Back to the drawing board

IN the midst of political change, the Board of Investment (BOI) has reverted to regulations outlined in a 2006 gazette for certain projects and is awaiting the formation of a new Parliament to take its task of attracting foreign investment forward.

This return to the drawing board is very important because during the last few years the BOI was consistently sidelined by politically-driven projects, some of which were unsolicited, brokered behind closed doors and pushed through parliament with little or no public input. This created a dangerous breeding ground for corruption that will need to be cleared up to allow the BOI to return as a faster, competent, streamlined institution that will hopefully be able to carry out its mandate.

Sri Lanka’s former Government had targeted $ 2 billion Foreign Direct Investment (FDI) for the past two years but failed to achieve the goal. Analysts point to the country’s haphazard policies, corruption and weak legal structures as the main reasons for lacklustre FDI. Limitations on contracts and a clogged legal system have made doing business harder in Sri Lanka.

Sri Lanka’s archaic and cumbersome bureaucracy together with a politicised public service had created an environment where unsolicited proposals were grabbed with both hands. Instead of having universal rules for investors, the former Government has made it clear that certain parties can come, negotiate independently and get better deals – including sizeable tax cuts. Yet such systems not only made international investors wary, they also cost much in terms of good governance.

With a GDP growth target of 8% or higher, Sri Lanka would need to raise its annual rate of investment from the current level of approximately 26% of GDP to at least 35%. With public investment to be capped at around 6% of GDP, this rise would need to come almost entirely from private investment. Within this, foreign private investment plays a critical role. 

In addition to helping bridge the domestic savings-investment gap, foreign investment brings other benefits as well – technology spillovers, management best practices, links to new markets. 

Like many developing countries, Sri Lanka has offered, and continues to offer, generous tax holidays and other tax-based incentives and exemptions to incentivize FDI inflows to the country. But it is widely acknowledged that they erode the government’s tax revenue base significantly.

Clearly, marketing Sri Lanka to the world requires consistent policies, adherence to law and order, minimised corruption and less red tape. Many of the tangles that beset the country since 2009 have not yet been adequately straightened out but with the former Government preferring to bypass them with a system of political patronage.

Focused strategies must effectively be in place to promote FDI, especially those with sustainable national economic and social value-adding potential. Together with the BOI policies, greater transparency should exist within the Central Bank, Securities Exchange, price control authorities, customs and Public Utilities Commission. 

The BOI has to stop being a political appendage and enter the sphere of the private sector if publicly-beneficial investments are to become a sustainable reality.

This means the new Government has to finally give the BOI pride of place and empower it to attract and implement investment, a tough task but one with huge rewards.