. Going to the IMF provides a soft landing for the Government. The thesis is that the previous Government left the finances in a parlous state. The only option was to go the IMF for help and this meant having to follow the reforms prescribed to get out of the mess created by the previous Government!

The long run

Foreign Direct Investment (FDI) that comes in with a long-term perspective can indeed be a strong contributor to the development of the economy. Good law and order, conditions that facilitate doing business, a handsome Prime Minister, a honest President are all helpful but they alone will not bring in any foreign investment.

Meaningful FDI is an inward investment that sets up a business that in the future will bring in regularly a stream of foreign income. This could be exports from the venture or it could be fee income. Such FDI will come in (only come in) if it makes good commercial sense to the foreign investor.

Target good DFI

The approach used by Singapore in the early days was very successful. They created the Singapore Economic Development Board to identify individual businesses that would benefit by moving their operations to Singapore. They worked out the case for investment in good detail and then presented it to the target company.

I have personal experience of this. When I was responsible for the Reckitt Benckiser businesses in the East, they made a detailed presentation making the case for moving manufacture from the UK to Singapore to supply the markets in the Far East. Largely using their data I put up a paper to the Main Board for moving manufacture. The Board approved it and we moved manufacture to Singapore. It was a momentous step for a British company to move manufacture out of the UK and was bitterly opposed by those responsible for exports, but the economic rationale won the day.

The point of the story is simple. Foreign investors will come and set up operations if it makes good economic sense to them. A bad law and order situation may result in an investor not pursuing what is a good economic opportunity, but the key starting point is whether the investment is a good commercial proposition.

Getting DFI

The Government should use the successful Singapore technique and target specific companies, and make the case that demonstrates that it will be good economic sense to move operations to Sri Lanka

Three people who worked for the Singapore Economic Development Board became Ministers, and Pillay became Chairman of Singapore Airlines.

We must look for big hits. Like 20 over cricket must look for the sixes and fours and partnerships and not the singles. However to do so like Singapore we must have good batsmen.

We should look for big hits like for example, to persuade Durex which make latex condoms to set up a global manufacturing plant; get global leaders in medical gloves, to collaborate with local industry. Deep mining of gems to create the world’s leading provider of blue sapphires. Explore opportunities in graphene, the new wonder material derived from graphite (our friends in China have most of the patents). Coconut water is now in the UK supermarkets. Collaborate with a big bottled water company and set up a major bottled coconut water project.

Privatise the two State banks and create joint ventures with foreign investors (like SLT). Persuade the big apparel firms like Brandix and MAS to sell equity to foreign firms who would be good partners. Go hard for money into tourism-related projects. Hotels, helitours, exclusive golf courses for Japanese, mini Orlando entertainment parks, create a mini Macao, etc.

The team

To get meaningful foreign investment, we must have a team that can go and demonstrate to individual investors that it is in their economic interests to move their operations to Sri Lanka. At present we do not have an organisation that mirrors what the Singapore Economic Development Board did in the early days of Singapore.

(The writer has done this, that, and the other, here and abroad, including a MA from Cambridge University in Economics.)


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