What ails the BOI?

Tuesday, 26 October 2010 02:51 -     - {{hitsCtrl.values.hits}}

By H.K. Seneviratne

A TOPIC of much discussion in business circles today is the future of the Board of Investment of Sri Lanka (BOI), which was established in 1978 as an autonomous statutory body. It was originally known as the Greater Colombo Economic Commission until it was renamed as BOI in 1992.

The institution was set up with a vision to encourage and promote FDI with a wide range of powers bestowed in it associated with the said objective.

Speculation is rife that the Government has decided to scrap this institution and replace it with a new one to play a role that is more of an Investment Promotion Agency (IPA). Over the past years, different governments have used this institution as a tool, giving overriding priority to implement their popular industrialisation-led programmes making this organisation over expanded and focus more on non-core functions. As a result it has largely assumed a role of an economic development agency rather than an IPA.

Heavily burdened

Despite the BOI being heavily burdened with managing 12 EPZs and Industrial Parks, it has assumed and continues to assume the role of a real estate manager with ad hoc acquisition of lands and getting involved in operation of numerous units in the past and present without technical personnel and a legal foundation such as the Bureau of Infrastructure Investment (BII) and Public Private Partnership (PPP) unit.

As a consequence, the BOI has become a heavy fee levying institution without a rational basis and commensurate services rendered in return to investors. The investors, both foreign and local, to begin with are being charged a substantial fee for BOI to process their investment proposals and to collect the standard draft agreement.

If the investment proposal exceeds US$ 25 million the processing fee would be an amount equivalent to 0.01% of the proposed investment. This would be followed by a lifetime annual payment, which is subject to upward revision at freewill of the BOI. The fees for projects located in EPZs and Industrials Parks owned by BOI are also subject to similar revision.

For infrastructure projects, the annual fee would be for the tax holiday period. There will also be a fee for advance ruling in verification of import export documentation function performed by BOI on behalf of Customs, for which Customs does no charge a fee.

The only justification is that BOI does a more efficient service than Customs. However these advance rulings could be withdrawn at any time retroactively by BOI. This dual function in recent times has created chaos when Customs openly questions the validity of BOI’s exercise of this authority, tarnishing the credibility of BOI and its legal authority.

Its role as a one-stop shop facilitation to prevent investors running from pillar to post has virtually become ineffective and superfluous due to the proliferation of constituted functionaries from whom the investors by law are required to obtain licenses, permits and approvals to set up and operate industries. In reality it would be waste of time and money for investors seeking BOI’s one-stop shop facilitation for such purposes rather than making those legally agencies more efficient and investor-friendly. The time is ripe for BOI to come to terms with the functions they rightfully exercise.

Vibrant role

From the inception the BOI was known to be a vibrant organisation and it has made a significant contribution to the economic development of the country with the advent of the free economy in the late 1970s. The BOI has earned recognition for its hassle free and speedy approval procedure of investment proposals, one-stop shop facilitation to prevent investors running from pillar to post for permits, licenses and approval to set up and operate industries and investor-friendly aftercare investor service.

Apart from this, what was unique was the confidence given to investors that an agreement once signed with the BOI had statutory sanctity and could not be repudiated or annulled arbitrarily and unilaterally. However, the BOI is not free from suits by investors on breach of contract allegations.

The business community, unlike in the past, is not too worried about what will happen to the BOI if adequate provision is made for the continuity of their existing agreements because they too are frustrated with the down-sliding of the organisation to a bureaucratic and ineffective ebb due to its own rules and procedures.

The officers pin the blame on the unstable policy environment which is holding public servants personally responsible for official decisions. However, this is not the only reason for the downfall of the BOI’s pivotal role as an IPA. The BOI has outlived its usefulness and the problems plaguing it are irreparable. It cannot be re-engineered as a viable institution to meet the new tasks.

The proposal to disband the BOI and replace it with a new institution with a new vision to attract FDI by shedding non-core functions would be a prudent in considering the economic development envisaged in the post-war era.

It is also stated that the new institution would be endowed with more power to eliminate bottlenecks that impede private sector participation, local and foreign, in the economic development and much-needed employment generation.

However, in an environment where the prevalence of peace and law and order is to be canvassed for the FDI drive, it is the responsibility of the policymakers to ensure that various agencies they have created to issue permits, licenses and approvals to set up and operate industries are operating effectively and in a business-friendly manner.

Wickremesinghe’s bill

However, this not the first time that different governments have attempted to change the structure and role of the BOI and prune it down to only an IPA by shedding all other activities, including the authority to grant tax holidays to industrialists. There were also proposals to create a separate EPZ authority to manage EPZs or privatise them to ease the additional burden off the BOI.

(The writer is a LL.B graduate of Colombo University and an Attorney-at-Law. He was one time Head of Legal Dept. of BOI and Legal Consultant and Secretary to the BOI Board. He can be reached via email on [email protected] or [email protected])

What ails the BOI?

In December 2002, a new BOI Bill was bulldozed through Parliament under Ranil Wickremesinghe’s Government but it never became a law for want of the Speaker’s assent and lapsed due to the subsequent dissolution of the Government.

This bill – the brainchild of Wickremesinghe and Prof. G.L. Peiris (Peiris was a Minister under Wickremesinghe at the time) – was based on Wickremesinghe’s action plan, the ‘Regaining Sri Lanka’ economic policy.

In addition to the creation of a new BOI, the bill had proposed the setting-up of five Regional Economic Development Commissions (REDCs) and removing the BOI’s right to grant tax holidays to industries.  It was also proposed that the tax concessions granted in terms of the Inland Revenue Act (IR Act) should be extended in the same manner and to the same extent as provided in the IR Act.

Though the bill was found to be ill-framed and unworkable, even before it became law, five REDCs were established and a large number of employees were retrenched by a Voluntary Resignation Scheme. However, with the change of Government, the BOI continued regardless, with the influx of new recruits to fill the loss.

Though the bill never became law, in line with the scheme so proposed the IR Act was provided the ability to grant tax concessions. Further, even under the new government that was formed following the defeat of Wickremesinghe’s Government, the Ministry of Finance continued the process of providing tax holidays in the IR Act similar to those granted by the BOI to its industries.

Thus, the proposal to provide tax exemptions or tax concessions under the IR Act for BOI-approved companies was not a new concept altogether and it was first introduced under Wickremesinghe’s ‘Regaining Sri Lanka’ and the ‘Mahinda Chinthana,’ wittingly or unwittingly, continued with the process.

Serious issue

The above situation, while providing concessions in the IR Act that would be offered by BOI and the BOI continuing to grant these tax concessions in parallel to enterprises in terms of its law, has created a serious issue with the BOI. The empowerment of the BOI under its law is to modify or vary the application of the IR Act in respect of its enterprises but not to extend to them the same or similar tax concessions as is contained in the IR Act.

In brief, the earlier ad hoc reforms made by policymakers for the BOI have resulted in the organisation being in complete disarray and lacking a central ethos.

A similar confusion has also been observed in the legislation hatched by bigwigs in the Ministry of Finance and passed by the Mahinda Rajapaksa Government called the Strategic Development Projects Act No. 14 of 2008, which provided the BOI to identify strategic developments projects with the concurrence of relevant ministries that would qualify for a tax free period for up to 25 years and exemptions from seven other laws specified in the act.

To qualify for the concessions, the identified projects should be of national interest and be likely to bring economic and social benefit to the country, which is also likely to change the landscape of the country, primarily through:

The strategic importance attached to the proposed provision of goods and services, which will be of benefit to the public.

The substantial inflow of foreign exchange to the country.

The substantial employment which will be generated and the enhancement of the income earning opportunities.

The envisaged transformation in terms of technology.

These projects are eligible for exemptions from the application of following laws:

The Inland Revenue Act No. 10 of 2006

The Value Added Tax Act No. 14 of 2002

The Finance Act No. 11 of 2002

The Finance Act No. 5 of 2005

The Excise (Special Provision) Act No. 13 of 1989

The Economic Service Charge Act No. 13 of 2006

The Debits Tax Act No. 16 of 2002

The Customs Ordinance

However, due to numerous flaws in the implementation, including the extremely complicated and cumbersome procedures announced in approving the projects under it, the law was practically shelved. In my view, to put it to practical use, it requires drastic changes to the present form.

In the context of the previous BOI and related reformations proposed and brought into effect by policymakers and their impact, the people and the business community should be more vigilant that the changes the Government proposes to reset the economic policies at least now would be a healthy conduit to lure in more foreign direct investors to the country.