Port City Colombo Commission Act: Special Economic Zone

The intentions of the creation of the Port City appear to be noble, and it is expected that the functioning of this institution will bring greater economic benefits for Sri Lanka and influence the culture, which is apparent in overseas markets, yet the success of this initiative will depend on the manner it is administered and the competence of the persons who manage it

The Port City Colombo gained legal status to operate and function as a Special Economic Zone (SEZ) as the Speaker placed his signature on the Colombo Port City Economic Commission Act No. 11 of 2021, in Parliament on 27 May. As set out in the Act, the Colombo Port City Economic Commission which includes seven members has now been established to promote the Colombo Port City to be a leading Special Economic Zone in the region and to administer its activities.  

A webinar titled ‘Port City Colombo Commission Act: Special Economic Zone (SEZ): Opportunities, Legal Implications and Contractual Issues’ was organised by Asian Path Finder Legal Consultancy and Drafting Services held on 1 June under the auspices of CHEC Colombo Port City Ltd., with a broad array of international participants ranging from Japan, China, India, Canada, US, Dubai, Australia, Singapore, Malaysia, and New Zealand. 

The industry experts shared insights on the most challenging issues that are faced by the SEZ in three sessions which included ‘An Introduction to the New Port City’ by Thulci Aluwihare, Assistant Managing Director, CHEC Colombo Port City Ltd.; ‘Salient Features of the New Legislature and its Legal Implications for Sri Lankan Businesses’ by Dr. Asanga Gunawansa  Ph.D. (NUS); ‘Contractual Issues in Foreign Investment Transactions and One Belt One Road Initiative and Legal Impediments’ by Dr. D. C. Jayasuriya, President's Counsel. The event was followed by a panel discussion that I (Malik Cader, Attorney-at-Law, Solicitor UK) chaired and moderated.

This article is a compilation of the presentations made by the speakers at the webinar which provided clarity on overreaching concerns surrounding the Port City Colombo Economic Commission Act.

The significance of the Act

Colombo Port City Economic Commission Act, after being challenged for being unconstitutional, followed by debates in the Parliament was finally appropriately amended as per the Supreme Court recommendations and enacted into law on 27 May. 

An SEZ is a geographically delineated area that is subject to different regulations and administration than the rest of Sri Lanka. This has been established to attract Foreign Direct Investments (FDI) which would otherwise be impossible to obtain under the original administration having been ranked as 99th in the world in the Ease of Doing Business Index. The Commission will act as a single-window facilitator responsible for the consideration and determination of an application made for registration, license, authorisation, or any other approval that is necessary to engage in any business or to invest in the Port City. 

The Colombo Port City project is the single largest FDI project to date in Sri Lanka, valued at $ 1.4 billion; 170 hectares of the land are considered as marketable land out of which 112 hectares have been leased to the project company on a 99-year lease. 

One of the advantages for Sri Lanka that was elaborated is a value creation of approximately over $ 7 billion because of the wealth created by reclaiming new landmass which is valued at current market prices. Sri Lanka is a lower-middle-income country whose economy specialises within a stiff range that ignores the service sector. The island's main economic sectors are agricultural commodities and tourism and the SEZ could allow for the necessary development of the service sector within Sri Lanka. 

Colombo District is the most densely populated district in Sri Lanka, with the central business district in Sri Lanka located at a Dutch Fort built in the 16th century; a location which is essentially impossible to expand and develop on and therefore, new land is vital for further expansion and to attract FDI into the country.

Will Port City be a part of Sri Lanka?

It is to be understood that this question is merely consternation, which is founded on outdated principles as the territory of the State being understood as naturally formed land is no longer the principle held in the status quo. 

Since the 17th century, the maritime territory was understood as a part of the State territory in some semblance, however with the advent of the United Nations Convention on the Law of the Sea (UNCLOS), it became a definitive “Constitution for the Ocean” and is the international legal framework that sets out the rights and duties of States in the use and exploitation of the oceans. It should be noted that Sri Lanka has been a party to the UNCLOS since 1982. 

Article 76 of UNCLOS is dedicated to provisions related to the continental shelf such as the determination and delineation of the outer limits of the extended continental shelf beyond 200 nautical miles and other rights of States over the continental shelf.  As per the provisions of the Convention, Sri Lanka exercises administration over four zones, which includes the territorial sea, the contiguous zone, the continental shelf, and the Exclusive Economic Zone (EEZ). 

The Port City is lodged comfortably within these limits of the State. Sri Lanka holds sovereign rights over the resources in the water column, seabed, subsurface as well as air space over the territorial sea, and the exclusive rights to authorise and regulate scientific research within this zone. Therefore, the concerns that the Port City is developed by separate entities and there being a potential threat to national security along the lines of foreign warships being allowed to enter is a distorted narrative as crossing the territorial waters of Sri Lanka still requires permission from Sri Lanka. 

When looking at the reclamation project where under Sections 58 and 60 of the State Lands Ordinance, provided that the custody and administration of the foreshore are vested in the State and that the President holds the authority to reclaim any sector of the foreshore or seabed. This is ingrained into the project agreements which the project developers have agreed to and by the President exercising his power to reclaim the land, it will systematically become a part of Sri Lanka’s territory by operation of law. 

Furthermore, on 5 August 2019, the “Administrative District Act No. 22 of 1955” was revised to extend the range of administration and dominion to include the reclaimed land of the Port City in the event where the President uses his power to reclaim the land. Even before the Act was debated in Parliament, Port City land was already a part of the administrative district of Colombo, with the project company only having the land under a lease, which is under the State Lands Ordinance. Unambiguously, the Colombo Port City is part and parcel of Sri Lanka and is still a protectorate of it.

Salient features of the Act

The Port City exists to generate new FDIs. Establishment of the Colombo Port City Economic Commission under Section 3 of the Act – an entity which is responsible for amending and enforcing community rules such as dealing with licenses and registrations of businesses is systematically created to act as a superintending entity for the Port City. Some of the key powers vested with the Commission are to develop and approve environmental standards, monitor, and enact environmental improvements, and co-operate and enter into agreements with other foreign entities. 

The Commission is required to seek the concurrence of the relevant statutory authorities when issuing such approvals.  Section 4 of the Act states that all zoning and physical development activities within the Port City should be implemented based on the “Master Plan” as approved by the Commission, with the concurrence of the President. Looking further into the powers of the Commission, Section 26 of the Act states that for a person to engage in business in and from the area of authority of the Colombo Port City, such person shall be required to have a license issued by the Commission. If the person were to be a company, then such Company shall additionally be required a Certificate of Registration as issued under Part VII of the Act. Sections 43 to 51 contain several regulatory provisions that powers and authority to the Commission to regulate offshore companies and offshore banking. Section 45 specifically states that regulations may be made for Part VII of the Act, with the concurrence of the Monetary Board.

Another forthcoming feature of the Act is that every person who is looking to become an authorised person must specify the total value of the proposed FDI to be made in any designated currency with an embargo on Sri Lankan Rupees. Furthermore, no authorised person can use a foreign currency deposit from any licensed bank within the meaning of the Banking Act or a foreign currency loan obtained from these banks to provide investment to Port City. All funds to the Port City must be raised overseas.

Section 35 of the Act makes it mandatory that authorised persons carrying out business activities in the Port City employ both residents and non-residents. Earnings from both types of employees will also be exempted from income tax. Section 36 allows the receipt of payment within the Port City to be in Sri Lankan rupees in respect of any goods and services provided to a citizen or resident of Sri Lanka. Section 39 enables the receipt of such payment to be in Sri Lankan rupees from any unrestricted purchaser and these payments may then be converted to foreign currency.

Part XI of the Act (Sections 52 – 53) deals with granting of exemptions or incentives, “notwithstanding the provisions contained in any other written law, to any authorised persons carrying on Business of Strategic Importance, as may be approved under this Part of this Act.” Section 53 (2) provides that such exemptions or incentives should be given to “Businesses of Strategic Importance” which would ensure the success of the objectives in establishing the Colombo Port City, having regard to the national interest or in the interest of the advancement of the national economy. 

Tangible qualifications of what may be considered a “Business of Strategic Importance” may include the envisaged transformation of knowledge in terms of the promotion of services or advances in technology, destination promotion envisaged for Sri Lanka, through the promotion of tourism, entertainment, and shopping activities, or through the promotion of urban amenity operations with the settlement of a residential community or the impetus envisaged through the promotion of services with the setting up of corporate headquarters operations and regional distribution operations. 

Part X1 of the Act further proclaims that the Commission should give such exemptions/incentives in consultation with the President, or in the event, a Minister is in charge of the subject of Port City, in consultation with such Minister.

The establishment of an International Commercial Dispute Resolution Centre (ICDRC) is dealt with in section 62 of the Act. The Centre will be established as a company limited by guarantee under the Companies Act, No. 7 of 2007 to offer conciliation, mediation, adjudication, arbitration, and any other alternate dispute resolution services. There is a need for the establishment of an ICDRC as local arbitration centres need to be upgraded to an international level. Although the infrastructure for an international arbitration centre exists, there is currently no secretariat to run it. Section 62(2) provides that any dispute that may arise between either the Commission and an authorised person, or the Commission and a resident or occupier (provided there exists a legally binding document between both entities), would be settled by way of arbitration by the ICDRC.

An interim measure is put in place by Section 64 which states that an authorised person may be permitted by the Commission to engage in business within Sri Lanka, but outside of the Colombo Port City if approved by the President for a period that does not exceed five years past the date of commencement of the Act. This ensures that business activities will be able to materialise while the physical infrastructure of the Port City is still being constructed.

Implications for local business

Port City Colombo has the full capability to local businesses by attracting FDIs. The project is very welcoming to FDIs as operations could be done in any foreign currency and it could fill the gap between Dubai and Singapore to act as a highly desirable hub with modern infrastructure in place in South Asia.      

There are no restrictions on local investors’ participation, however, the funding required for the Port City should be raised overseas. This means that if local companies were to see their capability to raise project financing overseas as an impediment, then they can partner with foreign investors and develop from these partnerships. Apart from business partnerships, there will be more opportunities for local businesses to provide services for businesses that would be operating within the Port City. As the primary focus is to provide foreign direct investments, it is highly unlikely that undue competition would arise.

Port City as an International Financial Centre

The nonpareil outcome which is desired for the Port City is to make it an international financial centre in the region; for it to be a place to gain access to capital most effectively and expeditiously. The Act has addressed some of the issues about financial markets and in PART VIII the regulation of offshore Banking Business in and from the area of authority of the Colombo Port City and should have also included the applicability of the Monetary Law of Sri Lanka in its entirety as done the applicability of other Acts.

The SEC Act is applicable under Part XI of the Act. It is understood that the capital markets that are to be established in the Port City will be substantial in size and volume to the current Sri Lankan market, and one wonders whether the regulations that apply to the Colombo Stock Exchange (CSE) is sufficient for a market that is vastly bigger in volume and size. The SEC Act will need to be beefed up to levels that would be sufficient to regulate an international securities market with complicated financial instruments, which are inherently complex. Furthermore, the SEC Act at its current level will not have an impact on the Port City as it can only regulate a not-for-profit organisation and an old-fashioned member-driven stock exchange. If The SEC Act to be applicable in its proper sense would have to be amended together with the Demutualisation Act of the CSE, which would create a shareholder-driven organisation. 

The Port City and the regulatory entity of the CSE will have different focuses. The SEC Act is designed to regulate the CSE with the focus of investor protection and safeguarding national interest while the focus of the stock exchange in Port City will be larger and greater than national interest.

All in all, the intentions of the creation of the Port City appear to be noble, and it is expected that the functioning of this institution will bring greater economic benefits for Sri Lanka and influence the culture, which is apparent in overseas markets, yet the success of this initiative will depend on the manner it is administered and the competence of the persons who manage it. 

The Act represents an important milestone in Sri Lanka's economic history. Its successful and smooth implementation will benefit not only Sri Lanka but South and Southeast Asia as well.  The new Financial Centre and the relocation of headquarters of multinational companies will usher in a golden era.

(The writer is an Attorney-at-Law and a Solicitor of the United Kingdom, a former Director General of the Securities and Exchange Commission of Sri Lanka, and a former Senior Advisor to the Minister of Finance. Currently, he practices under the boutique law firm Corporate Legal Consultants specialising in financial and securities laws. He can be contacted at [email protected])