United Petroleum’s exit and SL’s poor track record in attracting FDI

The impending departure of United Petroleum Lanka Ltd. – the local subsidiary of the Australian energy giant – would be a blow for the Government’s ambitious agenda to attract Foreign Direct Investments (FDI). The political stability guaranteed by an administration which has a two-third majority in the legislature provides better opportunities to attract FDIs compared to the period of Ranil Wickremesinghe presidency as his Government coincided the pre-election uncertainty.

As exclusively reported by this newspaper, the withdrawal is attributed to the firm’s dissatisfaction with the existing pricing formula and operational conditions. The company was reported to have expressed unhappiness as the terms and procedures it had to deal with did not reflect the operational freedom which was pledged at the time of investment. United Petroleum entered the island as a result of the previous Government’s decision to liberalise the retail fuel market. The new players were allowed to enter the local market on the conditionality of importing fuel from their own funds without obtaining foreign exchange from local commercial banks. 

At the time of the Australian energy firm’s arrival to the local market, the former Power and Energy Minister Kanchana Wijesekera remarked that it would not only boost market competition but also attract further foreign investments to the country. United Petroleum is a 100% Australian-owned fuel and convenience company, and its Sri Lankan venture represented its first retail gasoline operation outside Australia. The company entered into an agreement with the BOI to invest $ 27.5 million to import, store, and sell petroleum in the country. As part of the agreement, the Australian firm was expected to establish 200 fuel stations islandwide and operate them for 20 years. 

The South Asian island does not have a good reputation particularly with regard to the treatment of foreign companies involved in the petroleum industry. In the 1960s, Late Sirimavo Bandaranaike expropriated all the properties belonging to prominent multinationals like Shell, Esso and Caltex in the country and established the Ceylon Petroleum Corporation (CPC), thus creating a monopoly in the petroleum industry. The draconian move still continues to serve as a hindrance in terms of attracting prominent multinationals to Sri Lanka. Meanwhile, last December, the CPC Chairman Janaka Rajakaruna – a former CPC employee as well as a JVP trade union activist – in an interview to a local TV station had remarked that companies like United Petroleum had been allowed into Sri Lanka when there had been concerns over dollar reserves, but now their presence was unnecessary as the dollar crisis had eased. Such statements certainly dissuade foreign investors and reflect adversely on the Government’s commitment to encourage FDIs.

The JVP/NPP trade unionists as well as sections of CPC workers were opposed to the previous Government’s moves to liberalise the petroleum industry, and it would be interesting to see how they would behave now as their party is in power. Granting independence in terms of pricing is a key prerequisite to woo foreign investments into the industry apart from offering greater operational freedom.

When compared with countries like Vietnam, Sri Lanka has struggled to gain FDIs to bolster its economic growth. Although the war ended in 2010, the expected upsurge in FDIs did not materialise. Archaic labour laws and policy inconsistency have compelled investors to shun the island in favour of more business-friendly economies. Generous tax holidays offered by the Governments in the past failed to generate the desired level of foreign investments. 

The Government needs to give priority towards creating a policy environment which is conducive to attract foreign investments to the country led by reputed MNCs. A large influx of FDIs pursuant to investment-friendly policies would undoubtedly enable the country to transform itself to become a modern and prosperous economy.