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Thursday Dec 12, 2024
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Of the 37 underperforming enterprises and underutilised assets vested in the State from the date coming into operation of the said Act (11 September 2011) that was rushed through the Parliament as an urgent Bill, the activities carried out by the Competent Authorities of 29 of them are to be monitored and supervised by the Ministry.
Also included are the formulation of policies, programs and projects in regard to investment promotion and the BOI, the implementation of BOI Law and Strategic Development Projects Act, the SME Venture Capital Company and the SME Authority.
According to BOI sources, the new Minister in assuming his Ministry has spoken of the need to fast-track projects, upgrading the incentives that BOI offers investors, strengthening Free Trade Agreements, developing the current one-stop-shop and other subjects handled by the BOI and generating employment, its performance in attracting FDI.
In the presentation of the Interim Budget for 2015 the Minister of Finance has the following initiatives to mention in relation to trade and investment:
(1) To get back GSP+
(2) Extended facilities to the business community at BOI
(3) Construction of EPZs
In looking at the broader spectrum of policy announcement in 2015 presidential election manifesto, which is predictably expected to guide the new Cabinet of Ministers, lays down a cornerstone for the realisation of a just and stable country on which economic development is to be fostered.
To march forward for a just and moral society freeing from ‘total breakdown of the rule of law, fraud, corruption, wastage, and inability to identify national priorities, environmental degradation, moral and spiritual degradation’ is a hard task. This goes beyond the ‘100 day program’ and any serous endeavour to march towards promotion of FDI and investment is a conscious farsighted national effort to be taken for economic development in a sustainable manner appropriately assessing national and international realities.
The program to “fast track projects, upgrade BOI incentives to investors, developing one stop shop, new EPZs, etc.” was oft-repeated rhetoric being heard every time a regime is changed and it is nothing new but speech making.
The ad hoc changes and ‘short-termisms’ in the past were abortive in achieving the proclaimed objectives. Nevertheless these ad hoc changes in the recent past have created a perplexity in the country’s investment regime a glimpse of which is captured in the following lines.
The “re-structured BOI Board” effected by the amendment to BOI Law in 2012 the BOI Board is to have five members appointed by the President for a period of three years in contrast to five years earlier and one of whom to be the Chairman of the Board (the amended law erroneously refers to the word “Commission” for the word “the Board”).
Under the new structure the Director General designate is the CEO of BOI appointed by the President, in consultation of the Board but he is not a member of the Board. Yet he could attend meetings of the Board but could not have voting rights at Board meetings. The Director General exercises duties and functions on the general direction and control of the Board excluding the right to enter into agreements with enterprises and grant concessions to them under Section 17 of the BOI Law.
Certain ad hoc policies, legislative and institutional intrusions in the recent past have affected the weight of BOI tended other agencies to hold up BOI approvals and concessions and the exercise of authority. The fate and role of BOI was left in the hands of then Secretary to Treasury.
While the BOI was forced to dwindle in power gradually, a special law, the Strategic Development Projects Act No.14 of 2008 (SDP Act), was brought in to provide extraordinary tax and other fiscal incentives with the power to exempt the application from 12 laws to what they called strategic development (SD) projects for a period not exceeding of 25 years.
This special law is equipped to confer sweeping tax and fiscal benefits to SD projects that BOI identifies in consultation with the relevant line ministries and takes steps enumerated in the said Law.
A proposed SD project cannot be equated to an “enterprise” since the latter is a legal personality with which BOI grants exemptions from the limited number of laws specified in the Schedule to BOI Law, such as like Inland Revenue Law (IR Law), Customs Ordinance, Exchange Control Act in accordance with the regulations framed by the Minister through an agreement entered into between an enterprise and BOI under Section 17 of the BOI Law. Under the SDP Act the sweeping exemptions are granted to ‘projects’.
Such ‘projects’ are first identified by BOI in consultation with line ministries. The Minister of Investment thereafter publishes a Gazette notification giving information of the ‘project’ and also setting out exemptions to be granted to the project. After 30 days of Gazette notification the Minister of Investment in consultation with the Minister of Finance obtains the approval of Cabinet for the said ‘project’ and the exemptions granted to it.
On receipt of Cabinet approval, the Minister of Investment, within six weeks of Cabinet approval, publishes an Order in Gazette, specifying the name of the ‘Project,’ the period of exemption with its starting and ending dates and the commencement date of ‘Project’. Within three months of such Order, it will be placed before Parliament and immediately on being approved by Parliament the contents in the Order become operative.
It is clear that the said sweeping exemptions are conferred on the ‘Project’ and the law has not endowed with provisions to flesh out anything in amplification of the law or for making subsidiary legislations and cannot therefore be stretched beyond the words in the primary enactment. Though twice the SDP Act was amended in 2011and 2013 none of amendment provided a solution to the matter. The lawmakers apparently preferred ambiguity to clarity for reasons best known to them. It is questionable for SD projects to enter into agreements in terms the BOI Law.
Under the BOI the details of investment needed other criteria to be fulfilled by an enterprise in any given business undertaking and the eligible concessions are in public domain once the regulations stipulating those details are published in Gazette by the Minister which he does from time to time based on the current economy.
There is no similar transparent approach for SD projects. The law merely defines what the SD Project in broad sense to mean:
“a project which is in the national interest and which is likely to bring economic and social benefit to the country and which is also likely to change the landscape of the country, primarily through—
(a) the strategic importance attached to the proposed provision of goods and services, which will be of benefit to the public;
(b) the substantial inflow of foreign exchange to the country;
(c) the substantial employment which will be generated and the enhancement of the income earning opportunities; and
(d) the envisaged transformation in terms of technology.”
This enables the Minister of Finance with the Minister of Investment to have an absolute discretion go into a free voyage in the identification of projects and to grant extraordinary benefits to such projects and obtain legislative sanctity in the process. The discretion is opens to abuse and manipulations in a majority-rule government. An uncertain law without moral guides becomes tyrannical and opens for possible abuse and loss of confidence in the community and it is a form of autocratic social engineering.
The confused state of minds of the policy makers was also seen in Finance Act No. 12 of 2012 in announcing the BOI enterprises operating entrepot trade, off-shore business, provision of front end services to clients abroad, headquarters operations will exempt from Customs Ordinance, Exchange Control Act and Imports and Exports (Control) Act if any such business operates in a Bonded area declared by the BOI Law. The Government later realised that BOI is not empowered to declare Bonded areas and the law was changed a year later by Finance Act No. 12 of 2013. The credibility of law making will be lost in matters of this nature.
The Revival of Underperforming Enterprises or Underutilised Assets Act No. 43 of 2011 that was passed in haste as an urgent Bill to vest 37 enterprises or assets of enterprises in the State with immediate effect on the date it was passed is yet another law that undermined investor confidence in the country. Though the State has vested to itself 37 enterprises and assets in the guise of control, administer and manage them for revival, the activities of competent authorities 29 of them are to be monitored and supervised by the new Ministry.
The Land (Restriction on Alienation) Act No. 38 of 2014 was passed in Parliament on 29 October 2014 to operate retroactively from 1 January 2013 has created discrepancy in lease of lands in Katunayake and Biyagama EPZs.
The foreign investment entry channelling through approvals in terms of Section 16 and Section 17 by the BOI should be reviewed in the light of the importance to be given to FDI in the economic development and the role the BOI is expected to play in the operation.
The references to administration of affairs in and over the “area of authority” of the BOI, grant of exemptions and/or modifications from Inland Revenue Law to investors under Section 17 of BOI law, regulations referring to tax incentives to investors under Section 17 of BOI Law are disingenuous when they in fact are not the reality.
Such bewilderment points to genuine need for overhaul unambiguous policy posture at national level followed by proper institutional structure to give effect to them. Such policy orientation should be above-board of individual or imperfect institutional rules be better addressed in the long term economic benefits.
Against the above backdrop let’s discuss the agenda in the presentation of the Interim Budget for 2015 of the Minister of Finance which undoubtedly could have heavy impact on way forward in trade and investment.
(1) To get back GSP+
The new Government wishes to get back the GSP+ the facility the country has enjoyed for several years and had helped country in industrial exports. It is estimated that in the past seven years the loss of GSP+ facility has resulted in a loss of about $ 5,000 million and countless number of loss of jobs and shut down of factories. This was a serious setback in the country’s export performance and affected its balance of payments and external reserves.
The new Government is optimistic in the revival of GSP+ facility and thereby planning to revive shut down factories and set up new ones and invigorate private sector in partaking in export oriented industries.
The provision of EU GSP+ was aimed at promoting sustainable development and good governance subject to compliance of core human rights and internationally agreed labour standards as per the EU rules and regulations by the beneficiary countries. This trade benefit was withdrawn charging Sri Lanka’s dire human rights record and on the eve of withdrawal the entry to EU investigation team to probe human rights was refused by Sri Lanka Government on the ground that any probe of its rights record is a violation of its sovereignty.
It is still premature to see the progress of negotiations undertaken by the new Government to reopen the trade concessions. This illustrates that country’s conduct of domestic affairs cannot move on in isolation from internationally-recognised standards and rules concerning trade and investment without harmonising with those standards.
(2) Extended facilities to the business community at BOI
To set up a business facilitation networking unit consisting of Governmental institutions such as Department of Inland Revenue, BOI, Department of Commerce, Import and Export Controller, Registrar of Motor Vehicles, Registrar of Companies and Ministry of Finance to work as a one-stop-shop service the business community. The intended purpose of this unit is to assist entrepreneurs to obtain approvals needed in the commencement of business activities within a period of 100 days from the date of submission of proposal.
The proposed model of one stop service unit which was aimed at enhancing process of documentation for the commencement of business entrepreneur was not a new thinking but similar model was tried by BOI and failed and later abandoned. Such an administrative device could not bear fruits unless a proper legal baking is provided to it.
Instead the focus of policymakers should be more on system efficiency in clearing bottle necks affecting the general business climate to facilitate investment and trade on a long term benefits.
(3) Construction of EPZs
Among the initiatives envisaged include immediate construction of export processing zones (EPZs) on a large-scale under the BOI to attract local and foreign investors. In this initiative it was taken into note that not a single EPZ or an Industrial Park (IP) has been built in the last 10 years. However, the experience of the BOI shows that whenever a zone is built immediately it attracts local and foreign investors. And also take every measure to make use of the underutilised capacity in the existing zones.
A thorough cost/benefit analysis based on realistic expectations of prospective industries should be conducted at the planning stage of an EPZ. Any serious cost and benefit analysis of EPZs or Industrial Parks (IPs) were never under taken at the planning stages except at the inception of BOI. Most of those were ad hoc political decisions. The idling unutilised industrial sites and indisposed closed down factories in existing EPZs bear testimony of this impromptu.
Generally export-oriented BOI companies irrespective of the locations are allowed to import inputs and intermediates and export finished freely while goods transferred to the domestic customs territory be monitored and subjected to duty.
A ‘Zone Approach’ for FDI is to provide industrial sites to companies within a geographically defined enclave. This would be advantageous companies in view of ready availability of infrastructure facilities and other services and acts as an incentive to the companies.
Similarly to invest in a specified undeveloped or lagging area, in an EPZ or otherwise, may demand additional incentives adding more to government costs. The ‘Zone Approach’ would be easier to monitor the movement of goods and maintain the integrity of the customs territory, but this option restricts the ability of a company to freely choose the location of its production unit.
An ‘Enterprise Approach’ as an alternative to ‘Zone Approach’ has also been adopted by BOI and provided similar incentives to companies set up anywhere in the country side but outside an EPZ. The ‘Enterprise Approach’ will not involve upfront costs to the Government in terms of infrastructure investment. The main disadvantage would be the difficulty in maintaining the integrity of the Customs territory and other administrative costs of maintaining a country wide program. An enterprise depending on the location, backward linkages may be limited and infrastructure costs high.
At the inception the BOI has established EPZs in its area of authority. The BOI law, on the one hand, requires Customs offices to be stationed in the area of authority to perform investor friendly customs clearances and as an administrative arrangement, on the other, BOI officials are being officiated Customs documentation as facilitators in EPZs in area of authority. The jurisdiction in and over area of authority as originally bequeathed on the BOI has now been eroded by subsequent legislations.
If tax exemptions are to claim directly from the IR Law and the BOI incentives are limited only to free access of imported inputs and intermediate products, bonded warehouses and duty drawback mechanisms may provide similar benefits. However the BOI per se is not empowered to declare bonded areas.
In upgrading the incentives that BOI offers investors the offering of overfriendly fiscal incentives by tax direct or indirect tax exemptions or provision of concessionary goods or services could fall under “prohibited ‘or “actionable” under the definition of “subsidies” if they are contingent on export or to use domestic goods as inputs instead of imported goods under WTO agreements.
In the overall, as matter of generality one should not lose sight of the fact that the FDI policy would also depend to some extent on limiting factors such as the state of the home country economy as well as the global economy and the availability of funding on the international financial market, which are difficult to predict beforehand.
Yet FDI forms the most effective form of capital flow to achieve economic development that also helps to fill the country’s gap in technology, management know-how, market intelligence and the balance of payments, etc. – all of which are necessary to develop an export industry though at initial stages the investment is often used to import capital goods and necessary intermediate inputs.
In any event the FDI liberalisation plan is always a deliberate national policy choice to appropriately fine-tune the domestic situation to induce foreign capital inflow either to open restricted or unrestricted areas or combination of both to foreign investors to the economic activity. It is axiomatic therefore for policymakers to have a hard look at the needs of the country on a long term basis in the formulation of policies.
It is evident that policy makers sometimes have rushed into FDI liberalisation policies without much thought of it or with a strategy to yearn for a short term results. I have dealt with the policy issues that have resulted in predicament and negative effects in some aspects of the country’s investment regime.
The policymakers’ task is also to be mindful that FDI does not depend solely on domestic factors and it’s only one aspect of the issue. There are external and global issues vulnerable to the FDI flow some of which may be beyond the control of an individual country such as, the phase of development, size of domestic market and resources, etc.
Yet certain factors are in charge of individual countries such as good governance, compliance with core requisites of multilateral or plurilateral accords concerning trade and investment that weigh heavily in determination of investment destination. The systematic assessment of crisscross impact of bilateral and regional trade agreements too cannot be spared.
The country is on the threshold of structuring good governance on which just and stable country is to be fostered; it would be of paramount importance for national policymakers entrusted with the task of economic development to assess the complexities of above settings and to determine the specific role FDI is expected to play in the national economy. Such a national program goes beyond the ad hoc strategies the country has witnessed in the recent past that catered wishful egotistical desires of a few politicians.
A plan that supports sustainable development as the presidential election manifesto contemplates to meet the needs of the present without compromising the needs of future generation is a long term program. The national policy making for FDI in the scenarios of national and international ramifications being a huge task, the inputs of experts, economists and academia may be desired and what is important is that once policies are settled and accepted at national level, the implementation of the policies should be advanced in accord by all agencies at different levels and unhindered by any and elimination of the existing hindering impediments to ensure the country’s investment regime offered to achieve FDI is transparent, clear and unambiguous.
(The writer, LL.B, Attorney-at-Law, is formerly Head of legal BOI and retired Senior Director, Pan Asia Bank.)
