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Monday, 3 February 2014 00:22 - - {{hitsCtrl.values.hits}}
Identified investment gaps in
Sri Lanka:
1. Lack of coordinated effort to ensure continuous improvement in country’s business rankings
2. Absence of integrated investment law and a detailed investment plan
3. Investment Promotion Agency (IPA) not sufficiently empowered to carry out investment decisions in a speedy manner
4. Lack of preferential market access for the export of Sri Lankan products
5. Industrial zones not fully developed; need to offer plug and play facilities with built-in factories
6. The absence of readily available structured projects
Despite the enthusiasm and keenness in bringing in FDIs, Sri Lanka has not performed as it should have in this regard. Domestic reserves not being at desired levels coupled with the nation being heavily import dependent makes the situation rather complex and difficult for the country.
To present a realistic outlook of the investment situation and climate in the country, the Pathfinder Foundation last week held a seminar titled
"It is important for a country like Sri Lanka to have the support of the private sector to attract investments since it cannot be done through public sector initiatives alone. This is where the investment gap has to be addressed – Ministry of Investment Promotion Director General Investment Nihal Samarappuli"
‘Bridging the Investment Gap: Addressing the issues related to investment climate’.
The event, which was moderated by TWCorp Chairman and MJF Leisure Director Thilan Wijesinghe (former Board of Investment of Sri Lanka Chairman/Director), featured Ministry of Investment Promotion Director General – Investment Nihal Samarappuli, Lion Brewery CEO/Director Suresh Shah, International Finance Corporation (IFC) Country Manager for Sri Lanka and Maldives Adam Sack and Nidro Supply Managing Director Dawn Austin.
Investment trends
When looking at the performance of emerging regions in terms of FDI from 2002 to 2012, it was observed that while nations such as Indonesia
"The thing about attracting FDI is that we need to compete for it. No one is lining up at the BOI and immigration counters with pocketfuls of cash saying that they want to invest in the country. There is competition. What can we leverage on? The only thing is the business environment. It needs to be much better than every other competing country – Lion Brewery CEO/Director Suresh Shah"
and Vietnam have improved their investment levels, Sri Lanka and Bangladesh are among the countries that are still lagging behind.
Although FDIs have been coming into the country since 1978, it was only after 1990 that the levels actually picked up. Of the total US$ 9.8 billion in FDI, 75% was attracted within 1990 and 2012.
Noting that this level is rather low in comparison with regional peers, Samarappuli said: “It is important for a country like Sri Lanka to have the support of the private sector to attract investments since it cannot be done through public sector initiatives alone. This is where the investment gap has to be addressed.”
"There is no use of signing agreements and undertaking investment promotion initiatives unless there is a diligent level of commitment every day to ensure that capital is invested at the ground level – TWCorp Chairman and MJF Leisure Director Thilan Wijesinghe
In 2012, global FDI was US$ 1.4 trillion and Asia attracted around US$ 407 billion of it. South Asia pulled in US$ 33.5 billion and of that, Sri Lanka has managed to attract just above US$ 1 billion, which is 0.07% of the global FDI.
Current investment climate
Investors select a destination to put their money into based on three factors – policy environment, economic environment and business facilitation. In terms of business performance indicators, Sri Lanka has yet to achieve a ranking that makes it an attractive destination for investors.
"The World Bank points out interestingly that Sri Lanka ranks 72nd out of 87 counties in terms of the procedures and days taken to establish a homely foreign owned limited company. It is the weakest out of all its comparatives. There is room for a lot more improvement – International Finance Corporation Country Manager for Sri Lanka and Maldives Adam Sack"
Taking into account the 2012 rankings on the Doing Business Index, Sri Lanka ranks 89 out of 185 countries, and in the Global Competitiveness Index it stands at 68 out of 148 nations, FDI Attraction Index it ranks 159 out of 182, FDI Potential Index 68 out of 168, Index of Economic Freedom 97 out of 177, and in the Index of Economic Freedom it stands at 92 out of 168.
Looking at these rankings collectively, Sri Lanka has a lot to do to improve its status. “While ideally Sri Lanka should aim at being ranked within the first 40 slots, the current status shows that there is something wrong and this is call for immediate short term measures to improve our indicators,” stressed Samarappuli.
"From an agricultural point of view, I can see that there are very sustainable investment opportunities if there could be public private partnership. It may not sound huge but it will be effective – Nidro Supply Managing Director Dawn Austin"
In terms of the policy framework, it was noted that there is an absence of an integrated investment law and the changes in legislation are made without looking at the impact on investment.
In addition to the Investment Promotion Agency not being sufficiently empowered to carry out investment decisions, there is an absence of a detailed investment plan for private sector investments with provisions for implementation, monitoring and budgetary allocations.
With land policy, it was pointed out that the land law in relation to ownership by foreigners has changed. As per circulars issued by the relevant Ministry, the transfer of lands to foreign nationals or companies with more than 50% foreign shareholding is prohibited and dispossession of land is permitted by way of lease for a maximum of 99 years subject to a land lease tax, which has been set at 7.5% for projects in BOI zones and 15% for outside zones. To date, there is no legislation to this effect.
Taking into account the tax policy, there are currently 58 payments to be made per year for which the average time taken is approximately 200 hours. When Government taxes and social benefits are combined, Samarappuli said that the tax policy absorbs 55% of a company’s profits.
Investment gaps and recommendations
Identifying six gaps that call for immediate rectification, Samarappuli stated that the first is the lack of coordinated effort to ensure continuous improvement in the country’s business rankings. He asserted that the Government should aim at creating a dynamic mechanism to identify major investment gaps in areas such as policies, infrastructure, facilitation and others, and work towards setting targets and strategies with specific timelines to improve the nation’s rankings.
The second gap he pointed out is the absence of an integrated investment law and detailed investment plan. For this, he stressed on the need of an announcement of a comprehensive investment law dealing with related provisions for investments along with the formulation of a national plan, especially for private investments with provisions for implementation, monitoring and budgetary allocation to achieve set national targets.
The third gap identified was the Investment Promotion Agency (IPA) not being sufficiently empowered to carry out investment decisions in a speedy manner. He said it is absolutely necessary for the Government to entrust broader powers in the IPA to pursue its goal of stimulating FDIs.
The fourth gap being the lack of preferential market access for the export of Sri Lankan products, Samarappuli in line with this emphasised on the need for Free Trade Agreements (FTAs) with strong economies and trading blocs with deeper tariff cuts for products of Sri Lankan origin with export potential.
The fifth gap is that industrial zones are not fully developed to offer facilities for plug and play with built-in factories. The gap could be addressed by developing new zones by focusing on the needs of high tech innovative industries with built-in factory facilities and easy access to sea ports.
Noting that connected industries are scattered in various parts of the country without a proper plan for clustering, which prevents them being competitive, he stated that industry clusters of strategic importance in identified locations should be developed with provisions for the effective sharing of resources, coupled with city development.
Identifying the sixth gap as the absence of readily available structured projects, which has been a serious drawback in achieving national FDI targets, Samarappuli pointed out that the focus should be on the formulation of ‘structured’ projects which are easily marketable. The process should ideally include identifying financially viable large scale projects, reserving suitable land and obtaining preliminary approvals for environmental and other project related activities.
Attracting investment vital to be a breakout nation
Lion Brewery CEO Shah opined that for Sri Lanka to become a breakout nation, it should move forward by having export-led industries and by focusing more on infrastructure.
“FDIs are needed for infrastructure and export oriented manufacturing. This is important. If the Balance of Payments (BOP) and reserves are to be kept under control in an economy where the imports are growing very fast, it is necessary to balance it out with export-led industries,” said Shah.
This would mean Sri Lanka competing with countries such as China, Vietnam, Bangladesh and India, which are also in export markets, and the nation will face price based competition.
“Can Sri Lanka compete on the basis of cost? The answer is no because we have a small population of 21 million people and wage rates will increase very fast. In addition to this, we do not have the raw material to support cost-based competitive strategies. So for Sri Lanka, rather than seeking larger market segments and competing in price, we need to look at smaller markets segments and compete on the basis of quality,” he noted.
To bring in FDI, there is a need to focus on bringing in technologies that will in turn bring in transfer skills in the long term and better processes in the short term. However, when looking at technology based industries, it is imperative to consider the education needed to support technology based industry.
The six-hub concept has great potential to bring in FDI, for in tourism alone, there is scope for about US$ 1 billion in terms of investment in the construction of hotel rooms.
Looking at how the nation can attract FDIs, Shah said: “The thing about attracting FDI is that we need to compete for it. No one is lining up at the BOI and immigration counters with pocketfuls of cash saying that they want to invest. There is competition. What can we leverage on? The only thing is the business environment. And the business environment needs to be so much better than that in every other competing country.”
Perspectives of an international investor
FDI accounts for about 25% of the global GDP and it is surprising to note that although Asia has shown the fastest and most growth in the past decade, South Asia has the least amount of FDI accounting for its GDP. However, this is not just a problem for Sri Lanka but for the entire region, said IFC Country Manager Adam Sack.
Sack recommended that instead of relying on research, it is best to get the opinion of investors, and better those who have decided not to invest in the country, to fix the investment climate in the country.
“There are some licences and approvals that are not here, so the question as to why it is not here should be asked. The main concerns for FDI, this is not only for Sri Lanka but is relevant, is the lack of qualified staff, and the lack of suitable financing,” noted Sack.
The third area of concern is the political risks under which comes addressing regulatory change, breach of contract, and trade and competitiveness restrictions.
Assessing Sri Lanka under the ‘Three Is’ which are improvement, innovation and institution, while in the first two ‘Is’ the country is doing well, it is in the institution level that needs improvement.
“The World Bank investing in cross borders points out interestingly that Sri Lanka ranks 72nd out of 87 counties when looking at the procedures and days to establish a homely foreign owned limited company. It is the weakest out of all its comparatives. There is a lot more room for improvement,” pointed out Sack
He added there are many things to fix and relentless efforts will be required from the Government together with the private sector.
”The potential is there and the opportunity is significant and the IFC is excited and keen in supporting the investment of a number of these projects,” added Sack.
Issues in executing policies
While Sri Lanka has a tremendous amount data available at its fingertips, the fundamental failure is in the execution of policies, asserted Former BOI Chairmen Thilan Wijesinghe.
“There is no use of signing agreements and undertaking investment promotion initiatives there is a diligent level of commitment unless every day to ensure that capital is invested at the ground level,” said Wijesinghe.
When looking at competitive advantages in terms of location, it is mostly in relation to the IT and engineering industries, and many forget Sri Lanka is a county rich in minerals such as graphite, titanium, gems and phosphate, all of which the nation has economically tapped less than 5%.
According to him, with the advantage of location and ample natural resources in the country, there is no necessity for the nation to be at the current stage of economic development, mainly due to the fact that there are so many competitive advantages that are yet to be exploited.
“The key failures are at the micro level. We fail in interpreting a policy directive at the level of political authority. We fail at grafting the minor details. This is where, for months on end, the BOI and other agencies were left in limbo in the interpretation of issues such as land ownership and because of this, millions worth of investment has been held up in the country,” charged Wijesinghe.
Pix by Lasantha Kumara
Improvement in agriculture sector’s supply chain management requiredOpining that the agriculture sector does not fall into the category of needing FDI, Nidro Supply Managing Director Dawn Austin pointed out that investment into that sphere is much easier to achieve in comparison for what is required for other industries. Much has been done to make quality produce in the country which will yield higher returns and keep growth from being subjected to fluctuating prices and other volatile factors. Austin recommended looking into investment opportunities with India and China for agriculture. “We just need to tap into these chains. We are talking of 40% post-harvest loss. We don’t have to grow more, it is already there. There is only a need to tap into retaining that post-harvest product so that there will be more products coming into the market,” she said. As Sri Lanka is competing with South Asia, she said it has nothing new to sell to these markets and therefore needs to look at niche markets. “In that context, from agricultural point of view, I can see that there are very sustainable investment opportunities if there could be public private partnership. It may not sound huge but it will be effective,” added Austin. |
