Reforms to improve trade and investment climate in Sri Lanka

A host of bold reforms aimed at improving the investment environment are being undertaken after Sri Lanka slid one spot to land at 111th place in the World Bank’s “Doing Business 2018” report index, which measures the ease of conducting business across a variety of indicators. The government’s Vision 2025 mid-term economic agenda targets boosting Sri Lanka’s rank by 41 places on the survey, highlighting a multitude of reforms to support this goal. These include establishing a one-stop shop for investors, adopting digital innovation in licensing procedures, undergoing land reforms and providing incentives aimed at attracting investment into value-added manufacturing, including the high-potential pharmaceuticals industry.

The government has reiterated these targets in recent policy announcements, including the 2018 budget statement, and recently moved to form a task force with the mandate of improving the country’s Doing Business ranking. Export-oriented manufacturing and financial services are set to become key investment growth drivers in the coming years, supported by the development of new industrial and economic zones, namely the Port City Colombo (PCC) project, which is expected to transform the country into a competitive regional financial centre.

Investment Environment

According to an August 2017 report by the US International Trade Administration (ITA), starting a business in Sri Lanka is relatively simple and quick – the ITA reports it is 20% less expensive to start a business in Sri Lanka than neighbouring countries. However, many challenges await potential investors. High transaction costs and unpredictable economic policy have been hurdles for investors, with government service provision impeded by inefficiency and excessive bureaucracy. For example, the ITA reports that while the Board of Investment (BoI) is intended to provide a one-stop service for all foreign investors, with responsibilities ranging from project approval to residence permits, it often does not function as such.

Bureaucracy can impede activity within the BoI, which drives up the cost of procedures, such as registering foreign company branch offices. While the government has moved to implement more transparent procurement practices, the ITA reports that economic growth remains stymied by opacity, contract repudiation, cronyism, and fears of de facto or de jure expropriation. These challenges are reflected in the country’s ranking in the World Bank’s doing business index, which surveys 190 economies.

In the index, the distance-to-frontier (DTF) score measures a country’s progress towards the best possible performance in each indicator, with 100 being the highest. While Sri Lanka improved its DTF score across most indicators, most notably in the trading across borders category, where its score rose from 70.7 to 73.3, it continues to occupy low rankings in categories such as registering property (157th), paying taxes (158th) and enforcing contracts (165th). Sri Lanka performed better in the category of starting a business, at 77th place, and in the dealing with construction permits indicator, where it ranked 76th.

Reform Agenda

In June 2017 the Ministry of Finance (MoF) announced it was drafting a new trade and investment policy, which will include tax reforms and other measures to improve the overall investor experience. Mangala Samaraweera, the minister of finance, told local media that the government’s mandate to boost export- and financial services-oriented economic growth will be a primary consideration for policymakers, as will boosting private sector participation in economic development.

Rising investment is expected to bolster exports, with the Vision 2025 economic development strategy – published in September 2017 – seeking to transform Sri Lanka into an upper-middle-income country by 2020, supported by a forecast $5bn in annual foreign direct investment (FDI) inflows and $20bn in exports annually. This will require significant improvements to the business environment, and a task force focused on bettering the country’s performance in the World Bank indicators was formed in July 2017 to bring the Sri Lanka’s overall Doing Business ranking to 70th place.

The 2018 budget also includes a host of investment-boosting reforms, including plans to establish a one-stop shop within the Department of the Registrar of Companies to handle business registrations through a new, unified identification system. As part of this plan, authorities expect to introduce an updated system to scan and digitise company records, including trademarks. Digitisation features heavily in the budget’s investment promotion reforms, which include introducing an e-local government application system, an automated construction permit issuing mechanism, a digital land registry and a National Single Window, which would connect 31 government agencies with the Sri Lanka Customs Department.

Land Reforms

According to the ITA, many investors report that the most challenging aspect of starting a business in Sri Lanka is land acquisition, with private land ownership limited to 50 acres per person and the government owning 80% of land. State land includes most tea, rubber and coconut plantations, which are generally leased to the private sector for 50-year periods, or the occasional 99-year lease judged on a case-by-case basis. The ITA further reports that many land title records were lost during the decades-long civil war, with property disputes ongoing in the north and east.

More relevant for investors, though, is that foreigners are unable to purchase land and real estate outside of residential units located above the third floor of a building. However, the Cabinet can approve a land purchase for a project deemed in the national interest.

Land reforms were also promised in the 2018 budget statement, with the MoF announcing that the government will remove restrictions limiting land ownership rights of foreign-owned listed companies, as well as lifting restrictions on real estate ownership that prohibit foreigners from purchasing condominium units below the fourth floor of a building.

Industrial Parks

The 2018 budget includes plans to build a new industrial park at Milleniya, with Thailand’s Rojana Industries spearheading the $500m project and the government to provide land, utilities and supportive infrastructure, including access roads. According to the MoF, similar support mechanisms will be on offer for proposed industrial zones in Bingiriya and at the Charlemont Estate in Weligama. Furthermore, the government is currently developing an innovation park in Mahahenawatte, Pitipana, which is slated to host six companies in the biopharmaceuticals industry and an additional 15 value-added industries as construction progresses.

Plans to develop a robust biopharmaceuticals industry received another boost in January 2018, when authorities announced that Sultan Ibrahim Sultan Iskandar, the Sultan of Johor, had partnered with Malaysian businessman Patrick Lim Soo Kit to build a $100m dedicated industrial zone in Sri Lanka. Pharma Zone, as the area is called, has already received BoI approval and the authorities are planning to build the zone in the Welipenna area of the Kalutara district, according to a report in regional media. The facility is set to start operations within one year of construction, to begin in 2018, and will thus reduce the country’s dependency on imported medication. The Ministry of Health is expected to set standards and monitor the activities. According to media reports, the facility will be marketed regionally in an effort to attract investment.

Financial City

Development authorities are also moving to capitalise on Sri Lanka’s geographic position and rising regional demand for financial services with the construction of PCC, the single-largest FDI project under way in the country. In December 2017 the government announced it would sign a memorandum of understanding with the China Harbour Engineering Company (CHEC) to develop the project on 269 ha of land near the Port of Colombo. The company will also construct a $1bn office building complex that will act as the heart of the capital’s new financial district (see Construction & Real Estate chapter).

Unveiled by the Ministry of Megapolis and Western Development, the PCC building complex – comprising three, 60-storey office towers – will be constructed across 6.8 ha in the development. The first of two phases will require $400m of investment and is expected to commence in late 2018.

Competitive Advantage

In a bid to make PCC a competitive global financial centre, developers are working with the government to establish a separate legal and administrative framework for the city. Local media reported in October 2017 that Bob Wigley, chairman of the banking organisation UK Finance, is assisting in drafting legislation for the project. PCC will have a separate court and arbitration centre which would reduce the time it takes to settle a dispute from three to six years in the traditional court system to between three and six months. A robust and streamlined court system will offer Sri Lanka the ideal opportunity to capture a share of the global offshore banking market.

PCC is expected to eventually compete with similar financial centres in the greater region, according to local media. However, other stakeholders argue it will complement existing centres. “Port City Colombo will not only place Sri Lanka on the map as the financial hub between Singapore and Dubai, it will also build confidence in the country’s economy among investors and other stakeholders,” Ashok Pathirage, chairman and managing director of Softlogic Holdings, told OBG.

As of December 2017, 50% of the land for PCC had been reclaimed, including parcels to be used for its building complex. Reclamation is expected to finish in 2019, with land for the project planned to be made available under a 99-year lease.

In January 2018 CHEC announced it would begin construction on the three buildings at the centre of the development. Media reported that associated facilities including a marina, international school, hospital and large central park will support FDI inflows of up to $13bn from 2018 onwards, leaving Sri Lanka well positioned to meet its mid-term investment targets.