Port City Colombo: Beyond ‘Build it and they will come’ — A new era unfolds

By Mahesh  Yogarajan

“Build it and they will come” is an old adage, arising from Biblical times referring to finding animals to save on Noah’s Ark. Today, it is mostly used to describe visionary projects like the Port City Colombo project where the proposition is strong, but demand has remained speculative. However, recent developments have shifted this paradigm, addressing previous challenges, identifying solutions, and setting the stage for a surge in demand through strategic initiatives.

This article will explain:

1.How the demand problem has been solved, perhaps inadvertently

2.The origins of the solution

3.The inevitable surge in demand

4.How Port City Colombo will drive FDI into Sri Lanka 

5.The new initiatives that will guarantee success.

BACKGROUND OF WHY THE STORY IS CHANGING

In an era where high global interest rates constrain capital investment in traditional infrastructure, selecting projects with robust returns have become imperative. Investors and bankers now demand demonstrable yields and solid tenant pipelines, necessitating a strong business case even for potential tenants. With more mature ‘investor-friendly’ jurisdictions, including Dubai and Singapore, tightening the screws on corporate taxation, Port City Colombo’s SEZ proposition is in the “right place” at the “right time” to leverage on the opportunity to attract foreign capital.

HOW COMPANIES GENERATE SUPER NORMAL PROFITS

While manufacturing industries rely on infrastructure investments, protectionist market policies, strong distribution, and licensing agreements to create sustainable and highly profitable enterprises, service-based companies can rarely leverage these factors. In today’s rapidly advancing technological age with AI disrupting existing business practices, any software and service company’s edge is the quality of their people. These people enhance the quality of the service, its delivery, and the customer experience it ultimately creates. To compound the value of the people in an organisation, it must retain the right people, enhance their skills and be able to enhance their earnings. Port City Colombo enables this by allowing the staff and the companies to both earn their remuneration in foreign currency, and enjoy the benefit of 0% corporate and personal income tax.

ROOT CAUSE FOR A NEW EXPORT ECONOMY

The 2022 economic crisis created difficulties for many Sri Lankan companies – from accessing foreign exchange, to facing mandatory conversion of forex earnings, to the inability to pay foreign vendors for licenses, infrastructure usage and even services provided – all due to forex shortages. These companies were forced to set up operating companies in jurisdictions where they would not face such issues. 

These actions, although sometimes portrayed as a betrayal of the country, actually saved the economy and the Sri Lankan workforce. These companies paid their Sri Lankan staff in foreign currency, reducing the staff income tax liability to 0% but ensured a large proportion of the foreign earnings of the company did return to their founding shores. 

From the 1st of April 2025, these dollar earning foreign earnings will be taxed progressively up to 15% for individuals. The employers are now liable to pay a 15% Corporate Income Tax. These companies and individuals are likely to look for offshore destinations to receive their salaries and revenue alike. In this context, Port City Colombo could be the country’s solution to encourage these foreign currency earnings to continue being remitted to our shores.

THE CATALYST FOR PORT CITY COLOMBO 

Even the companies that have already adopted foreign operating entities will face an increase in cost of at least 15% in order to compensate their workforce for the increased taxes that have to be paid from the 1st of April 2025. This workforce is globally mobile and will require compensation or be lost as brain drain. This year’s staff earning increments, together with the increased tax cost, which includes tax on the increments will cause greater pressure on the bottom line. 

The companies that have remained in Sri Lanka, utilizing the previously available 0% corporate income tax rate on service export earnings, will now be liable to the 15% corporate income tax as well. Port City Colombo’s SEZ framework allows them to maintain the status quo with regard to taxes – retaining a 0% rate, avoid business disruption, and bring foreign exchange into the country. 

BRINGING VALUE BACK TO SRI LANKA

Returning to their roots, Port City Colombo would allow these companies looking to retain their domestic workforce and do so at no additional cost while benefiting the country with the multiplier effect of onshore spending. At Port City Colombo, the opportunity presented by the SEZ’s attractive tax incentives enable an injection of foreign direct investment into the Sri Lankan economy whilst bolstering our foreign reserves. The benefits encompass increased job creation, and the purchase dynamics of goods and services between the larger city of Colombo, and the businesses who set up operations at Port City Colombo. The perfect trifecta – people, companies and the wider economy - driven with people at the forefront.

This multi-service Special Economic Zone would essentially promote many formerly Sri Lankan companies—previously compelled to establish foreign entities—to re-establish their operations in Sri Lanka, specifically at Port City Colombo, ensuring that their valuable talent stays home rather than being lured away by higher compensation packages overseas which will bring only limited value back home.

FDI GROWTH AND TOURISM IMPACT

The offices of these companies, the residences of their staff, their healthcare, education and leisure requirements will now have to be catered to. This will drive significant foreign direct investment (FDI) into commercial, residential and tourism infrastructure, thus spilling over to the mainland and driving a resurgence of economic activity. Additionally, Port City Colombo – given the fiscal and non-fiscal incentives it offers, demonstrates the positioning to be one of the world’s leading centres for design, digital outsourcing, and back-office functions of global offshore investors. 

Simultaneously, Port City Colombo will attract a wave of international businesses eager to tap into Sri Lanka’s deep pool of skilled professionals. This influx will not just be about retaining talent; it will create a thriving ecosystem where expertise is readily available for short-term training assignments and specialized projects. This would drive the sustainable growth of MICE (Meetings, Incentives, Conferences, Events) tourism into the city of Colombo. The pioneering duty-free travel retail offering at Port City Colombo supports the emergence of Colombo as a retail destination. Which highly skilled trainer would pass the opportunity of a gig at Port City Colombo with the opportunity to explore the rest of our beautiful nation within a few hours? 

TURBOCHARGING GROWTH

Port City Colombo is often a misinterpreted project, as the SEZ presents a pioneering economic policy and progressive regulatory framework that is unparalleled for the region of South Asia. Against the context of Sri Lanka’s recent macroeconomic challenges, Port City Colombo demonstrates an ambition to transform Sri Lanka into a robust regional player, which requires us to step into unfamiliar yet exciting waters. However, stronger regulatory precision and support for the project’s fiscal and non-fiscal incentives are a necessary push to support Port City Colombo’s role as a strategic driver of the Sri Lankan Economy. The game changing next steps we need, in my opinion, are:

• Fast-track online processing of Port City Colombo applications to facilitate imminent applications. We need to be competitive globally – Dubai offers registrations in less than a week.
• Fast-track the offshore banking set-up to facilitate rapid cash inflows. It is imperative that the offshore banking system is operational and functional.
• An online payment processing gateway akin to Stripe to facilitate payment collection online
• Commencement of operations of the International Commercial Dispute Resolution Centre to assure investors their investment is within a robust legal framework. 
• To foster stronger investor confidence, the government policies on investments within the Port City Colombo Special Economic Zone (SEZ) absolutely must remain consistent and protected from sudden changes.

As we navigate our way out of restrictive default, we must recognize a crucial reality — Sri Lanka is competing for investment with a multitude of attractive destinations. We should focus on the opportunity Port City Colombo offers to differentiate our long-term value proposition as we finally offer political stability to investors. The public and private sectors must collaborate to provide an efficient, competitive and secure investment environment for our people to truly thrive. 

(The writer is a CEO/Managing Director of a renowned local tax firm, which helps with the planning of taxes, investment structuring, and tax compliance. He is an alumnus of PwC and EY, an AI evangelist, and has raised over $ 200 million for companies in Sri Lanka.)