In the backdrop of a shift in economic momentum towards the East on a global scale, competition for investment has increased drastically; investment which will prove crucial to Sri Lanka’s future economic prosperity.
In an exclusive interview with Mirror Business, Head of the United Kingdom Trade and Investment in the British High Commission, Michael Halpin, went over some of the issues relating to Sri Lanka’s attractiveness as an investment destination for UK companies.
By Channa Fernandopulle
Q: What role does the British High Commission play in facilitating investment coming from the UK to Sri Lanka?
Our role within the UK Trade and Investment team is to look after British business interests here in Sri Lanka. We identify key sectors, where we think there is the most potential for UK companies in Sri Lanka and we then promote them to those companies.
We assist and support UK companies as they try to enter the Sri Lankan market from initial inquiries to market research to setting up a physical operation. We also try to connect them with local partners here in Sri Lanka. So, the scope of work we do is quite broad and very expansive and most important, it’s very much tailored to the wants and needs of the customer.
Q: Can we expect to see any significant investments from UK companies in the medium to long term?
Before talking about what’s happening now, I think it’s important to note that last year the Trade and Investment team had a record number of inquiries from British companies interested in the Sri Lankan market. One of the positive things that we took from this was that inquiries weren’t constrained to one sector but were from a wide variety of sectors. I can’t say much about the on-going projects but I can say that there are a number of significant and substantial investment projects going on at the moment.
Q: Could you specify the sectors?
The infrastructure and construction sectors.
Q: What are some of the potential areas of investment that are highlighted in promoting investment opportunities in Sri Lanka?
Tourism is an obvious sector of opportunity and we are promoting these opportunities to UK companies but there are a number of other areas as well.
We see a lot of potential in ICT. We already have a couple of big companies involved in the Sri Lankan market, the London Stock Exchange through MillenniumIT and Aepona; so, that’s a very positive thing.
We also see opportunities in Business Process Outsourcing (BPO) and manufacturing is also another potential area of investment.
One of the areas we see a lot of work in is garments because of the expertise and the highly qualified staff and workforce that Sri Lanka has. Companies are able to come in and produce highly specialized equipment such as with the UK Olympics, where we had the kit being made in Sri Lanka. The design of those kits was all about making sure it was aerodynamic; so, it was quite high tech and that was all done here in Sri Lanka.
Education is another area of potential investment and we think there could be some exciting education projects started here.
A further area of investment is in renewable energy. This is something that could benefit the people of Sri Lanka as well as UK companies.
There have been some power interruptions lately, so I think that definitely, more the energy is independent, Sri Lanka can become better. Renewable energy is a potential source for Sri Lanka achieving this.
Certainly, some UK investors are already looking at energy in Sri Lanka like CAIRN Energy which has been drilling off Mannar and is now going to start the next phase of exploratory work. That’s quite exciting but there is also potential for the energy sector through wind and biomass power generation.
Finally, there are opportunities in the infrastructure sector. In a post-conflict country, there are always infrastructure project opportunities and UK companies are winning some of these projects for bridges and flyovers. As well as being good for business and economic development, these projects are always pleasing to be a part of, as they help unite communities in Sri Lanka.
Q: With the financial issues developing in the UK and the European Union at the moment, market diversification is currently thought to be the key to the sustainability of Sri Lankan exports. What observations would you make in such an environment?
That is something for the Sri Lankan government to decide but I can say that the UK government is certainly looking at the emerging markets like India, China, Indonesia, Mexico and Malaysia.
Those are the areas that have probably been least hit by the economic crisis and therefore they are the areas which tend to grow quicker. So, logically, it makes sense to approach these countries and try to increase trade.
Q: Do you feel that the current situation with demand for Sri Lankan exports in the UK is something that’s going to recover or do we need to be looking at a greater degree of market diversification?
If it was me, I think I’d be doing both. I think there’s truth in both sides in that the economic challenges being faced in the UK are having an effect. So, one would think that once the economic situation started looking a little brighter, exports may start to recover. But, as I said previously, increasing trade with emerging markets is a sensible approach.
Q: Some analysts feel that a lot of investment will come out of the EU as they inject cash into their systems to stimulate a recovery, which could mean that some of that capital could find its way to Sri Lanka as foreign direct investment. Do you feel that this is feasible?
Well, I think that Sri Lanka is already seen as an emerging market by many investors. So, you could conclude that they’ll see some of it, though it is of course difficult to put a figure on how much.
Many investors will look to the bigger economies of China and India but certainly Sri Lanka has a high growth rate and there have already been a large number of UK companies inquiring into Sri Lanka and we hope that this will lead to some more UK companies investing here.
Q: What kind of advice do you give UK companies in terms of navigating the Sri Lanka market?
We cover a wide range of issues. We talk about the local business climate; how easy it is to start up a business, what are the transparency processes like and how easy is it to do business; we talk about the UK companies that are already here - at present there’s already over 100 UK companies present in Sri Lanka, including companies like HSBC, Marks and Spencers, Standard Chartered, De La Rue and Avivia. So, the UK has quite a big footprint.
We also brief them on issues such as transparency and corruption. We have to go through these things and we have to be honest about them.
The Hambantota project is another area of interest. It could mean a lot of trade coming into Sri Lanka and that offers up more opportunities for others as well and investors are interested in the port.
We touch on the political and economic scene as well to give customers a sense of where the government and the economy is heading as political stability is obviously very important for investors. They want to put their money somewhere stable where the risk is minimized.
Q. What do you say about the political stability of Sri Lanka?
In terms of political stability, we tell them the government is in a strong position and is stable.
Q: How closely are issues related to governance tied into the country’s economic progress?
Good governance obviously instills confidence for investors. So, if they see standards of good governance dropping, then it’s a warning sign. I’ve been here for four months and everything I see and hear suggests that the government of Sri Lanka is very much aware of this and is making efforts to improve the business environment.
Q: What needs to be done over the near to medium term to address these problems?
The corruption issue and the perception of corruption need to be tackled. Lack of transparency and efficiency in certain enterprises needs to be looked at but headway is being made.
In the Transparency International corruption perception index, Sri Lanka is going in the right direction having moved up five spots in 2011 from 2010 and its performance is better than any of its neighbours. Its important Sri Lanka doesn’t get complacent and that it keeps the momentum moving forward and making it better and easier for companies to invest.
Q: Since the end of the war we’ve seen several major projects being pushed through based on the efforts of politicians. Does the ability of such people to circumvent or fast track certain projects over others act as an incentive or a deterrent to investors?
This issue is not unique to Sri Lanka and it’s not the only place where these challenges exist. A politician or someone pushing through a project, it can often give the perception of there being some form of corruption. For some, it will raise a red flag and will cause some anxiety to potential investors. This is why transparency is very important. The more transparency, the more confidence investors will have. I believe a ‘one-stop-shop’ for new companies entering the Sri Lankan market would help in this regard.
Q: So, that would be the Board of Investment’s role?
Yes, most likely the Board of Investment.
Q: What are some of the obstacles to investment into the country?
The single biggest comment that I hear from companies is the need for a ‘one-stop-shop’. It gets very confusing for new companies as they have to go through many different government departments to get separate permits and authorizations. This can be a lengthy and confusing process.
At present, it takes 38 days to start a business, 111 days for dealing with construction permits, 95 days to get electricity, 161 days to register properties, 173 days to pay taxes, so there’s a huge amount of time consuming issues and barriers there.
In the UK it takes 13 days to start up a new business, and that’s one of the reasons why even though the UK is experiencing some economic challenges at the moment, we still have a huge amount of investor confidence because things can be done quickly and it’s easy. I think having a one-stop-shop where companies can go and have all the paperwork taken care of and the transparency is taken care of would certainly attract more investment
Q: From last November, we’ve had major shifts in the country’s macro-economic alignment and there has since been lots of debate about whether these were the right decisions. Did the pace at which these developments happen causes any concern amongst UK investors?
I think it’s largely been seen as something that was necessary.
It wouldn’t have been an easy decision to make for the government because they knew it wouldn’t make them popular and its not been easy for the Sri Lanka people who have had to deal with increased cost of living but it was the right steps to take and something they had to do. The governments actions probably gave some reassurance to investors that they are taking the issue very seriously and they’re trying to sort out its fiscal debt. So, no, I don’t think it puts investors off.
Q: In terms of devaluing the rupee perhaps so but what about the expropriation bill? The perception appears to be that it was a one off piece of legislation and that is what the government described it as but is it something that investors still raise as a concern?
I think at the time it created a perception of instability and they were a bit unsure if this was the right place to come to and it made investors here feel a bit insecure. But I think this is now dissipating. The point here is that policy consistency is very important and making policy decisions arbitrarily isn’t good for investor confidence.
Q: In terms of the country’s macroeconomic direction, what needs to be done next?
I think Sri Lanka is getting there. Both the IMF and the Central Bank are right for emphasizing the need for greater policy flexibility and consistency. The trade deficit is an area of concern and it’s something that has to be watched closely as does the external debt. The economy needs to further lliberalise and find ways to generate more revenue to the country. The loss-making state-owned enterprises also need to be restructured and revamped.
Q: More recently, we’ve seen several regulatory issues crop up in the Colombo Stock Exchange followed by intervention at times by President Rajapakse. What needs to be done to make the CSE a viable option for long-term investment?
The UK is very much about the free market and letting market forces dictate where things go and I think investors are comfortable with that idea and they get a bit nervous when they see external forces come in and impact on that. So, the more it can be left to work on its issues, it will get more confidence.
(Pic by: Varuna Wanniarchchi)