Impact of bureaucracy on FDI

By T.S.A. De Silva

What is the impact of bureaucracy on Foreign Direct Investment? In an article in the Sunday Times on 11 June titled ‘Killer bureaucracy impedes tea exports,’ the Chairman of the Sri Lanka Tea Board (SLTB) was quoted saying: “Red tape at the SLTB directly impacts tea exporters who are compelled to send their teas to the Board for testing and the laboratories for analysis and a culture testing takes seven days, and if a test has to be repeated it may eventually result in a delay in exports containers being held up to three months.”

Why leave it to other countries to blend and packet our tea when we have a reputation for producing quality teas? – Pic by Shehan Gunasekara

He stated he has taken remedial measures by employing the services of other State-run laboratories. Due credit goes to bureaucrats who take such action. However, are there better options to such issues that could help to attract FDI to the country? 

Export of tea from Sri Lanka is jealously guarded and the leading traders involved know their responsibility towards maintaining the standards of tea that is being exported. However, tea cannot be exported from Sri Lanka without a permit issued by the SLTB; a procedure that may take one to seven days before shipment. 

Despite several positive steps taken by successive governments to facilitate trade, this procedure has depressed Sri Lanka’s position in the World Bank ranking index on ‘Ease of Doing Business’ to 110th position and the ‘Trading Across Borders’ index to 90th position. These ranks which compare poorly with other countries (see table) may have a damaging impact on Foreign Direct Investment (FDI) in Sri Lanka. 

Sri Lanka needs to attract FDI for which the successive governments have been making much effort, but the potential investors would hesitate to invest in Sri Lanka when they get negative signals, such as above. Even if we cannot reach the ranking of Singapore which stands at 02 in Ease of Doing Business and No. 41 in the Trading Across Borders Index, we need to improve this position to be on par with a country such as Malaysia which has a ranking of 60 or potential investors may bypass Sri Lanka, even if the infrastructure required to get their cargo across our ports is in place. 

Major impediments for positive changes are negative thinking, the mindset of the bureaucrats and over-employment in the public sector institutions such as the SLTB, SLPA, and Sri Lanka Customs. These lead to corruption and hinder the smooth flow of goods at interphases. 

Why facilitate trade? 

With the increase in application of Electronic Business (eBusiness) and Electronic Commerce (eCommerce), modern businesses tend to stay ‘lean’ with a view to maximising profits. Modern businesses tend to minimise inventories of finished products and inputs. Instead of ‘pushing their products’ to the markets, companies such as Dell resort to zero inventories and ‘build-to-order’ system; dependent on an internet-based supply chain, a system which Dell refers to as ‘Pull-To-Order’. 

Dell claims their production cycle is only four-and-a-half days and they could deliver a ‘build-to-order’ computer within five days of receiving an order. All suppliers of components are geared to immediately respond to requests of Dell manufactures. This is a step ahead of ‘Just-In-Time delivery’ (JIT) manufacturing system of the Japanese. In these scenarios none of the suppliers can have a short fall in any way, as the entire supply chain could come to a grinding halt if one of the suppliers delays in delivering inputs on time. 

Dell says it has emptied its warehouses to make use of space for production. Dell assembles computers in a limited number of six locations in the world and it depends on the efficiency of the internet-based supply chains and express delivery services. Visit the following URL for details. http://yousigma.com/benchmarking/dellsglobalproductionnetwork.html. 

Sri Lanka will be left behind by those who meet with the required efficiency levels of traders and consumers, if no steps are taken to strive to reach the level of efficiency and quality standards required by modern supply chains, even if it is to continue to export only tea and garments. 

There is no future for our tea exporters, if they were to be strangled by procedures such as submitting ‘Blend Sheets’ and a variety of other supporting documents to get the approval of the SLTB after receiving an export order. Suggesting simplified procedures is by no means implying opening the ‘flood gates’ for unscrupulous traders to get undue advantage of such systems. 

Examples from developed countries and recommended standard practices by the World Customs Organization could be followed to ensure maintaining high quality standards by those engaged in the trade. For example differential treatment depending on the performance, post shipment quality checks, drawing samples for inspection from shipments by the Customs on a selective and random basis to be passed on to the SLTB for necessary audits. If and when any offenders are found, they should be dealt with severely to prevent anyone from taking undue advantage of the simplified procedures. 

If the Government’s vision to make Sri Lanka a commercial hub, a financial hub and several other hubs is not limited to words, Sri Lanka needs a paradigm shift as in the case of Malaysia, Thailand, etc. Should not we take the first step by making Sri Lanka the number one tea blending hub in the world by taking advantage of its image for producing highest quality teas?

Why leave it to other countries to blend and packet our tea when we have a reputation for producing quality teas? Isn’t this the best opportunity to put words in to action to attract potential investors to Sri Lanka? Walk the talk! 

After two years of ‘Good Governance’ we have not yet been able to attract any iconic company to invest here, while our neighbour India, and countries in the Asian bloc, such as Thailand and Vietnam are forging ahead attracting FDI to their countries. The Government needs to take bold decisions in eliminating obsolete and unproductive procedures if the country is to progress from where we are. 

Blending blues

Exhaustive discussions on the results of allowing blending of foreign teas with local teas appeared in recent issues of the Sunday Times and Daily FT. In an insertion within ‘Killer bureaucracy impedes tea exports’ (Business Times/Sunday Times, 11 June), under the caption ‘Govt. seals prospects of blending teas,’ it was stated the SLTB Chairman temporally suspended taking a decision on allowing blending of imported teas with Ceylon Tea due to lack of consensus among members of a high-level committee appointed to discuss allowing blending of imported teas with Ceylon Tea with a view to making Sri Lanka a tea blending hub. 

As a result a specific request for establishing a tea bagging and packing facility within the Board of Investment/Free Trade Zone (BOI/FTZ) was suspended, due to concerns expressed by some. The main concern was, if Sri Lanka allowed a blending hub to be established here, it may some way damage the image of the brand Ceylon Tea, also the possibility will be there of imported teas eventually entering the auctions as Ceylon Tea. 

It further states, despite the high profit margins that could be gained by exporters, the fear of losing the quality standards set high by the Ceylon Tea brand has resulted in the State authorities refraining from taking a decision.

Also see, ‘Exporters list 12 consequences of not liberalising tea imports’ on page 15 of Daily FT, 20 June.

[The writer was Chief Technical Advisor in Trade and Transport Facilitation/eBusiness, Projects in Nepal and Pakistan, of UNCTAD/World Bank; and in four other countries in Asia and Africa as a consultant in Trade Facilitation of UNCTAD-International Trade Centre (ITC), CFTC and UNOPS. He also worked as a consultant in TF for UN-ECE/CEFACT, GTZ, ADB and UN-ESCAP. He was the Founder Secretary (1980-1999) of SRILPRO-Sri Lanka Trade Facilitation Committee, an advisory committee of the SL-EDB. The writer can be contacted at: [email protected].]