Boosting investment in Sri Lanka: Part 1 – Prospects

Countries that were behind us at the time of gaining independence are ahead of us. The countries which were fascinated by the Sri Lankan economic model then, demonstrate their models to us, today. Our failure is reflected in challenges for investment – Pic by Shehan Gunasekara

By Chandrasena Maliyadde

‘Pandemic’ and ‘investment’ are the two most used words in Sri Lanka today. Pandemic needs boosting immunity. Investment needs boosting prospects. Air, pregnant with opinions, thoughts, arguments and the coronavirus, is blowing through our corridors. 

While trying to escape from getting infected by the virus, I could not escape from sharing some of my thoughts and experience on investment. I am a man who succeeded as a practitioner but failed as a researcher. I am taught that I make normative statements based on ideologies and value judgments. True, my ideologies and value judgments are based on the experience I gain on the ground. 

I studied economics more than half a century back. Recently, a friend of mine refreshed my knowledge on positive statements and normative statements. I am told that normative statements, unlike positive statements, cannot be accepted or rejected. It gave me a sigh of relief as my normative statements might not be accepted but, certainly cannot be rejected by some researchers who rely on abstract theories, irrelevant models and dream hypothesis. 

Sri Lanka opened the economy in 1978 and declared that the private sector would be the engine of growth. The government introduced new agencies, schemes, procedures, and incentives to promote, attract and facilitate investors.  Sri Lanka is blessed with potentials and prospects for investment to thrive. Both the Government as well as the private sector invest a colossal amount of funds. But, the country is lagging and staggering. The engine of growth has failed to deliver the anticipated results after 40 years. 

In an Investment Policy Review Report on Sri Lanka, United Nations Conference on Trade and Development (UNCTAD) concludes: “Sri Lanka’s investment framework presents a clear picture of actions that should be taken at both ends of the spectrum of problems and opportunities.”

Factors influencing investment

After a continuous growth throughout 2016 and 2017, and a fall in gross investment in UK in the first and second quarter of 2018, a study was conducted on ‘The Determinants of Investment’. It has identified Business confidence, Accelerator effect of changes in national income, Interest rates, General expectations, Corporation tax, Level of savings as few factors that influence prospects for investment.

Investment prospects in Sri Lanka

General framework

The Sri Lankan people are friendly, amicable, charitable and hospitable. Gender parity, child protection, and freedom are enshrined in the Constitution. In 2016, Sri Lanka ranked 5th in the World Giving Index, by the World Economic Forum registering high levels of contentment and charitable behaviour. 

Sri Lanka is the first South Asian country to liberalise its economy. Macroeconomic framework, governance, judiciary system is conducive for investment. Sri Lanka is officially the Democratic Socialist Republic of Sri Lanka. All that an investor expects is in the name. 

Strategic importance and resource endowment

Sri Lanka has been called “The Pearl of the Indian Ocean”. It’s not only because of its shape; but, its prospects and great strategic importance with geographic location, deep harbours and a major trading hub known to both the Far East and the European continent from ancient time.

The island consists of flat to rolling coastal plains, with mountains.  It has 103 rivers, 51 natural waterfalls, 45 estuaries, 40 lagoons, 61 wildlife sanctuaries, 22 national parks, seven nature reserves, one jungle corridor, 65 conservation forests, one national heritage wilderness area and a mangrove ecosystem spanning over 7,000 hectares. The climate is tropical and warm. Rainfall is fairly adequate. Foreigners wonder why some parts of the country are called ‘the dry zone’.

Infrastructure

The country owns a well-knitted infrastructure network and connectivity system developed and left by colonial rulers and improved and expanded by successive governments. The road network consists of expressways, national roads, trunk roads, provincial roads, local and rural roads, flyovers, footpaths, bridges and culverts. One can reach any destination of the island within few hours. 

The Sri Lankan rail network is 1,508 km in broad gauge. Some of its routes are scenic, with the mainline passing (or crossing) waterfalls, mountains, tea estates, pine forests, bridges and peak stations. The country has a well-developed irrigation network with engineering marvels developed by ancient kings.

Human capital

Sri Lanka is rated “high” on the Human Development Index (HDI) annually computed by UNDP. Sri Lanka has a well-educated, healthy skilled labour force. Language skills, IT skills, and communication skills are fairly at a high standard. There are countries both developed and developing that largely speak their mother tongue only. In a country like Japan, the English speaking percentage is relatively low; documentation is in Japanese. Most of the contracts are taken by Japanese nationals. Facilities for translation, interpretation, printing and communication are available at a reasonably low cost in Sri Lanka.

The Government maintains a high welfare budget; it provides Samurdhi benefits, free health, and free education, pension, and welfare facilities for the elderly and disabled population. The welfare of the people is fairly looked after at Government expense. This would reduce the need for investors to maintain a high welfare and insurance budget. They have to supplement the Government schemes already in operation. 

Institutional arrangements

Successive governments maintained an investment-friendly approach. With the liberalisation in 1978, the government has taken several measures to promote investment. New institutions with a specific mandate to promote investment were created, in addition to the well-spread existing administrative network. The BOI, IDB, ITI, EDB, SLTDA, UDA are a few among them. They provide tariff and tax concessions; facilitate obtaining finance, technology, and approvals; identify locations and sites; streamline procedures and mitigate administrative barriers. 

They are expected and mandated to attract investment with a view to contributing to the national product and employment by way of receiving improved modern advanced technology, reducing poverty, mitigating regional disparity and enhancing regional contribution. The BOI and IDB develop fully fledged industrial estates and economic zones with infrastructure facilities, services, and factory sites entailed with credit facilities, tax concessions, incentive schemes and investment facilitation.

There are extension facilities, certification facilities, research and transfer of technology, supply of planting materials, subsidy and financial incentive schemes available for investment promotion. They are provided and facilitated by Government agencies such as departments, boards, district and divisional secretaries, and an army of extension officers, field officers, and development officers. There is a minimum of five officers in each GS division and one public servant ready to cater to 14 persons on average. 

Dynamic service and financial sector

The service sector is dynamic, vibrant, efficient and professional with networking facilities. It occupies more than 60% of the GDP. It facilitates investors with a variety of services and facilities. Skills development, resource identification, consultancy and advisory facilities, legal aide, construction, administrative and management facilities (run virtual offices), headhunting is among them. A Sunday paper discloses a host of such varying facilities available to an investor.

The country is endowed with a well-developed, well spread professional banking and financial network. The cost of funds is low. CBSL has brought down lending rates to unprecedented low levels; reduced reserve ratios of commercial banks and provided many incentives. Commercial banks have introduced many schemes to promote new investors and to support investment affected and that has run into crisis. The package includes eased collateral requirements, eased application process, cutting downtime, and rescheduled existing unpaid loans. In addition to the Government, CBSL, and Banks, there are international donor agencies such as World Bank, ADB, EU, IFC, UNDP; individual countries and I/NGOs that introduced financial support schemes for the investment of all scales.

Sri Lankan law allows repatriation of profits made by foreign investors. Laws related to dispute resolution and arbitration are flexible. An aggrieved investor can go for international arbitration. In the case of infamous hedging, investors won compensation through arbitration.

The Sri Lankan Rupee is depreciating. Although it has negative effects it works as an incentive to attract investment. An investor, an exporter and a foreign exchange earner get more LKR for a US Dollar. This would reduce the amount of investment required in USD terms. 

Options

There are several options made available for an investor to choose from. Build Operate and Own, Build Operate and Transfer, FDI, Public-private partnership, out-grower system, sub-contracting, and forward price agreements are few. There are schemes, procedures, and facilities made available by the Government to promote and facilitate these options. There is transparency and separate laws and regulations for these options.

Government capital budget  

The Government maintains a high capital budget. Most of the infrastructure is funded and implemented by the Government. This facilitates, promotes and generates new investment opportunities.  Construction, provision of services, facilities, machinery and equipment, labour contracts, material supply are handled by the private investor. In 2016, immediately after the change of government, private contractors complained about the loss of business opportunities resulted from reduced capital expenditure by the Government.

Sri Lanka sits on a gold mine; its potential, resource endowment and prospects for investment are abundant; it has created an environment conducive for the private investor. It is stated and repeated that the private sector is the engine of growth. But, the country took 60 years to jump from the low-income category to the lower-middle-income category. The country was elevated to the upper-middle-income category and pushed back to the lower-middle-income category. 

Countries that were behind us at the time of gaining independence are ahead of us. The countries which were fascinated by the Sri Lankan economic model then, demonstrate their models to us, today. Our failure is reflected in challenges for investment.

(‘Boosting investment in Sri Lanka: Part 2 – Challenges’ to follow)

(Chandrasena Maliyadde has served as a Secretary to three Ministries before his retirement. 

He is currently a Vice President of Sri Lanka Economic Association. 

He can be reached via [email protected])