Will govt.’s FDI plans flounder on corruption and bureaucratic apathy?

Sri Lanka today carries a huge foreign debt burden. Sri Lanka’s external debt has averaged US $ 42632.32 million from 2012 until 2017, reaching an all-time high of US $ 47302.10 million in the third quarter of 2016. During the first quarter of 2017, according to Trading Economics, the external debt decreased to US $ 46514 million from US $ 46585.7 million in the last quarter of 2016.

Media reports have quoted Sri Lanka Ports Authority Chairperson Dr. Parakrama Dissanayake speaking at a forum organised by the National Chamber of Commerce as saying the Hambantota port project required a further investment of Rs.90 billion or US $ 600 million to make it viable.

The annual loan repayment, he was quoted as saying, amounted to Rs.9.1 billion and would double to Rs.18 billion in three years. 

Today, the annual revenue from exports stands at approximately US $ 10.3 billion, mainly from the tea and garment industries; the remittances from migrant workers, which form approximately US $ 7.2 billion per year, is the country’s largest source of foreign exchange and helps to partially offset the external deficits. Tourism constitutes a US $ 3.5 billion industry with two million tourist arrivals in 2016.
The government’s strategy to extricate the country out of this seemingly insurmountable debt situation is to expand the export sector and invite foreign direct investment (FDI) via a plethora of incentives. 
Based on this strategy, in 2017, the government set itself a target of attracting US $ 1.5 billion in FDI.
Unfortunately, the events on the ground don’t seem to be working out as well as the government planned. The US Department of State in its report of June 2017 states Sri Lanka’s FDI dropped 35 percent to around US $ 450 million in 2016 from US $ 700 million in 2015, primarily as a result of economic policy inconsistency.

Trading Economics, headquartered in New York, an online platform that provides historical data, economic, news and trading recommendations, shows FDI in Sri Lanka increased by US $ 76 million in the first quarter of 2017. 

Former Board of Investment (BOI) Chairman Upul Jayasuriya, in the board’s publication ‘BOI News’, charged that over the past few years the Treasury had played a role in blocking foreign investors from making investments in property, either through lease or on outright purchase. He said restrictions were placed via circulars issued by the Treasury and added they were totally arbitrary. According to Jayasuriya, the Treasury subsequently brought in an amendment to the law and from November 2014 made it legal. The US State Department in its climate investment statement also highlight this point.
The report added, “Large numbers of investors were discouraged. Even when agreements were signed they failed to take off due to this reason.”

International Trade Minister Malik Samarawickrema has described the drop in investments as “extremely low by any standard”.

Daily FT also quoted the minister as saying the state-run BOI should promote investment by making the necessary changes to rules and regulations to attract investments: “... certain existing regulations are hampering the efforts to attract the desired investment targets”.

The country is therefore faced with a situation that while the government works toward achieving a goal of attracting a massive injection of FDI into the economy, the reality is, there has in fact been a drop in investment.

At the same time, 2016 also saw a sharp increase in Sri Lankan companies investing abroad.
A lack of resources and the small size of the domestic market are among the reasons adduced for the flight of foreign currency out of the country. In fact, in 2016, Sri Lankan firms invested US $ 237 million in ventures abroad – a giant leap from the average of US $ 62 million Lankan firms have been investing overseas during the past four years.

The local investors also cited the risks of contract repudiation, cronyism, damage to reputation and de facto or de jure expropriation as concerns. 

A lack of skilled labour and a smaller talent pool have also been cited as drawbacks, which means the companies are unable to speed their growth.

The foreign investors also face difficulties in registering their organisations or companies. For example, registration of foreign company or branch offices in Sri Lanka can be expensive and is cited by the US government as a major drawback.

The BOI was intended to provide a ‘one-stop’ service for foreign investors, with duties including the approval of projects, granting incentives and arranging utility services.  It is also supposed to assist in obtaining resident visas for expatriate personnel and facilitate import and export clearances. 

However, the BOI is not yet a one-stop shop. According to investors, the BOI is relatively effective in assisting the investors who want to establish operations within its export processing zones. It is less effective in facilitating and servicing large and small investments outside these zones. 

‘export.gov – Helping US companies export’, an organisation providing the US companies plan, develop and execute international sales strategies, states the bureaucracy in Sri Lanka often works at cross-purposes with the BOI authorities.

The reason behind this is that the infrastructure and legislation necessary for the BOI one-stop shop to function smoothly have not been set up as yet. 

Until such time as these changes take place, our bureaucrats will drive investors – both foreign and local – from pillar to post and make them rue the day they decided to invest in this country. Ultimately it may lead to a situation where the country will fail to attract it has set for itself as regards FDI and we may see a reverse trend taking place – a flight of investment out of the country.

Story of Michael Ofri

Michael Ofri, an investor from Israel who first came to Sri Lanka as a tourist in 2001, is a classic example of how the bureaucracy stymies the government’s attempts to attract foreign investment into the country.

Among the places Ofri visited as a tourist was Arugambay on the east coast, which fascinated him to the extent that he kept returning to the area annually, despite the ongoing war. 

“We, Israelis, are used to war and I did not feel threatened even during those dark days. No one bothered about my religion or country,” he said. 

In the aftermath of the Boxing Day Tsunami of December 2004, which affected the Arugambay area particularly badly, ‘Miki’, as he is known locally, returned to help the affected people in the area.
With economic stability returning to the country after the war ended in May 2009, Ofri, recognizing the tourist potential of Arugambay, decided to start up a boutique hotel in the area. He spent 2010 and 2011 with his lawyers studying the local laws and other requirements in order to set up a 16-room boutique hotel. 

“I also set up my own company – ‘Shalom Holdings’ –leased out land and planned building a small boutique hotel.”

In 2013, he applied to the BOI at the ‘One-Stop Shop’ for the BOI registration. The BOI, according to Ofri, referred the application to the Divisional Secretariat (DS) in Pottuvil and suddenly problems began to surface.   

“While constructing five of the 16 planned rooms, I got a land claim from two people, in their private names. One of them is a very high-ranking government official.

“This high-ranking government official laid claim to a portion of the land I had leased,” he said. 
In an effort to sort out the problem, Ofri said he met the official and said he was willing to give the land back to him if he could prove his ownership by providing a deed and survey plan.

The official’s answer, according to Ofri, was, “I can make paper” or words to that effect. Ofri adds the official said this in the presence of witness.

In desperation, Ofri went to the local Muslim Mediation Court, who having visited the site and after carrying out their own investigation, ruled the land did not belong to the DS.

Left with no option, Ofri decided to take the issue to the court. The case was filed in the Amparai District (Pottuvil Court numbered Case no. L-109). Yet, three years later, the court case still drags on.
In the meantime, in December 2013, officers from the Immigration Department descended at Ofri’s office, forcibly collected his project files, handcuffed him and frog marched him to the airport, where he was taken like a common criminal and deported from the country.

The immigration officers told him they had received complaints he was violating the visa terms.
Events took a turn for the better during former President Mahinda Rajapaksa’s visit to Israel in February 2014. At a meeting with potential Israeli investors, the problems Ofri faced was brought to President Rajapaksa’s notice at a dinner hosted by Israeli President Shimon Peres, at which Ofri was also present. President Rajapaksa immediately got his officials to check what had happened. Once the officials clarified what had taken place, the president apologised for what he said had been a genuine mistake. 

He had the deportation order revoked, visa terms corrected and invited Ofri to return to the country.
“It’s three years since I returned,” said Ofri. “I’ve already invested around 40 million leasing land, setting up the hotel, brought down an Israeli chef specialised in the preparation of Hummus (a typical Israeli dish). But I am still to receive the BOI registration.

“I also met the Pradeshiya Sabha chairman to try to get the matter amicably settled but he angrily told me they don’t want tourism here.”

“In order to keep up with the Tourist Board requirements and to obtain permission for extension to building plans, I need to get the approval from the local authority but I’m being totally ignored. If this does not happen soon, my visa too may not be extended. Then they will be free to take over my place,” he said. 

Ofri added around 12 other investors who had faced similar difficulties had already left the country and had invested in Thailand.

Daily Mirror contacted the DS Pottuvil regarding the land issue and completion of documents need by the BOI. 

The DS replied that he could not recall the case or the foreign investor Ofri. He suggested Ofri speak to him again to see how the matter could be settled.