Race for FDI

THE fight for Foreign Direct Investment (FDI) to South Asia is heating up, with India becoming the latest country to introduce sweeping reforms to spur growth. The new efforts increase onus on Sri Lanka to not fall behind in the race.  

India eased Foreign Direct Investment (FDI) norms in 15 major sectors, including mining, defence, civil aviation and broadcasting, the Government said on Tuesday in a bid to drum up investment and speed up growth, international media reported. The Government also increased the financial power of the Foreign Investment Promotion Board to give single window clearance for investment projects up to Rs. 50 billion ($753.35 million) from Rs. 30 billion.

The crux of these reforms is to further ease, rationalise and simplify the process of foreign investments into the country and to put more and more FDI proposals on automatic route instead of Government route where time and energy of the investors are wasted, the Government said in a statement. This is the rationale often talked about in Sri Lanka but has not yet managed to achieve. 

Sri Lanka’s Government has targeted $ 2 billion Foreign Direct Investment (FDI) for the past two years but failed to achieve the goal. Despite the end of a three-decade war in 2009, the South Asian island has lagged behind in attracting FDI.

Analysts point to the country’s haphazard policies, corruption and weak legal structures as the main reasons for lacklustre FDI.  Sri Lanka’s archaic and cumbersome bureaucracy together with a politicised public service has created an environment where unsolicited proposals are grabbed with both hands. Instead of having universal rules for investors, the 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 make international investors wary, they also cost much in terms of good governance.

Clearly, the allure of Sri Lanka is the main draw behind FDI rather than clear policies, adherence to law and order, minimised corruption or reduced red tape. Many of the tangles that beset the country since 2009 have not yet been adequately straightened out but have rather been bypassed by a system of political patronage that can be seen in the way investment offers are handled.

In fact the Board of Investment (BOI), needs to have its previously trimmed powers reinstated. Numerous attempts to make Government institutions such as Customs, the Inland Revenue Department and the Urban Development Authority (UDA) support the BOI to speed up projects that had previously fallen by the wayside, with more and more personalised involvement replacing a streamlined process. This latest move shows that the Government has no interest in changing this trend.

Perceived high level of policy capture, corruption, nepotism and rule of raw challenges, especially from politically-exposed persons, will need the immediate attention of all stakeholders. Further, focused strategies must effectively be in place to promote FDI, especially those with sustainable national economic and social value adding potential.

In the every deepening rush for FDI Sri Lanka is in grave danger of falling behind as other countries work to get there institutions lined up in a row. The Government must now fast track reforms as even with the best of intentions they could simply come too late.