US investment outlook flags Sri Lanka’s stalled SOE privatisation, labour laws

• Stalled CEB privatisation blocks cost-effective energy for industries
• Investors cite high costs, policy shifts and opaque procurement
• Rigid labour rules, emigration and weak protections limit flexibility
• US firms eye ICT, energy, aviation and defence

Sri Lanka’s stalled privatisation of State-owned enterprises, rigid labour laws and restrictions on foreign participation continue to weigh on investment prospects, the US State Department said in its 2025 Investment Climate Statement.

The report noted that 527 State-owned enterprises, including 55 designated as strategic, remain a major burden on public finances. 

“The previous Government initiated a program aimed at comprehensive SOE reform, including potential privatisation of several major entities. However, the current Administration suspended these privatisation efforts upon taking office,” the report noted. 

“It has instead announced alternative restructuring approaches focused on improving management practices, reducing operational costs, and enhancing efficiency within the existing state ownership structure,” it added. 

“The stalled privatisation of deficit-ridden State-owned enterprises, notably the Ceylon Electricity Board, hinders development of cost-effective energy supplies crucial for industrial operations. Foreign investors consistently report high transaction costs, unpredictable policies, and opaque procurement procedures”.

At the same time, the report pointed to continuing strengths. Sri Lanka permits 100% foreign ownership in most sectors, with constitutional guarantees for investment protection and unrestricted repatriation of earnings, fees, and capital. 

The Colombo Stock Exchange recorded $ 66.5 million in net foreign inflows in 2024 and mobilised $ 568 million in capital. Worker remittances climbed to a record $ 6.58 billion, pushing reserves to $ 6.1 billion by year end. 

Export Processing Zones continue to attract investment, while new initiatives such as the pharmaceutical manufacturing zone in Hambantota and the Colombo Port City are expected to expand opportunities.

The Economic Transformation Act, which was intended to abolish the Board of Investment and replace it with five specialised agencies, has not been implemented, leaving approvals fragmented and slow. 

“Other key impediments include unnecessary regulations, legal uncertainty, and poor bureaucratic responsiveness,” the report noted. 

The Government’s decision to impose new taxes on service export firms while granting exemptions for Port City projects has reinforced perceptions of uneven treatment. Corruption in procurement persists despite legislation passed in 2023.

Labour market conditions were also identified as a critical risk. “Rigid dismissal rules make restructuring costly, while emigration has intensified shortages in IT, apparel, tourism and engineering,” the report said. 

It added that “the garment industry reports turnover rates of 40%” and that “weak social protections and limited coverage for informal workers contribute further to labour market inflexibility.”

Although GDP growth of 5% in 2024 exceeded expectations and the Administration’s commitment to the IMF’s four-year, $ 3 billion program provided reassurance, foreign direct investment remains limited. 

Most deals are in the $3–5 million range, concentrated in tourism, ICT, renewable energy, manufacturing, and real estate. 

The report noted the Government’s commitment to finalise Sinopec’s $ 3.7 billion oil refinery in Hambantota, the largest FDI project to date if successful, but confidence was dented when Adani Green Energy exited a $ 400 million wind farm after the Government sought to renegotiate an awarded contract.

Restrictions on land and ownership were also flagged. Foreign companies with more than 50% equity are generally barred from purchasing land, with only narrow exceptions. 

Caps of 40% apply across sectors such as agriculture, natural resources, shipping and education, while retail under $ 5 million, pawn broking and coastal fishing are entirely prohibited.

The report concluded that Sri Lanka’s outlook for investment rests on its ability to convert stability into reforms that reduce state dominance, simplify approvals and enforce transparency. 

“Without progress in governance, trade facilitation and labour flexibility, the Government’s $ 5 billion FDI target for 2025 will remain difficult to achieve,” it said.