Setback for Sri Lanka’s duty-free plans

 CHEC Port City Colombo Deputy Managing Director Thulci Aluwihare PIC BY PRADEEP DILRUCKSHANA

“ The mall spans approximately 6,500 square meters and required an investment of around US $ 7 million. Construction was completed in February 2024, with the initial opening planned for April 2024, ahead of the new year”

**Update: Further additions, which were part of the discussion, are made to the response given to the fourth question to provide further clarity.**

The anticipated introduction of duty-free shopping in Colombo by April promised substantial benefits for Sri Lanka. However, the momentum for the project, led by the Port City Commission, has been abruptly halted by last-minute legislative challenges.

Mirror Business recently sat down with CHEC Port City Colombo Deputy Managing Director Thulci Aluwihare to delve into the complexities surrounding this setback. 

Aluwihare sheds light on the hurdles faced, implications for investor confidence and current status of the project, which was poised to launch imminently.

Following are the excerpts from the interview:

Could you provide some background on the Port City Duty Free Mall and its development process?

The Port City Duty Free Mall was conceptualised in response to the government’s request for initiatives to stimulate the economy, following the COVID-19 pandemic. Originally intended to be part of the Colombo International Financial Centre Retail Mall, the government asked us to expedite the development of the duty-free facility. 

The mall spans approximately 6,500 square meters and required an investment of around US $ 7 million. Construction was completed in February 2024, with the initial opening planned for April 2024, ahead of the new year.

Could you elaborate on the current status of the Port City Duty Free Mall’s opening, considering the reported delays, due to legislative issues? What is the latest update on the situation? 

The Port City Duty Free Mall has been completed and we have secured two operators: China Duty Free and One World Duty Free from Singapore. China Duty Free is the world’s largest travel retail operator in terms of revenue, with annual earnings exceeding US $ 10 billion. One World Duty Free, while smaller, is still a significant player in the industry. 

Their decision to invest in Sri Lanka is particularly noteworthy, as it came at a time when the country was facing severe economic challenges, including a looming balance of payment crisis. Both operators have invested heavily in fitouts to meet their brand standards, with an estimated combined investment of close to US $ 5 million. China Duty Free has already hired 50 staff since February, while One World has brought on board approximately 18 employees. 

How is Port City handling the situation, especially considering that all plans came to a halt at the eleventh hour? 

The sudden halt in our plans, especially after receiving requests from the government, has been quite disappointing and disheartening. While we understand the importance of following due process, it is crucial that the process is investor-friendly and conducive to attracting foreign investments. 

As a country facing a balance of payment crisis, we are actively seeking foreign direct investment and capital. Therefore, it is essential to ensure that the experience for investors in Sri Lanka is positive and encourages further investment. 

There seems to be a contradiction in opinion regarding the authority of the Port City Economic Commission to publish rules under the Special Economic Zone (SEZ) law, as per the Port City Economic Commission Act. Can you clarify the differing opinions of the Attorney General and Commission? 

Under the SEZ law, this is possible and the Port City Economic Commission published the rules under the SEZ law. However, the Committee on Public Finance (COPF) said they do not have the authority and these should not be rules but regulations. The COPF has expressed the view that such rules should undergo the parliamentary approval process. This difference in opinion has led to uncertainty regarding the regulatory framework for the Port City. 

I will leave it to the legal experts to say, whether as per the Act, the Port City Commission has the authority to publish these, or they have to follow the typical process of gazette it and parliamentary approval process.

Anyway, now the regulations are in the process of being finalised, it is a matter of converting these rules into regulations, and gazetting them as per the due process, I don’t think the Commission has an issue with that.

From an investor perspective, these issues must be addressed promptly. The establishment of a SEZ in the Port City was intended to address the challenges faced by the investors in Sri Lanka. Regardless of the legal technicalities, the priority should be to create an investor-friendly environment and ensure that the country’s investment potential is not compromised.  

How much longer will the process take? 

The process of setting up a downtown duty-free is not new, with numerous examples worldwide, especially in Southeast Asia. Countries like South Korea, China and Singapore have successfully implemented such initiatives. The key considerations are whether it will impact the local retail market and if there could be leakage of goods from the duty-free outlet into the local market. 

There are established protocols, both internationally and within the local context, that have been carefully considered and implemented. Sri Lankans who have travelled overseas, including returnees, are eligible to shop, as are tourists, with the condition that the goods are collected upon departure to prevent leakage into the local market. 

Returning Sri Lankans are subject to similar shopping privileges as those at the airport duty-free. Additionally, there are 18 specific categories of items that can be purchased, with limits of US $ 2,000 per annum, as defined by Sri Lankan customs as non-commercial quantities. 

Comparing this to the airport duty-free, which has a US $ 1,750 limit per annum and requires the purchaser to have been out of the country for over a year, reveals the careful consideration given to prevent market disruption. 

These measures serve as effective guardrails to protect against cannibalisation of the local market and ensure there is no leakage of goods into the local market. The goal is to attract tourists and create a shopping destination in Sri Lanka, capitalising on the average tourist’s stay of seven to 10 days, with an average spending day in Colombo being just one day. 

The broader objective of the Port City is to increase footfall and benefit the entire Colombo ecosystem, including hoteliers, by offering a range of entertainment activities such as a yacht marina, gaming facilities, water-sports and underwater diving, among others. The aim is not to cannibalise but to expand the market and promote economic growth. 

With the current issue causing delays and uncertainty, what message is Sri Lanka sending to its investors? 

We can speculate (laughs). The message is clear: we must adhere to the correct procedures and follow due process. However, despite our preparations and readiness, there seems to be a glitch in the system. We were on track to proceed but now we are in a holding pattern, eagerly awaiting the government to gazette the regulations. 
Once this step is completed, we are fully prepared to begin. 

How can we establish a mutually beneficial outcome in this situation?

It’s crucial to consider the bigger picture. If the stakeholders are reassured that we have implemented sufficient safeguards to prevent any negative impact on the local businesses, it could lead to a win-win scenario. It’s important to note that the duty-free mall primarily deals in foreign currency transactions, making it distinct from local retail. Given the lack of success in our approaches over the last 75 years, adopting a new strategy is imperative for positive outcomes.