Friday, 19 September 2014 01:21
‘Booming Sri Lanka beckons Big Apple!’ was the title of the special report filed by the Editor of the Daily FT, following the ‘Invest Sri Lanka’ capital markets forum of CSE-SEC in New York, which had ended with record participation and strong interests.
The Senior Minister for International Monetary Cooperation quoting the Dhamma Pada had said “come and see” to the prospective investors, whilst the Governor of the Central Bank had highlighted the Impressive results delivered under the present leadership.
Ambassador Palitha Kohonna had listed why Sri Lanka should be the next investment destination for US firms. The CSE Chief had highlighted the opportunities in Lanka’s capital markets and recommended a strategy of entering into Government bonds and bills market and thereafter diversifying into the equity markets.
A resounding success?
The powerful Sri Lankan delegation had top Government officials, 14 listed company top management and 20 market participants. Over 150 US-based fund managers, institutional advisors, financial advisors and individual investors had attended. From all reports published in Sri Lanka, the forum had been a resounding success.
“Congratulations and well done!” and “May all the efforts be duly rewarded” and “Resource effectiveness on costs and time, exceed the organisers’ wildest expectations”.
However, a web search on the forum did not bring up prominent coverage in the foreign financial media of the event and its ripple effects. Let us hope that these references were equally positive. At the same time let us pray that any half truths, misinformation and outright misrepresentations , if any posted during the event and follow-up sessions, do not haunt the Sri Lankan capital markets in the years to come.
According to Wikipedia, “half-truth is a deceptive statement that includes some element of truth. The statement might be partly true, the statement may be totally true but only part of the whole truth, or it may utilise some deceptive element, such as improper punctuation, or double meaning, especially if the intent is to deceive, evade, blame or misrepresent the truth. The purpose and or consequence of a half-truth is to make something that really only a belief appear to be knowledge, or a truthful statement to represent the whole truth, or possibly lead to a false conclusion. According to the justified true belief theory of knowledge, in order to know that a given proposition is true, one must not only believe in the relevant true proposition, but one must have good reason for doing so.”
Keeping participants informed
Can those who made up the Sri Lankan contingent place their right hand across their heart and confirm that the opening session, one-on-one meetings and network options during and outside the Forum informed the participants, financial analysts and the media of the impending legislation before the Parliament with a preamble reading ‘Whereas it is the National Policy to regulate the use of lands, in a sustainable manner, having imposed restrictions on the alienation of lands to foreigners, foreign companies and certain institutions with foreign shareholding and having granted concessions to citizens of Sri Lanka for certain development projects’?
They must further declare of having duly informed the participants:
1. Of the specific provisions of the Land (Restrictions on Alienation) Bill
a. which prevents the sale of land, and
b. imposes an upfront tax of 15% on leases based on the rent payable for the entire duration of the lease
on foreigners, as well as locally registered companies (including listed companies), where the foreign ownership crosses a defined threshold. Their attention should have been drawn that some of the provisions were retroactive and further imposes continuous compliance requirements over the levels of foreign shareholding in excess of twenty years. There are further restrictions imposed on the mortgage of such lands. This bill will in effect bring back some restrictions on the trades of listed shares; enhance the operating risks; and make valuations of shares/companies and trading in shares of entities with foreign shareholdings a nightmare. The financial consequences of a subsequent declaration of land transfers as ‘null and void’ are also not clear.
2. That not so long ago, in 2O11 by an enactment titled ‘Revival of Underperforming Enterprises and Underutilised Assets Act,’ 37 privately-owned assets and businesses were expropriated by the State, in the guise that these were underperforming or had underutilised assets which required revival and restructure. Some of these business/assets taken over were;
a.Liquid and effectively performing with adequate profitability
b.Were covered by Constitutional guarantees and Board of Investment guarantee agreements recognised for MIGA guarantees
c.Outside the scope of the legal framework of the Act, not being businesses set up on lands leased by the state
d.Even as of today, some foreign and local investors (including the Hilton Hotel Colombo), remain unsatisfied as to the settlement of reasonable compensation for the property acquired
3.That Company Law does not have sufficiently effective and easily enforceable provisions for Chapter 11 type bankruptcy and capital/debt restructure options; and laying off of staff is an cumbersome and expensive process
4.That there are no effective enactments and investigative/administrative capacity to pursue mega corporate crimes, especially to recover the proceeds of crime; and public institutions engaged in bribery and corruption control, human rights protection and control over justice and law enforcement systems are under the control of Executive appointed preferred nominees.
5.That there is always opportunity for unsolicited proposals to be taken up by the Cabinet and approved under the Strategic Development Projects Act, as Cabinet approved development projects or as Public-Private Partnerships. These proposals only require the effective network of a power broker and accommodation of facilitation fee demands; and can then easily be rewarded with outright sale of State land, long term land leases, tax and duty waivers and concessions; and non application of restrictions and taxes imposed on other competing local and foreign entities.
6.That proposals for State infrastructure development projects, both planned and unsolicited are welcome, on a bilateral basis subject to negotiated terms, especially where supported by commercial financing facilities
7.That in Sri Lanka
a. Mergers and Acquisition processes
b.Anti-competitive Practice Rules
c.Money Laundering and Know Your Customer Rules
d.Regulatory reviews over finance, banking, insurance, shipping, port operations, telecommunications and power/electricity sectors (including where monopoly, duopoly and oligopoly controls are in place)
do not hassle investors; and in any event these requirements can be eased with the regulators being appropriately directed to overlook, grant preferential treatment or facilitated by the non appointment of a regulator, as seen in the case of Port operations.
8.That special concessions, duty waivers and even undervalued and undeclared imports and exports can be facilitated on a network preference basis, even where items concerned are narcotics, dangerous drugs, protected fauna and flora, etc.
9.That preferred entities and individuals with network support can engage in market manipulations, insider dealing and pump and dump transactions, without penal sanction or by compounding offences on a meagre payment of a fine.
10.That effective frameworks, resources and infrastructure for just and cost efficient dispute resolution mechanisms by way of arbitration and mediation are not available; and adversarial court based solution are extremely time consuming and costly and fair and reasonable outcomes cannot be predictably expected.
1.Finally can the presentations in New York escape the classification of half truths, unless the audiences were briefed that in this ‘land like no other’;
2.Policy capture corruption; State capture of key infrastructure, essential services, local banks and media institutions; and relatively high costs of power and energy are significant challenges of business. The State capture of the Employee Pension/Provident Funds leads to the perception that these funds are leveraged for debt and stock markets valuations to be manipulated.
3.Policy consistency is more the exception than the rule; relatively lower productivity and quality commitments; and technical and innovative skills of human resources being low are challenges of business.
4.A sizeable number of market participants believe that the Central Bank, Census Department, Regulators and State authorities (e.g. Tourism Board) effectively massage and present data and statistics to please their superiors or are directed to do so in pursuit of meeting egoistic needs to realise set targets. There are rumours that in pursuit of certain targets the key officials are currently interested in increasing the total market cap of the stock market, and to maintain an overvalued exchange rate.
5.Effective international relations and economic diplomacy conducive to business development, foreign investments and technology transfer s are hampered by unqualified persons heading key foreign embassies.
6.Business leaders and business chambers in fear of reprisal or in pursuit of personal favours play patronage politics and are at times not even willing to review and advocate on issues that negatively impact on members
7.Effectiveness of law enforcement, rule of law and justice systems are impacted by executive interests and demands.
National resource allocations, key state spends and infrastructure developments are not fully aligned with national priorities, equity and the needs of the business sector
A post-audit market survey is essential to ascertain whether the participants (both local and international) rated the initiative as value adding in the longer term; had provided the requisite comprehensive technical, economic and regulatory knowledge as well as specific information to change any adverse perceptions; and whether the audiences, supported by the financial analysts and media, were adequately encouraged and incentivised to seriously look at Sri Lanka as a destination for investment, trade, and services, beginning from an initial entry via the capital markets of Colombo.
The post audit evaluation must also assess the quality of the audience and presentations; the effectiveness of network sessions; whether the questions raised were effectively responded; and the effectiveness of post forum follow up processes. For example, was the reported question addressed to the Governor about frontier markets, currency and article 4 managed floats (including how much managed and how much float) and his response (as published) referring to himself “not being very much into technical terms and being a more realistic guy” leave audience satisfied?
Let us pray that captains of industry and not robber barons will respond!
(The writer is a former Chairman of the Ceylon Chamber of Commerce and a good governance activist.)