In January this year, Prime Minister Ranil Wickremesinghe went on record saying the country targeted attracting US $ 5 billion in foreign investment over the next five to 10 years.

Shortly after his ascendency to the presidency, the newly elected President Maithripala Sirisena in March 2015, during his visit to China, welcomed China’s expanding foreign direct investment (FDI) portfolio in Sri Lanka and said his government was in the process of making the business and investment climate in Sri Lanka more favourable for investment.

What both leaders have been emphasising is that they targeted FDI as the principle means to get the country out of the economic morass in which it is presently caught up.

The Central Bank figures for June 2017 show the country’s foreign debt stands at US $ 49,146.65 million, up from US $ 46,514 million in the first quarter of the year. In his budget speech of November 9, the finance minister announced the country’s foreign debt exceeded Rs.1,000,000, 000,000.

Annual exports bring in approximately US $ 10.3 billion (mostly from exports of tea and garments). Our imports cost around US $ 19.4 billion, creating an annual trade deficit of over US $ 9 billion. The remittances from migrant workers bring in another approximately US $ 7.2 billion per year (the country’s single largest source of foreign exchange), which helps partially offset the external deficits.

However, while the country’s leaders have made clear that they viewed FDI and an export-oriented economy as the principle means of overcoming its economic problems, statistics show that inflows of FDI have actuality decreased. 

A Sunday Times report shows FDI declined from US $ 1070 million in 2014 to US $ 970 million in 2015 and it was only a paltry US $ 445 million in the first nine months of last year.

What ails our economy?

What ails our economy? Where has the country gone wrong? Why are we unable to attract FDI? After all, it was Sri Lanka that pioneered the opening up of the economy as far back as 1977. Today, Bangladesh and Vietnam, of which, the directional change of economic policy came years later than ours, are attracting more investment.

A World Bank Research Paper by Kaminski, Bartlomiej and Ng, Francis of June 2013, cites the lack of stability in the trade policy combined with the expanding protectionism and the state’s micromanagement of investment as being inimical to creating the framework conducive to the rapidly evolving composition of exports and their fast growth for the slow growth of FDIs in Sri Lanka. 

The report points out even Sri Lanka’s share of clothing in manufactured exports has remained largely unchanged over the past 25 years and pins blame on the lack of stability in the trade policy combined with the expanding protectionism and the state’s micromanagement of investment, which does not create an institutional/policy setting conducive to the rapidly evolving composition of exports and their fast growth.

To make matters worse, the country’s Ease of Doing Business ranking has slipped a notch to 111th place from last year, according to the World Bank’s ‘Doing Business 2018’, which measures the ease of doing business in 190 countries. Meanwhile, our giant neighbour India has made remarkable gains in the Ease of Doing Business Index and jumped 30 spots in the index. 

In March this year, the former head of the Board of Investment (BOI), Upul Jayasuriya, highlighted the harassment and delays the investors faced in their attempts to invest in the country.  

He highlighted the instances in October 2015, where Sri Lanka had US $ 5 billion worth of FDI in the pipeline. Of this, he said, only around a 10th materialised.
He said the long delays in the legal process and a lack of speedy approvals from the government institutions, were among the deterrents to attracting FDI. 
The BOI is the central facilitation point for foreign investors. The BOI is supposed to provide assistance and advice throughout the investment process. Sri Lanka has 12 free trade zones, also called export processing zones, which are administered by the BOI.

Now there is reason to suspect malpractices within the BOI rather than attracting investors because corruption in high places is in fact blocking the potential investors via putting up roadblocks and creating delays, which are driving away the potential investors.

Perhaps it was this type of insidious activity that prompted former Justice Minister Wijedasa Rajapakse to make a dramatic charge at a forum organised by the Ceylon Chamber of Commerce (CCC), that the legitimate businesses were being obstructed by the BOI-registered companies and demanded that the BOI itself be scrapped as it was impeding investment in the country rather than facilitating it.

Was he implying that corruption was taking place at the highest levels within the BOI and or blaming the BOI-registered companies driving legitimate investors away?
The case of Magick Woods (Pvt.) Ltd (WML), a reputed manufacturer of vanity and kitchen cupboards, is a case in point.

MWL approached the BOI for a suitable site in its export promotion zones in January this year.

WML, with sales offices in Chicago and California, is a Canadian-based company, owned by three brothers, who fled Sri Lanka during the race riots of 1983. 
The brothers, all qualified as engineers in Canada, set up their business establishment in 1993, producing and marketing vanity and kitchen cabinets. Today, the company has marketing and sales offices in Ontario in Canada, Chicago and California in the US, with sourcing offices in Shanghai in China and an outlet in Indonesia.

In 2003, the company set up a manufacturing plant in Chennai.

Once the war in this country ended, the brothers targeted setting up a manufacturing unit in Sri Lanka for the export of kitchen and vanity cabinets to the US and Canada.

In January this year, MWL approached the BOI for a site to set up a manufacturing unit for production of vanity and kitchen cabinets for export. The project envisaged an investment of US $ 10.325 million over a period of five years, with a fixed capital of US $ 6.125 million. 

The company anticipated a turnover of US $ 22.5 million and would provide direct employment to 350 young people locally. The project also anticipated bringing state-of-the-art technology to the country.

In February, the company identified a non-operational plant, which had been closed for several years at the Mirigama Export Promotion Zone (MEPZ), which it felt was suitable for setting up a manufacturing unit. 

After negotiating with a non-operational company – Chemcel (a CIC group company), MWL sought to buy the shares of that company and commence operations.
Chemcel then wrote to the BOI in May, seeking permission to sell its shares to the new investor.

However, on June 17, the BOI disallowed the transfer of shares to a new investor, as well as for a change of scope of business on the grounds that its contract with the BOI had been terminated for non-compliance. 

The letter added its (BOI) Monitoring Department had already taken action to terminate the agreement with Chemcel and demanded the company negotiate with the new investor (MWL) for the transfer of the buildings and keep the BOI informed on its progress.

While the negotiations with Chemcel were ongoing, MWL submitted a project proposal to the BOI to be set up at the MEPZ and sought the approval for setting up a local subsidiary.

On June 14, the BOI informed MWL it had no objection to the incorporation of a new company to carry forward the preliminary work.

On the same date, MWL wrote to the BOI’s Director Appraisal indicating its willingness to pay a sum of US $ 34,000 per acre for the 6.91-acre bloc at the MPEZ, as well as the ground rent. MWL said it made the maximum offer to Chemcel for the buildings, which were in a badly deteriorated condition and for the electricity connection by letter dated June 10 and was awaiting a reply from that company.

On July 6, the local branch of WML was registered.

As Chemcel had not responded to several requests of MWL’s offer to purchase the now dilapidated buildings on the block, MWL on July 11 wrote to the Investment Appraiser and Executive Director - Project Monitoring of the BOI requesting a valuation of the said buildings by an approved valuer of the BOI and a transfer of the same, together with the 61.91-acre block of land on Plot No. 34, saying they were willing to pay the valued amount via the BOI.

Finally, on August 14, MWL received a call from the BOI saying they had received a government valuation for the buildings on the plot of land, which amounted to Rs.28 million.

A shocking turnaround

MWL accepted the valuation and on August 18, the BOI e-mailed MWL asking them to be present for a meeting at the BOI office to finalise the transfer of buildings previously owned by Chemcel to MWL.

And then a shocking turnaround occurred. When MWL Vice President based in Chennai flew in for the meeting, the BOI Director Investment Appraisal announced he had sent a wrong valuation. According to him, the valuation report was for some other company in the MEPZ.

Soul-searching at BOI 

Making no apologies for his mistake, the BOI’s appraisal investment director in a finger-wagging outburst, warned both parties, including the investor who had especially flown down for the meeting and said both parties (WML and Chemcel) would have to abide by the government valuer’s report.

A day following the ‘drama’ (22.8.2017), MWL received a letter from the BOI Director General that the BOI had approved their project and on August 28, MWL received another letter from the BOI asking MWL to be prepared to make a payment of US $ 2,300 plus value-added tax (VAT). However, MWL was successful in its claim for exemption from payment of the VAT.

But more shocks were in store. On September 1, the BOI produced a five-line valuation report for the buildings at the site to the value of Rs.111,500, 000. Disputing the valuation report, MWL asked for a revaluation through the intervention offices of National Policy and Economic Affairs Ministry Advisor R. Paskeralingam.  
At the 29th Investment Approval Facilitation Committee meeting held on September 11, Paskeralingam instructed the officials of the BOI to request the chief government valuer to carry out a revaluation of the said buildings at the MPEZ. 

The BOI Director General emphasised both Chemcel and MWL would have to abide by the Chief Valuer’s report. 

The revaluation undertaken by the government Chief Valuer’s report estimated the costs of the said buildings to be Rs.71 million.

MWL accepted the revaluation report and expressed its willingness to pay the sum of Rs.71 million for purchase of the buildings. However, the Chemcel representative asked for time to get the approval of his board of directors, to which the BOI agreed.

Then things began to get curiouser and curiouser. Chemcel demanded a payment of Rs.90 million, claiming it had made considerable losses on its investment. The BOI officials, who are supposed to smoothen the way for investors, instead began pressurising MWL give into Chemcel’s demands. 

Whilst the negotiations were in progress, out of the blue, so to say, the MWL and Chemcel representatives were called to the 92nd meeting of the Officials Committee on Economic Management (OECM) on October 31, at the Prime Minister’s Office, which was chaired by Paskeralingam and attended by Advisor to Prime Minister Charitha Ratwatte.

At the meeting, Paskeralingam clarified once again as to where the dispute between the parties stood. He agreed with MWL’s claim to pay the government valuer’s estimate. Ratwatte too strongly agreed with Paskeralingam’s ruling and asked Chemcel to abide by it.

Despite both Paskeralingam and Ratwatte giving the go ahead regarding the cost of payment for the buildings, the BOI is yet to give a written undertaking to MWL regarding this and the standoff continues. 

Negotiations remain deadlocked and now there appears to be every possibility that the investor may withdraw. Is this going to be another opportunity lost? It also raises questions as to whose interests the BOI is serving. 

Why is it so interested in helping a company the BOI itself had just a few months earlier terminated its agreement for non-compliance?

Through its haphazard valuation, the BOI has also left itself open to charges of corruption and negligence.

Do officials of the BOI realise foreign investors are bringing the much-needed hard currency into the country and needed to be treated with respect? 

Do they not understand that they cannot waste those people’s precious time and money on useless journeys and that the investor needs to be spoken to with respect?

It’s time for soul-searching at the BOI.