No free lunch

Monday, 2 April 2012 00:01 - - {{hitsCtrl.values.hits}}

Traditionally Sri Lankan governments are famous for handing out freebees to gain popularity. According to recent reports, this habit of giving things freely has been expanded with the decision to make Hambantota a “free port,” despite spending a gigantic amount of money constructing and promising that the income would boost the economy.

It was reported over the weekend that laws permitting free trade – exempt from Customs, exchange control and import-export regulations – have been passed in Parliament. The areas where free trading could take place have not been specified so far but will be gazetted, according to the amendments made to the Finance Act.

The move comes in the wake of comments by Sri Lanka Ports Authority (SLPA) Chairman Priyath Wickrama that Hambantota would be a free port with no tax involvements. The SLPA website quoted the Chairman as saying that the users of the Hambantota Port would be allowed to use it for loading, value addition and distribution without any taxes. The exemptions will apply to BOI registered companies engaged in entrepot trade involving import, minor processing and re-export, off shore business where goods can be procured from one country to be manufactured in another country and shipped to a third country without bringing them into Sri Lanka.

It will also apply to businesses that provide front-end services to clients abroad. The other businesses that will get the exemptions are those with headquarters operations of leading buyers for management of finance supply chain and billing operations as well as those that provide logistic services such as bonded warehouse or multi-country consolidation in Sri Lanka. The enterprises that are engaged in the physical importation of goods, wares or merchandise for re-export will be required to carry out such activities in a free port operated under the supervision of the SLPA or a bonded area declared under the BOI law of Sri Lanka.

The problem with this idea is that the Government has spent a colossal amount of money in what is billed to become “the largest port constructed on land in the 21st century” once completed. The estimated cost for phase one was US$ 361 million and it has been rumoured that the Government has already signed the contract for the second phase at a whopping US$ 600 million. The full project is tabled at US$ 1 billion. In addition at least US$ 148 million has been spent on equipment and US$ 140 million loan was obtained to blast the rock that was “belatedly” found. Reports of the exact cost of this rock removal varies between US$ 40 million to US$ 82 million, but what everyone is sure about is that all this money is given by China on commercial interest rates. So how will Sri Lanka pay all this back?

Keeping in mind that there are scores of other development work taking place that further indebt the country, it is clear that the Government has to come up with a transparent strategy on how to make these massive projects financially viable. There is growing concern that “free ports” could encourage money laundering and other nefarious activities that Sri Lanka has inadequate resources to combat. There are also worries that the country can get into a “debt trap” through inability to pay loans. Hambantota Port needs to attract business but it also needs to make profits and given the high trade deficit, the sooner the better.