By P.K.Balachandran/Ceylon Today
The Colombo Port City Economic Commission Bill was passed by parliament on May 20 with amendments proposed by the Supreme Court to keep it within the framework of the Sri Lankan constitution.
Given the fact that the Commission has to function under the overall supervision and over-arching authority of Sri Lanka’s regulatory institutions and constitutional bodies, the question as to whether this will help or hinder the Commission’s bid to make the Port City an attractive international financial hub arises.
While integration with Sri Lanka’s established institutions is a matter of the nation’s sovereignty, and is in line with the island’s democratic system, it may also adversely affect the Port City’s ability to attract investors like other financial hubs, such as the ones in Singapore or Dubai.
Companies in the Port City will be subject to the provisions of the Inland Revenue Act and the Customs Ordinance. Key authorities such as the Central Bank of Sri Lanka, Central Environmental Authority, Department of Labor, and the Courts of Sri Lanka will supervise and monitor the implementation of laws in the Port City. Tax exemptions or incentives would have to have parliamentary approval. The Registrar of Companies will supervise the offshore companies in the manner he would an offshore company registered under Part XI of the Companies Act. The commission cannot pass laws or levy “taxes” as such and can only charge rates .
To prevent money laundering and terror financing, the Convention on the Suppression of Terrorist Financing Act No. 25 of 2005, Prevention of Money Laundering Act No. 5 of 2006 and the Financial Transactions Reporting Act No. 6 of 2006 would apply. Disputes can be settled either by arbitration or by the Lankan courts.
However, some Sri Lankans feel that the Port City Special Economic Zone will not deliver the goods if it is not truly international in its laws and systems. It cannot be tied to Sri Lankan laws and institutions on the one hand, and on the other hand, expected to rake in billions of dollars in business. One has to take into account the fact that Sri Lanka now ranks 99 th., among 190 countries in the World Bank’s Ease of Doing Business list. Clearly, there are serious flaws in the systems prevailing in the country.
It is therefore proposed that Sri Lanka should have followed the Dubai International Financial Center (DIFC) model in toto if the Port City is to deliver the goods.
Independence of DIFC
In the 2011 Economic Activity Survey on DIFC, released in July 2012, it was reported that the nominal GDP of DIFC entities grew from US$ 1.8 billion in 2007 to US$3.1 billion in 2011, an increase of 72% despite the global financial crisis. Over the same period, the number of registered entities within the Center increased 62%, from 505 to 817. NASDAQ Dubai, opened in 2005, grew to a market capitalization of US$ 31 billion as of August 31, 2013, according to Zawya, a subsidiary of Thomson Reuters. The DIFC is a model for similar centers in Egypt and Morocco.
If the DIFC is bringing in money it is because it enjoys independent jurisdiction under the UAE’s constitution. It has a legal framework separate from that of the rest of the country. Based primarily on English Common Law (as opposed to UAE civil law) DIFC Courts administer civil and commercial disputes efficiently and to international standards. The DIFC Courts have an international panel of respected judges. The DIFC is governed by an independent regulatory framework under the Dubai Financial Services Authority (DIFC).
Constraints in a Democracy
However, one cannot ignore the fact that Sri Lanka is a democracy. Its leaders cannot adopt the policies and methods of implementation of the Sheikhs or dictators of West Asia. Also, Sri Lanka’s economic plight would not permit it to be as liberal in financial terms as the DIFC.
But this cannot be an excuse for not carrying out reforms to get a more respectable ranking in the World Bank’s Ease of Doing Business chart and making the Port City Financial Hub, an international hub in the true sense of the term.
Honest and proper implementation of laws can make a big difference. Institutions in Sri Lanka do not work as they should. There are delays due to red tape and absence of commitment. Corruption is endemic. If the Port City is to serve its international clientele, it has to have internationally recruited personnel. It is felt that the present Act does not fill the bill. It can only make a marginal difference to the nation’s economic scene.
In a letter to Sri Lanka’s parliamentarians earlier this month, the Advocata Institute pointed out that Sri Lanka‘s laws in regard to money laundering and terror financing are weak, an aspect highlighted by the current US Ambassador in an interaction with the media. The laws in this regard must completely conform to the Basel Committee on Banking Supervision and the Financial Action Task Force. Labor policy should be highly flexible but with a cushion in the form of an unemployment insurance.
Rohan Maskarola, CEO of the Colombo Shippers’ Academy, points out that investors will not make a beeline to the Port City merely because there are internationally accepted laws or other modern facilities there or there are tax concessions. They would look at conditions in Sri Lanka as a whole –its legal, administrative and political systems, the state of the Rule of Law, political stability and policy consistency. Government should not renege on agreements or cancel contracts without a strong reason. Maskorola also stressed the importance of a national consensus on all matters relating to the Port City, so that policy does not change with a change of government.
Then there is the regional and geopolitical situation to keep in mind as that will impinge on investment prospects in the Colombo Port City. It is being built by a Chinese State-owned company with a Chinese governmental loan of US$ 1.4 billion. Given the hostility towards China and opposition to its efforts to make a presence in Sri Lanka and the Indian Ocean, investments from rivals India and the US-led West, are unlikely to come to the Port City. Therefore, to begin with at least, investments are likely to come only or mainly from China (sometimes in collaboration with Lankan firms). There is already a commitment to put in US$ 1 billion into the Port City.
Eventually, this scenario will turn out to be in favor of China. China looks at the Port City as a part its Belt and Road Initiative (BRI) which has long term strategic goals. In this context, some observers like former Lankan MP and Ambassador in Egypt, R.Yogarajan, wonder if other regional and global powers would eventually encourage their investors to put money in the Port City if only to prevent it from becoming wholly Chinese.