FDI depends on the presence of conducive environment global as well as local
The environment for attracting FDI within Sri Lanka is also deteriorating
In the process of promoting FDI, due care of Environment Protection Laws is absolutely necessity
The political and financial crisis of the country a serious threat to FDI
Attracting Foreign Direct Investment (FDI) as much as possible seems to be one of the key strategies adopted by the Yahapalanaya Government for overall economic development.
In fact, architects of the Yahapalanaya Government pledged at the 2015 Presidential and General Elections that they were confident of mobilizing FDI on a mass scale and thus boosting Sri Lanka’s economy. Trusting what they promised, the people preferred Yahapalanaya in place of the Rajapaksa Palanaya.
Has it fulfilled this pledge?
The inflow of FDI basically depends on the presence of a conducive environment for FDI globally as well as within Sri Lanka or in other words it depends on external as well as internal factors.
The conducive environment required for promoting FDIs is being deteriorated globally because of the emergence of a political polarization in most parts of the world, based on national agendas such as the America First concept of the current US President and the fear of global insecurity by rising terrorism. The conducive environment needed for attracting FDIs within Sri Lanka is also deteriorating because of various factors, some of which have been highlighted in this article.
The Board of Investment of Sri Lanka is the principal Agent of the Government entrusted with the responsibility of promoting, facilitating and maintenance of FDI in this country based on Board of Investment Law No. 04 of 1978 and Strategic Development Act No. 14 of 2008 and subsequent amendments thereto.
The objects of BoI as set out in Clause No. 03 of BoI Law No. 04 of 1978 are in a nutshell as follows.
“Foster and generate the economic development, widen and strengthen the base of the economy, encouraging and promoting foreign investment, diversify the sources of foreign exchange earnings and to increase the export earnings, encourage and foster the establishment and development of industrial and commercial enterprises within the Republic”.
Strategic Development Projects Act No. 14 of 2008 provides for attracting mega FDI projects which fall within the category of SDP as defined in the SDP Act. Based on power vested in BoI in terms of above enactments (BoI Law No. 04 of 1978 and SDP Act No. 14 of 2008) it has developed a package of incentives to motivate and attract FDI, which is in brief as follows.
Incentives granted under Section 16 and 17 of BoI Law No. 04 of 1978. “Section 16(a) of BoI Law No. 04 of 1978 states that Board shall have the power to do all such acts or take such steps as may be necessary or conducive to the attainment of the objects of BOI.”
Section 17(1) states “Board shall have the power to enter into agreement with any enterprise and to grant exemptions from any law referred to in Schedule B, or to modify or vary the applications of any such law”. Section 17(2) states every such agreement shall be reduced to writing and shall upon registration with the BoI constitute a valid and binding contract between the BoI and enterprise concerned. Article 157 of the Constitution of Sri Lanka provides Constitutional guarantee for such agreements.
Laws specified in schedule “B” of BoI Law No. 04 of 1978 encompassed Inland Revenue Act, Customs Ordinance, Exchange Control Act, Companies Ordinance, Merchant Shipping Act, Finance Act, Air Navigation Act, Value Added Tax Act, Economic Service Charges Act, Debit Tax etc.
The projects approved under section 16 of BoI Law are subjected to laws specified in schedule B above referred to.
Nevertheless, they are entitled to certain benefits such as facilitation of entry to foreign shareholdings, transferring of shares in a non-FDI project to FDI project etc. FDI projects approved under section 17 of BoI Law are granted exemption from laws specified in schedule “B” of BoI Law No. 04 of 1978. Projects scheduled under section 02 of Strategic Development Projects Act No. 14 of 2008 are also granted exemptions from laws specified in schedule “B” and further concessions recommended by minister concerned subject to the approval of Cabinet of Ministers and the Parliament.
FDI Projects approved under Section 17 of BoI Law No. 04 of 1978 are further benefitted by Bilateral Investment Protection Agreements, Double Tax Avoidance Agreements and Free Trade Agreements that Sri Lanka Government proposed to be entered into with some selected countries.
When compared to the facility available for FDI Projects in most of the countries in the region FDI projects located in Sri Lanka are at added facilitations such as skilled trainable workforce, emerging prospects of Sri Lanka being logistic and trading hub of the region, after eradication of terrorism.
However, there are some impediments in the process of attracting FDI, the clearance of which are absolutely necessary to expedite FDI inflow effectively.
Some legal provisions in Tax Laws, Land Laws, Exchange Control Laws, Customs Laws, Labour Laws, Environmental Laws etc. which are not conducive for FDI inflow should be cleared.For an example restrictions imposed in alienation of State-owned lands to Foreign Investors should be relaxed in favour of FDI, subject to the condition that due care is ensured on national interest in that process. Similarly, we should not entertain any junk which comes into this country on the pretext of FDI.
The criteria for selecting FDI Projects is given in SDP Act No. 14 of 2008 as follows
“Project which is in national interest, which is likely to bring economic and social benefit to the country and also likely to change the landscape and to make substantial employment opportunities and transformation of technology”.
In the process of promoting FDI, it is absolutely necessary to take due care of Environment Protection Laws, principles of Sustainable Development, preservation of national assets, upkeep of socio-cultural values of Sri Lanka.
It is necessary to reexamine whether FDI projects already approved are capable to satisfy above requirements. It appears Labour Intensive FDI Projects are very few due to the fact that most of them have adopted high-tech mechanisms for their operations. The employment opportunities created by some FDI projects are not attractive. Due to this reason, there are thousands of vacancies for skilled workers that exist at any given time in Free Trade Zone. Some FDI Projects have caused serious threats to the environment for an example Coca-Cola.
There were some FDI Projects proposals which would have been caused adverse impact on socio-cultural values of the people of this country such as Casino Projects. The political and financial crisis that exists in this country at present is considered serious threat to the inflow of FDI.
Bond Scam drama has caused worldwide publicity on political bankruptcy and financial crisis that exists in this country at present. This has caused an instability, lack of Confidence and uncertainty amongst Investors.
Politicization of FDI promotion strategies seems another impediment that hinders FDI inflow to this country. Most of the pledges they have made on attracting of FDI at public meetings and political platforms appeared to be false exaggerations to deceive the masses. Targets set by these politicians on attracting of FDI seemed unrealistic and unachievable when compared to the actual FDI levels already achieved for last three years. The fate of the pledge given to the masses on Volkswagen factory at the last General Election is a glaring instance which corroborates the fact that their pledges on FDI nothing but sheer exaggerations and political gimmick.
Proposed Free Trade Agreement with some selected countries and negotiations with prospective Foreign Direct Investors based on Public Private Partnership (PPP) concept are considered two important strategies launched by the Government for promoting FDI. The benefits that could be yield under Free Trade Agreements depends on the aggregate value of imports from the partner country to Sri Lanka and the aggregate value of exports from Sri Lanka to the partner country.
If aggregate value of export is bigger than aggregate value of imports, Sri Lanka would be benefited. Otherwise, Sri Lanka would be on the verge of a risk consequent to the widening of unfavourable Trade Gap. The export sector of Sri Lanka is not geared enough to realize this benefit through Free Trade Agreements proposed to be entered into with India, China, Singapore, Malaysia etc. due to the fact that Sri Lanka is in a weak position to promote its exports at a competitive edge over and above imports from those countries.
The Government has already entered into some agreements with FDI projects based on PPP concept. The Agreement entered into with China on Hambantota Port is based on PPP concept. In this exercise majority of share capital should be with Sri Lanka. If not country would be at a loss having offered national asset belongs to the people of this country and its future generation to a foreign country violating one of the cardinal principles of sustainable development.
Another impediment on motivating FDI Projects is that failure on the part of Government to maintain facilities and incentives provided for FDI projects already established in the Export Processing Zones as per BOI agreements entered into with investors concerned. Dividends payable to shareholders have been identified as taxable income in the newly enacted Inland Revenue Act.
Whereas dividends are exempted from taxes as per some Agreements entered into with BOI under section 17 of BOI Law No. 04 of 1978. Similarly, raw materials imported for production purpose are exempted from taxes in terms of BOI Agreements entered into. However, the last budget of the Government has imposed a heavy tax on some raw materials to be imported for production purposes. Export processing Zone Authorities are not in a position to provide lands and water required by FDI projects for their expansions in the Zones.
The Government has so far failed to put up new Export Processing Zones as pledged at the Investors Forums.
However amidst all sorts of impediments emerged on its way, BoI claims it has been successfully achieved FDI targets assigned to it by the Government. The total sum of Foreign investment after restoration of peace and political stability consequent to the eradication of LTTE Terrorism in years 2011, 2012, 2013 and 2014 US Dollars Million 1066.059, 1338.155, 1391.405 and 1616.328 respectively. This trend has been drastically declined in years 2015, 2016 and third quarter of 2017 to the level of US Dollars Million 969.659, 800.997 and 795.502 respectively (Source – BOI Data Bank).
There is a diminishing trend of FDI in SEC. Foreign Investor tends to withdraw their investment in share market continuously.
However, when compared above achievements of BoI to the exorbitant and unrealistic FDI targets pledged to be achieved by the Government as disclosed at the political campaigns, it appears that Government is in the habit of making unachievable pledges just for its survival in power politics.
The writer is a retired Executive Director of the BoI, HRM Consultant on Fiscal Reform Programme –ADB, Inland Revenue Department 2005, Lecturer in HRM and HRD – American College of Higher Studies. (2002/2003) Management Consultant since 2006 Multinational Group of FDI Companies.
