Foreign direct investments, arbitration and competition law: The role of lawyers

By Dr. Dayanath Jayasuriya, PC

The subjects of Foreign Direct Investments (FDI), arbitration and completion law are timely and relevant for a number of reasons. The Government has announced that the Board of Investments will shortly be restructured to achieve greater efficiency by minimising delays and other problems.

With the dawn of peace and access to geographical areas that were inaccessible for almost three decades, Sri Lanka is better positioned now to attract FDIs. Arbitration is rapidly gaining popularity as a means of resolving commercial disputes. Competition law is seen as a priority area for law reform with the possible entry of major players targeting hitherto restricted services and products.

FDI

In the 19th and the early part of the 20th century, the expansion of the tea plantations was a direct result of FDIs. However, when FDIs in the Asian region gathered momentum in the late 1960s and the 1970s, Sri Lanka was not able to reap the maximum benefit from the steady flow of investments.

Investors tend to have long and bitter memories about countries that have not provided a stable and conducive environment to foreign investments. The nationalisation of the petroleum industry and the restrictions on the operations of foreign insurance companies and multi-national drug companies, for instance, were perceived as dark spots on the country’s foreign investment record.

In the late 1970s, when a policy decision was made to enact legislation to set up an institutional mechanism to encourage and regulate FDIs, a cautious approach had to be thus adopted. The Greater Colombo Economic Commission Law laid the foundation for attracting foreign investments. Neither that legislation nor the policies of the day were intended to be of a far-reaching nature, but it was understood that gradually more concessions would be offered and that the legal framework would be reinforced.

The lack of a comprehensive national policy statement on foreign investments has been a major constraint on the ability to attract long-term foreign investors with a commitment to use Sri Lanka as a regional hub. Occasional statements by minority political parties condemning foreign investments have caused some degree of concern, particularly given the country’s less than impressive attitude to foreign investments some three or four decades ago.

Foreign investors have a wide choice of locations for investments. Countries that realise the potential value of foreign investments go to extremes to offer comfort of seriousness and commitment. Bangladesh, for instance, is a classic example where even at the height of political turmoil and strikes, the immigration authorities operated a special counter at the Dacca Airport for ‘Foreign Investors’ and accorded fast track approval for visas.

In the case of Vietnam, the transition in the 1990s from a rigorously controlled centralised economy to a quasi-open economy involved a major paradigm shift. The significant social, economic and political measures taken and needed to be taken have been analysed by me elsewhere (see Jayasuriya, D. C. 1993 ‘Vietnam’s Foreign Investment Law: Some Social, Economic and Political Aspects,’ The Company Lawyer (U.K.), 1993, Vol. 14(5)).

Even though Vietnam does not yet offer the most perfect destination for investors, measures taken thus far have yielded a bumper crop of good results. In terms of cumulative investment, Singapore is the single largest foreign investor in Sri Lanka; Singapore’s investment (stock) went up marginally from S$ 0.2 billion in 1995 to S$ 0.3 billion in 2005 (Abeysinghe and Jayawickrama, Singapore’s Direct Investment in Sri Lanka, NUS Working Paper, 2008). During the same period, Singapore’s investment in Vietnam went up from S$0.4 billion to S$ 1.7 billion.

In order to offer a stable and conducive investment climate, Sri Lanka needs to take several measures. The country must adopt a national policy on foreign investments – the policy statement must be developed through a consultative process and endorsed by major political parties and trade chambers. It is important to revamp the Board of Investment – the deficiencies in the current legislation, institutions and reporting structures must be addressed.

Good governance and accountability systems must be instituted. Labour laws must be revisited. Sri Lanka’s embassies and trade missions must be more proactive in promoting the country’s potential for foreign investors. There must be short, medium and long term plans for infrastructure development.

Human resources that are needed for different sectors must be projected based on viable assumptions and appropriate vocation skills development projects must be initiated. Continuing education programmes for all professionals and skilled and semi-skilled personnel must become the norm rather than the exception.  

Arbitration

Sri Lanka has lagged behind many countries in introducing reforms to facilitate and streamline business operations; payment of taxes and duties; and with regard to the conducting litigation. For the resolution of disputes, the worldwide trend is to move towards arbitration procedures in preference to the institution of proceedings in courts of law. Court proceedings are often perceived to be costly, tedious, time-consuming and offering too many opportunities for appeals.

Most business entities now prefer conciliation and arbitration to court proceedings and this often becomes a prerequisite to the finalisation of the other clauses in the contract. When China opened its doors to foreign contractors and investors, much time and effort were spent on trying to understand the rationale for this approach in the Chinese context.

Provision for conciliation followed by arbitration is now the standard blueprint in most contracts involving one or more Chinese entities (for one of the earliest studies on the dynamics underlying the Chinese approach, see Jayasuriya, D.C. ‘Conciliation and Arbitration in China: The Interface of Culture and Tradition with Legal Policy,’ Business Law Review (U.K.), Vol. 11 (6), 1990). The drafting of arbitration clauses and their inclusion in contracts is an art by itself.

Recognising the potential benefits of offering a neutral and convenient venue (in terms of access; ease of communication, etc.) for arbitration, some countries such as China and Singapore have set up facilities to host arbitration proceedings. With modern state-of-the-art facilities and infrastructure, such a centre could be a financially rewarding venture. Countries that do offer host facilities have developed a roster of lawyers and law firms whose services can be enlisted, if the need arises.

Competition Law

With the enactment of the Fair Trading Commission Act in 1987 expectations were high that a set of broad principles would evolve but much of the work of the Commission focused on price adjustments. Amendments to reinforce the existing provisions were not introduced and the Act was eventually repealed by the Consumer Affairs Authority Act of 2003.  

The new Act, however, did not contain even the bare minimum provisions required for the effective regulation of anti-competition and unfair practices. Thus, it has been observed that in the absence of amending legislation, the Authority and the Council would face “a formidable challenge of trying to navigate in unchartered territory without even a compass and a map” (Jayasuriya D.C. Guide to the Consumer Affairs Authority Act, 2004).

The role of lawyers

This workshop offers a unique opportunity for members of the Bar Association to become familiar with the legal regimes applicable to FDIs, arbitration and competition law. There are new opportunities for the Bar Association, law firms and individual lawyers to contribute to the policy debate on how to revamp the BOI, establish a new institutional mechanism and formulate a new national policy on FDI.

Competition Law is an area that needs to be further developed in terms of legislation and practice. Lawyers and law students need to be familiar with international and trends and developments. They should be in a better position to advice clients on the applicable legal principles and requirements.

With regard to arbitration, it is hoped that the Bar Association and bodies such as the Corporate Lawyers Association will conduct training seminars on the drafting of arbitration clauses and the conducting of arbitration proceedings. Sri Lanka can develop the capacity to offer host facilities as a regional centre for international and regional arbitration proceedings and this possibility must receive due consideration.

(This article is based on opening remarks as Chairman of the Workshop at the National Law Conference, Colombo, 2010)