Investment blocks

THE Annual Report of the Finance Ministry gives a view of the problems that Sri Lanka is facing in having profitable State enterprises and attracting overseas investment.

The report points out that promotional agencies, particularly in investment, tourism and export, have operated under traditional institutional framework with red tape, lack of investor friendly institutional environment, poor coordination with other Government agencies and lack of conclusive decision-making process. The report insists that reforms to make them private sector-friendly are urgent to promote investment.

The Central Bank has set a target of US$ 2 billion in Foreign Direct Investment (FDI) for 2012 and depends on tourism to provide the bulk of this along with infrastructure projects. However, facilitating foreign investment consistently and transparently has been a significant issue in Sri Lanka for many years with many complaints of red tape and bureaucracy delays. Ad hoc measures by the Government to fast-track the process by picking specific companies and pushing the projects through ministries rather than the Board Of Investment (BOI) has created a complicated web that could hamper FDI flow.

Recently there were reports that the ongoing tug of war between the Treasury and BOI was hindering Sri Lanka’s efforts. The report points out that having been absorbed by the Economic Development Ministry, the BOI is still in a transition without a chief executive officer proposed in 2010 and included in November when the 2011 Budget was presented, to issue clear direction on investment promotion. They said the BOI top management has failed to perform up to expectations in spite of Treasury instructions towards revitalising the country’s premier investment agency.

More than 18 months after proposing the post, Treasury Secretary Dr. P.B. Jayasundera again referred to the issue at a media conference last week, saying they were searching for a suitable candidate for the post of CEO to turnaround the BOI.

On the other hand, top BOI officials expressed concern over foreign investment deals and canvassing for investments by powerful individuals, completely ignoring normal procedures. They said that the role of the BOI had become less important as its functions and responsibilities had been taken over by certain ministries and that this was one of the reasons for its slow progress in facilitating new investments. Right now the BOI is simply acting as an agency to obtain tax relief, not promote investments, they say.

According to economist Dr. Saman Kelegama, to maintain consistent levels of eight per cent growth, investment would have to grow to US$ 6-8 billion – a hefty task indeed. This places even more onus on the Government to streamline its various institutions to support a clear, transparent and efficient investment system that functions independent of political influence. It is the tough task but one that is essential to meet the Government’s expectations of development.

According to the Annual Report, the top reasons include inefficient approval processes that take investors to multiple agencies, lack of focus on investment priorities and project proposal priorities as well as price controls on some selected commodities such as milk, poultry, and cement, etc., instead of using the pricing formula and regulatory supervision.

Inadequate flexibility by line ministries and agencies to promote private sector into commercial activities, inadequate long-term funds and institutional support to SMEs, outdated institutional setting in investment promotion agencies and inadequate professional skills are the other points that have been highlighted.

Now that the Government has the list, it will be interesting to see how it irons out these challenges.