Government of Sri Lanka seeks to grow foreign direct investment

The election of President Maithripala Sirisena in January 2015 signified an historic shift in Sri Lanka’s trajectory. With the former administration having often been accused of nepotism and political appointments to key roles, the team of the prime minister, Ranil Wickremesinghe, has signalled a move towards liberalisation, transparency and more merit-based leadership.

Challenges remain in making the public sector more efficient and effective, with top-level decision-making now split among more than 50 ministries. However, various moves present an opportunity to improve the business environment and foreign investment inflows in the years to come. Sri Lanka’s investment promotion bodies, in particular, are due for restructuring, with the aim of bringing foreign direct investment (FDI) figures into line with regional peers.

New Ministry

Following parliamentary elections in late 2015, several ministries have begun restructuring their portfolios, while others have been created to serve new purposes.

One of the strongest new entities is the Ministry of Development Strategies and International Trade (MoDSIT), which was renamed from the Ministry of Investment Promotion. All issues around trade and investment are delegated to the MoDSIT or to agencies including the traditionally powerful Board of Investment (BOI) and the Export Development Board (EDB), with a number of new agencies also currently in the pipeline.

The BOI has been Sri Lanka’s main investment promotion agency for 38 years, and was known as the Greater Colombo Economic Commission until 1992. It serves as the central facilitation point for investors, and works to make improvements in the country’s investment climate. Services include visa facilitation, approvals and clearances, and the management of the BOI’s land bank. In addition to five regional offices, the BOI maintains the country’s array of industrial parks and export processing zones – 14 in total – and it has also approved several strategic development projects, which retain special privileges under Sri Lankan law. BOI-registered companies employ an estimated 407,000 people country-wide, and account for 65% of total exports (see Industry chapter). Sri Lanka has investment protection agreements with 28 countries and double taxation agreements with 38 countries.

Local Lag

While the BOI has maintained a commitment to increase FDI inflows in recent years, the numbers have remained somewhat modest relative to regional peers. According to the World Bank, FDI inflows have averaged 1.2% of GDP over the last five years, well below rival emerging markets, including Vietnam (4.9%), Malaysia (3.1%), and Indonesia (3%). In South Asia, Sri Lanka also remains below neighbouring India and Bangladesh, with 1.7% and 1.4%, respectively.

According to the BOI, in dollar figures this has still resulted in gains. FDI totalled $602m in 2009, rising to $1.06bn in 2011, $1.39bn in 2013, and $1.6bn in 2015. Between 2005 and 2015 the greatest source country for FDI has been Malaysia, bringing in $1.3bn, followed by China ($966m), the UK ($954m), India ($844m), Hong Kong ($837m), the Netherlands ($602m) and Singapore ($536m).

The minister of development strategies and international trade, Malik Samarawickrama, said in early 2016 that the country was targeting $5bn-6bn in FDI over the next three years, and highlighted the dual challenges of difficult global macroeconomic conditions and the need for a consistent domestic policy framework.

The MoDSIT is scheduled to participate in several international roadshows in 2016. Over the last 10 years the majority of FDI – an estimated 53% – has gone into infrastructure, which includes property development, telecoms, power generation and port development. Some 26% has gone into manufacturing (textiles, coal, rubber, petroleum, and food and beverages). Another 19% has gone into services, including IT/business process outsourcing, and hotels and restaurants. Agriculture has received only 1% of FDI over this period.

The BOIs efforts appear to be paying off. The BOI states that its improvements are a direct result of better facilitation and the new government’s commitment to expediting procedures, along with heightened investor confidence. The $1.6bn in deals recorded in 2014 consists of 66 new projects and 45 expansions of existing projects, which will employ an estimated 16,000 people in total. Among these are three separate deals struck with domestic telecoms firm Dialog totalling $175m, a $26.5m deal with Senok Automobile to assemble Volkswagen cars in the country, and the revival of Kantale Sugar under a 30-year build-operate-transfer agreement with M G Sugars Lanka at a cost of around $100m. In the first two months of 2016, a further 16 separate agreements were signed, for a total of $110m.

Facilitation

The BOI approves projects under Sections 16 and 17 of the BOI Law, which was enacted in 1978 and has been amended six times since. Section 16 pertains to foreign investments with no fiscal concessions and a minimum investment amount of $250,000. Section 17 empowers the BOI to give projects exemptions from inland revenue, exchange control and Customs duty.

The BOI’s primary methodology in the past has been an array of incentives to help attract investment. These include exemption from corporate income tax, Customs duties, value-added tax, and a ports and airport development levy. Exemptions are detailed specifically depending on the area of investment and sector of the economy. Many consider these to have been quite effective in bringing new deals to the country, while others have cited them as a factor in the country’s low tax base.

A systematic country diagnostic released by the World Bank in early 2016 noted that “the benefits of incentives in terms of attraction and retention of productivity-enhancing FDI might not outweigh the cost involved in the fiscal losses and potential disruption of market dynamics”.

Budget Implications

Sri Lanka’s 2016 budget, which was released in late 2015, signalled major moves to help expedite processes for foreign investors. Underneath the MoDSIT, two new agencies are in the pipeline, including an Agency for Development and an International Trade Agency. The latter is expected to take the initiative around free trade agreements and export/import issues, while the Agency for Development will be in charge of Sri Lanka’s one-stop shop, ensuring investors face minimal barriers to entry.

These agencies are expected to work alongside the BOI, EDB and Tourism Development Authority, all three of which are expected to be restructured in their own right. Also included in the budget is an expected raft of new legislation, including a new Investment Act and a Trade Regulation Act.

Megapolis

In addition, following parliamentary elections, Sri Lanka unveiled its new Ministry of Megapolis and Western Region Development, which will oversee the Western Region Megapolis Project. The Megapolis plan has a total estimated price tag of $40bn over 15 years, and serves as a blueprint for redeveloping Colombo and its surrounding suburbs – a total area of 3600 sq km. The plan was created with the technical assistance of Singapore, and is embodied by 150 smaller projects, including Aviation City and the $1.4bn Colombo Port City, which was on hold for most of 2015 but was granted approval in early 2016.

Housing projects, industrial zones, green zones and agricultural zones are all part of the Western Region Megapolis Project, which is open for investment from both the public and private sectors, with the latter seen as particularly essential to the success of the plan. Areas of development include a trade hub, a high-rise central business district with at least 60 towers, a science and technology city, and major improvements to public transport through an integrated systems approach.

The Megapolis project also aims to correct many of the haphazard methods previously used to address informal housing, urban sprawl and resultant waste disposal issues. Key to avoiding past pitfalls Sri Lanka has faced in planning and implementation will be the formation of a Megapolis Authority and a clearly articulated Megapolis Act, both of which are expected in 2016. The Megapolis project is one of many strategies needed to foster economic growth, leverage public-private partnerships and improve FDI inflows to Sri Lanka.