Damage control?

Thursday, 17 November 2011 00:00 - - {{hitsCtrl.values.hits}}

SRI LANKA is aiming high in development. In fact, according to the Central Bank Governor, US$ 21 billion in public investment will be made in the next six years. Undoubtedly, local and foreign private investment is also needed to achieve this goal but the controversial ‘underutilised’ assets bill is posing a challenge.

Since the end of the war, Sri Lanka has allocated more than US$ 6 billion to the development of ports, power plants, railways and highways, to meet needs neglected during the 25-year conflict and make the country more attractive for foreign investment.

According to the Central Bank, the planned US$ 21 billion is around 6.5 per cent of the country’s GDP and all of it will be for infrastructure projects. Sri Lanka has planned to spend $ 3.75 billion for public investment this year, $ 4.43 billion next year and $ 5.05 billion in 2013. The number will rise to $ 5.76 billion in 2014 and $ 6.53 billion in 2015.

Total foreign debt has risen 57.5 per cent to Rs. 2.3 trillion ($ 20.9 billion) through August, since the war’s end in May 2009. Sri Lanka’s total outstanding debt as of end August was Rs. 5.1 trillion ($ 46.3 billion). As a proportion of GDP, it came down to 82 per cent in 2010 versus 86 per cent in 2009.

This is worrying indeed, so if the Government needs to keep growth at an optimum, then it needs foreign investment. However, two rating agencies have already warned that the takeover bill that was passed in Parliament last week would hamper investment.

Fitch Ratings and Moody’s are the two companies that have cautioned the Government over the bill and pointed out that it can affect foreign investment since it could potentially endanger a company to a takeover.

While the Government has said that this is a one-off measure, and the list implies that the act is limited in scope, Fitch warned that “there is a risk that it will set a precedent for further expropriation and will be applied to a broader range of businesses and assets.” This would be a disincentive for both local and foreign investors, the rating agency insisted.

Even though Cabraal has told local media that there are plans to “enlighten” Moody’s on the bill it is unlikely that the initial negative publicity will wear off or inspire rating agencies to change their stance.

Ironically, even as the negative reports were being issued, the Government was busy signing off the Embilipitiya Paper Mill to an Australian company. One of the things that this sequence of events highlights is the unclear policies of the Government, with no view of what measures are needed to support investment for the future.

There is a school of thought that the bill served to gain political vengeance while others ask what warranted such special methods and the inclusion of profit-making companies. Whatever the reason, it is obvious that the Government has to be more comprehensive and long-term in making policies as well as having a clear idea of larger objectives. This means not giving into petty and short-term political agendas.

It is imperative that the Government shows more transparency and better governance, two points that are consistently ignored and will have a deep effect on attracting investment.