John Wilson, Managing Proprietor, John Wilson Partners: Interview

Interview: John Wilson

How has rule of law evolved in Sri Lanka?

JOHN WILSON: I think it is fair to say that we in Sri Lanka, for all our laws, regulations and our constitution, have seen a serious decline of the rule of law. Successive governments have not understood that a country with strong institutions and a strong judiciary is an attractive investment destination. No serious and reputable investor is going to invest money in a country which does not respect or understand the importance of the rule of law or which appears not to do so. Countries which do not do so tend to be countries in which corruption and bribery are rampant, and Sri Lanka’s ranking in the Corruption Perceptions Index of 83 out of 168 countries leaves much to be desired.

In your opinion what can be done to improve the current environment for foreign direct investment (FDI) from a legal perspective?

WILSON: The right investment mix includes the rule of law, a strong independent judiciary, an independent bar, effective institutions, and rational and balanced policy making. Our government needs to understand the importance of not making arbitrary decisions and policy choices. Many would have observed that the taking of decisions which  may not take into account medium to long-term consequences, risks causing a negative backlash on the general foreign investment climate. Examples include the enactment of the Revival of Underperforming Enterprises and Underutilised Assets Act and the recent Land (Restrictions on Alienation) Act. Measures such as these do not send out the right signals to the global investment community.

Provided that Sri Lanka’s institutions and the rule of law are strengthened, the overall outlook for investment is good. There are opportunities to capitalise on, particularly when one considers our traditional trading and investment partners. The government recognises, as evident in its 2016 budget speech, that FDI in Sri Lanka is below that of its regional peers and that a strategic roadmap is needed to improve the investment environment. The government has also identified key thrust areas that have the potential to attract investment of over $2bn. However, while many of these proposals are salutary, they do not go far enough and a bolder approach is required.

How has the Land Act hurt investor sentiment?

WILSON: This is certainly another factor that led to a general perception that Sri Lanka was not open to foreign investment. It was seen as extremely unfair and retrograde legislation to many foreign investors that had already purchased land in Sri Lanka and were, in most cases, effectively unable to exit those investments by selling to another foreign investor.

Additionally, the legislation conveyed a foreign investment regime that appeared as though it would become more restrictive. This left significant doubt and uncertainty in the minds of existing investors as to what awaited them in the future. Instead of liberalising, Sri Lanka clearly provided a signal to both the corporate and private foreign investor community that it was moving from a liberal regime, which allowed foreign ownership of land (subject to taxation), to a regime prohibiting it.

While the new 2014 law did not prohibit acquisition of leasehold tenure by foreigners, the 15% land lease tax imposed on leases in favour of foreigners by the new legislation actually had the effect of deterring a number of potential investors from investing in Sri Lanka. The issue of the Land Act and its restrictions on alienation demands urgent government attention, and Sri Lanka should swiftly return to a more welcoming and open regime for foreign investment, especially investment by small and medium-sized enterprises. A recent positive step has been the administrative removal of the land lease tax as of January 1, 2016. The enactment of legislation in this regard is awaited.