How ETB missed the mark on investment zones and what can be done

The Economic Transformation Bill (ETB), which passed through the Sri Lankan Parliament on July 25, sets ambitious targets for investment and export growth, aiming to address numerous economic issues through a single piece of legislation. This article focuses on provisions for zone management in the ETB. By including zone management within a Bill that aims to fix many problems, Sri Lanka has taken a divergent path compared to other developing countries in the region. Many other developing countries including Thailand, Malaysia, Vietnam, and Bangladesh, have in place a single overarching legislation to govern the development and management of zones. A close examination of the provisions in the ETB by Verité Research reveals significant gaps in zone management in comparison to regional and global best practices. These gaps and their impact are discussed in detail in a recent publication titled ‘Looking Beyond the Economic Transformation Bill — Three Steps Sri Lanka Can Take to Increase the Supply of High-Quality Investment Zones’. This article provides a summary of the findings of this report, highlighting the need to address these gaps to facilitate the development of high quality investment zones that can entice investors to come and invest in Sri Lanka. 

 
SRI LANKA CANNOT COMPROMISE ON QUALITY

The scarcity of land in Sri Lanka compared to competitor countries like Thailand, Vietnam and Bangladesh, makes it impossible for Sri Lanka to match them in the quantity of zones. These countries have hundreds of zones and are planning to add hundreds more in the coming years. For example, Vietnam aims to add 161 new Special Economic Zones (SEZs) to its already sizable roster of 397 over the next decade, and Bangladesh aims to hit a target of 100 economic zones by 2030. By contrast, Sri Lanka has only 15 Export Processing Zones; even doubling this number will be a challenge given the land limitations.   

This reality makes it critically important for the country to focus on the quality of the investment zones over the quantity, to be a competitive and attractive destination for investors. A critical gap in the ETB is the lack of provisions that focus on the quality of the investment zones. The legislation governing zones in competitor countries has specific provisions to ensure the quality of the facilities and services provided. These include enforcing minimum quality standards for zones and establishing minimum criteria for the selection of investors to develop and manage zones.   

Minimum Quality Standards - Focusing on the standards of infrastructure and services is not merely an administrative detail but a fundamental aspect of creating an environment conducive to high-quality investment. In addition to having state of the art infrastructure facilities, the Zones are increasingly required to meet higher environmental and social standards. Investors are expected to maintain rigorous architectural standards and sustainable practices. ETB has not made provisions on quality standards for Zones. Quality is critical for Sri Lanka to distinguish itself from its regional competitors.  

Moreover, evidence suggests that robust infrastructure and efficient trade facilitation play a much more critical role in drawing investment than tax incentives, which have become nearly irrelevant in a world where such perks are ubiquitous in Export Processing Zones (EPZs).  

Minimum Criteria for Investor Selection – The expertise and experience of investors in developing and managing Zones are critical factors that will determine the quality of the Zones. Therefore, zone developers should be evaluated on their technical capacity, financial strength, and commitment to the project. The legislation in other countries provides for these, and additionally stipulates a minimum financial commitment or equity requirement for the EPZ developer to ensure the developer’s commitment to the Investment Zone’s success. The rigour in investor selection reflects a commitment to quality that transcends mere numbers, impacting long-term investment outcomes.  

What bears emphasising is Sri Lanka’s pressing need to avoid falling into the trap of developing substandard investment zones. Over the past two decades, despite numerous initiatives, the country has struggled to complete even one Zone successfully. Given our limited resources, we cannot afford to waste them on poorly executed projects. A poorly developed investment zone doesn’t just waste resources—it actively deters investment, as investors are reluctant to commit to an underwhelming setup.  

FAIR COMPETITION THROUGH INDEPENDENT REGULATION CRITICAL TO ATTRACTING PRIVATE INVESTORS 

Sri Lanka is a latecomer in bringing in private investments to develop and manage Zones. All 15 of its Export Processing Zones were built and are managed by the public sector. The global shift to private zones began in the 1990s and by 2008, the share of private zones had increased to 62 percent. The majority of the Zones in competitor countries such as Thailand, Vietnam and Philippines are private zones. The explicit recognition given to private sector investments in the ETB, therefore, is noteworthy. However, it has left a critical gap that undermines its desire to court the private sector for Zone development and management. This is its failure to assure fair competition by providing for independent regulation. Sri Lanka is aiming to bring private investments into a sector where the public sector already plays a dominant role. Therefore, it is critical to ensure fair competition between publicly and privately developed and managed Zones. This requires the separation of the role of the regulator from the role of Zone developers and operators, and assuring regulatory independence. Failure to separate the role of the regulator from that of the developer and operator is a critical gap in the proposed provisions of the ETB. This separation is crucial for maintaining investor confidence and enhancing the overall integrity of the investment climate.  

THE WAY FORWARD

The lack of access to land is already a constraint faced by investors in Sri Lanka. Investment Zones can increase access to quality industrial land in a country with scarce land resources, deficient land market, poor infrastructure connectivity, and weak public services. Given that the country’s key export processing zones are already operating at capacity, it is important for Sri Lanka to fast-track investments in high quality Zones. This requires the country to have an appropriate regulatory framework in line with regional and global best practices, addressing the critical gaps highlighted in this article. The focus must shift to creating a robust regulatory framework that not only attracts private investment but also upholds high standards across all investment zones. Without these reforms, the country risks squandering its limited resources and failing to capitalise on the potential benefits of high-quality investment zones. 

Note:As the final Act had not been made publicly accessible at the time of writing, this article is based on the findings from a report that analysed the original bill as gazetted and tabled in Parliament, taking into account the Supreme Court determination of the Bill. 

The writer is a Research Director at Verité Research, a think tank based in Colombo. Research assistance was provided by Malinda Meegoda, Assistant Manager - Economics at Verité Research.