By Sugeeswara Senadhira/Daily News
Colombo, September 15: Seeking investments from abroad to speed up economic development through increasing production and exports is the top priority today. However, every independent survey stated that Sri Lanka has performed very poorly in terms of attracting Foreign Direct Investments (FDIs). This is an alarming development considering that the country has many positive advantages such as adequate resources, and location advantages as it is situated in close proximity to international maritime lanes and impressive human capital indicators.
Senior Government sources confirmed that top ministers often express absolute frustration about long delays in granting permission for FDIs that could fast forward the drive to get out of the economic crisis. “Some bureaucrats insist on 40 odd preliminary clearance reports to grant an approval for FDI,” a senior Minister lamented at a staff meeting. “Who will wait for years to invest in Sri Lanka when there are many other attractive investor-friendly places?” he asked.
It has been pointed out that systematic research on the determinants of FDI and FDI productivity is almost non-existence in Sri Lanka. The few studies done by researchers confirmed the fact that lack of trade openness, expeditious clearances, economic stability, regulatory quality and exchange rate for attracting FDI flows are the main hurdles.
It is worthy to mention that a research has pointed out that International Finance Corporation has categorised Sri Lanka as a frontier market – a country that is less developed but has immense untapped potential for growth. Despite these conditions, Sri Lanka has not performed well in attracting FDIs.
A legal luminary turned politician said that Sri Lanka will not attract FDIs, unless the out-dated regulations are reformed and the top public officials adopt an investor-friendly attitude, without trying hard to find ways of discouraging potential investors.
Most surveys have revealed that Board of Investments (BOI) runs into many obstacles to get clearances for FDIs, though the institution has been described as one-stop window. “The success of most of the South East Asian tigers is due to their professional efficiency in clearing FDI applications. The moment an application is submitted they assign an officer to that task. He or she will have to clear the application within a specific period of 3 to 6 months. If not they have to give valid reasons to justify why the permission could not be granted. Such efficient systems have attracted FDIs to those countries and they have overtaken Sri Lanka by leaps and bounds,” the ministerial source said.
Prime Minister Dinesh Gunawardena emphasized the importance of early reforms enabling officials to take expeditious decisions. He said that during his recent discussions with many top-level foreign investors and envoys, they wanted quick responses to their investment proposals. He said permission should not be delayed for environment-friendly alternative energy project proposals under any circumstance.
Those who invest need the assurance that they will not lose out due to inflationary surges. And investors must be confident that that there will not be crises that produce sudden reversals of policy. Hence, we have taken steps to enact a national economic policy that is consistent, irrespective of changes of Government.
Investors always look for stability of contracts and a well-designed dispute resolution process. Hence, reforms are being introduced to establish a stable and predictable legal framework. Since many investments only pay off over the long term, it can be costly to investors if the rules of the game are changed frequently. Hence, tax regime has been simplified and tax incentives have been harmonized.
Sri Lanka made a heavy investment in education and increased the literacy rate to over 90% in two decades after independence. Subsequently, steps were taken to develop a skilled labour force, capable of responding to shifting demand for labour. We all know that this will be welcomed by investors. It also promotes equality of opportunity, and lifts people out of poverty.
The budget for 2023 spelt out reforms to attract foreign and local investments to boost the sagging economy. “There is need for simplifying and making existing arrangements efficient to create a more business-friendly environment,” President Ranil Wickremesinghe said in his budget speech. “Accordingly, measures are required to reduce costs, procedures and times, and to improve transparency enabling to create a healthy business environment. Hence, I propose to allocate Rs 200 million to the Ministry of Investment Promotion to introduce the necessary reforms in this respect,” he said.
For several years, there were demands for drastic liberalisation of regulations to attract foreign investments. Experts always showed how countries like Singapore, Korea and Vietnam attracted foreign investors by offering strong incentives and how the investments helped them to leap into the higher bracket of developed nations.
Top-level foreign delegations also told Prime Minister Dinesh Gunawardena about the need for reforms to attract investors, during his recent visits to China and Thailand, where he addressed an investment forum. President of the Chinese Association for Friendship with Foreign Countries, Ambassador Lin Songtiyan said what is needed to attract foreign investments is to enact necessary legal reforms. Pointing out that Sri Lanka has all the ingredients such as a strategic location in the centre of Indian Ocean, highways, ports and also skilled youth resources needed for leap forward in industrial and agricultural development, he said Hambantota, Trincomalee and other economic Zones as well as the Colombo Port City could attract global investors if necessary reforms are enacted and investor-friendly atmosphere is quickly established.
The Prime Minister assured foreign investors in Thailand and China that the top priority of the Government is to establish necessary legislations to ensure speedy clearance of investment proposals submitted by foreign partners. He said Sri Lanka seeks investments in new areas such as solar power, wind power and other alternative energy resources.
Researchers have pointed out that studies based on FDI into selected countries in Asia indicates that countries that have better human capital indicators attract more FDI; however, this was not the case with Sri Lanka. It was evident that the relationship between human capital and FDI flows was significantly negative for Sri Lanka, while, in general, human capital is a positive determinant of FDI flows to rest of the countries in the sample of countries. Two main reasons for this discrepancy were the linguistic limitations or the lack of English knowledge and professional skills.
Foreign firms tend to hire high proportion of skilled workers, pay higher wages and undertake more in-house training programmes. They are more active in R&D and more innovative. They are more export oriented but rely more on inputs of foreign origin.
Palitha S B Konara said in a research paper submitted to York University that countries can increase their trade openness through liberalising their trade policies through reducing tariff and other barriers to trade. Trade openness, the degree to which a host country is open to trade, can have implications on FDI inflows. Trade restrictions are likely to be linked with other forms of policy imperfections such as exchange rate controls and restrictions on foreign investments.
As observed from international precedents, Government tends to be more effective when it isolates its role from that of capital provider and delegates commercial investment decisions to qualified private sector fund managers. Konara advocated that a separate expert investment committee should be formed to expedite investment decision-making.