Impact Of Economic Transformation Act On Boi And Fdi

• Lack of a practicable mechanism to convert exaggerated predictions into a tangible development of economy seems to be a glaring deficiency in the ET Act

In terms of the Economic Transformation (ET) Act, the overall transformation methodology of the economy consists of following steps viz. to repeal the Board of Investments (BOI) Law No. 04 of 1978, to establish Investment Zones Sri Lanka, to set up an Office for International Trade, to establish National Productivity Commission and to establish the Sri Lanka Institute of Economic and International Trade and matters connected therewith and incidental thereto. This article has been focused on repealing the BOI Law and its impact on Foreign Direct Investments (FDIs).

ET Act in the face of Presidential Elections

What would be the real intention behind the enactment of the ET Act abruptly at the doorstep of the Presidential Election? Based on public statements made by President Ranil Wickremesinghe on economic crisis of the country and how he is going to resolve it, his intention behind the enacting of the ET Act seems to be a complicated one which may consist of one or more of the following reasons: (1) he is not satisfied with the performance of the existing system of managing the economy of the country; (2) he might have intended to establish a new set of institutions with enlarged and energised scope of policies, powers, responsibilities and functions truly required for the accelerated economic development of the country based on the principles of export oriented economy, FDI liberalised trade and commerce, and accelerated development of industrial and agricultural sectors; or (3) to satisfy the International Monetary Fund (IMF) in the process of restructuring debts owed by the Government; or (4) he might have thought to use the ET Act to promote his uniqueness on resolving the economic crisis and thereby to convince the masses in his favour at the forthcoming Presidential Election. Out of the 04 reasons mentioned above, the third and fourth are more vital in the process of enacting the ET Act. It is a fact that he uses the agreement entered into with the IMF and the ET Act simultaneously at the election campaign to promote this image.

Repealing of BOI Law

The repealing of BOI Law No. 04 of 1978 and the establishment of the Sri Lanka Economic Commission and Investment Zones Sri Lanka in place of BOI are considered one of the important steps for transformation of the economy focused in the Act.
The Economic Commission of Sri Lanka and Investment Zones Sri Lanka are assigned with wide powers, responsibilities and functions headed by a Board of Directors, in addition to the powers, responsibilities and functions to be transferred from BOI to these two institutions. The core objectives such as to foster and generate economic development, to widen and strengthen the base of economy, to encourage and promote foreign investment, to diversify the sources of foreign exchange earnings, to encourage and foster the establishment and development of industrial and commercial enterprises assigned to the proposed Economic Commission of Sri Lanka and Investment Zones Sri Lanka under ET Act are typically analogous to the same core objectives set out in the BOI under BOI Law No. 04 of 1978.
The formation, appointment, directing and controlling of the Boards of Directors and their members of the Economic Commission of Sri Lanka and the Investment Zones Sri Lanka are exclusively in the hand of President and the Minister concerned, hence there is a tendency to get them politicised and make them proxies of the Minister and the President. As a result, it is presumed that Boards are not in a position to exercise their professionalism independent of politics, but to act as the cat’s paw of the Minister. The same deficiency was there with BOI as well under BOI Law No. 04 of 1978. This has paved the way for politicisation of the institutions eventually. This is an inherent deficiency in almost all institutions headed by the Boards appointed by politicians.
In terms of Articles 13(i)(o) and (p) in Chapter 03 of the ET Act, there are some powers, functions and responsibilities assigned to the Economic Commission of Sri Lanka and Investment Zones Sri Lanka with regard to the outsourcing of Private sector in order to make the transformation of economy more effective such as, formation of companies, recruitment of experts, advisors and consultants, to sell, mortgage, lease, convey, device, assign, exchange or dispose of any movable or immovable properties for the purpose of development of investment zones. Article 15-06-(b) in Chapter 03 of the ET Act, states “a zone shall be a designated geographical area which has the potential to be developed on a public, private–public–partnership or private basis”.

Privatisation of Export Processing Zones

It appears that the ET Act has paved the way for privatisation of Export Processing Zones existing at present, as well as Export Processing Zones which will be built up in future. At present, there are 13 Export Processing Zones and 02 Industrial Parks under BOI covering the land extent of approximately 4,000 acres consisting of 280 companies in operation providing 135,500 direct employment. Their annual aggregate export revenue is US $3 billion. These zones are being managed effectively and profitably. In that context, there is no urgent necessity of privatisation of these zones and outright selling of their movable and immovable properties to the private sector in terms of the provisions set out in Article 13 and 15 in Chapter 03 of ET Act. Privatisation could lead to a conflict between national interest and private sector interest in the process of running the zones, which in turn could be detrimental to the overall national development of the country and the advancement of national interest in the long run.
The preamble to the ET Act states, “Economic Transformation is vital for (1) fostering sustainable development (2) enhancing prosperity (3) boosting productivity (4) promoting  social progress (5) and ensuring opportunities for all”. In the above context, it gives an impression that overall economic development of the country covering vital aspects marked from 01 to 05 above could be achieved by implementation of the ET Act. However, there is no assurance given in the Act to the effect that the above aspects of economic development would definitely be achieved by implementing the Act.

Targets for Growth of Economy

Similarly, there are some targets fixed in the ET Act in respect of the growth of the economy. Article 04(e) in Chapter 01 of the ET Act states, “the export of goods and services as a percentage of GDP should be not less than 25% by year 2025, not less than 40% by 2030, and not less than 60% by 2040.” The development of economy and the percentage of the growth of exports and services as above referred to, are considered highly exaggerated presumptions, due to the fact that it is not possible to fix targets covering the time length up to year 2040 under the prevailing uncertainty of principal factors such as social and political stability which are considered sine-qua-non of economic development.
There is no specific strategy set out in the ET Act for accelerated development of the manufacturing sector for production of exportable goods and services within the country. Without producing exportable goods and services within the country, the objective of the conversion of the present economy to an export-oriented economy remains as a sheer prediction. The validity of predictions can only be established by empirical testing of factual situations on which predictions have been generated. Lack of a practicable mechanism to convert exaggerated predictions into a tangible development of economy seems to be a glaring deficiency in the ET Act. The development policies set out in ET Act seemed to be an exaggerated phenomena lacking feasibility. 

Expediting approvals for FDI projects

Article 90 in Chapter 21 of ET Act provides specific powers to Investment Zones Sri Lanka to expedite approvals required for FDI projects and how to overcome any conflict, in the process of granting approval to FDI. Article 97 states that in case of any inconsistency between the provisions of this part (part 03 of ET Act) and provisions of any other law relating to Investment Zones (save and except Colombo Port City Economic Commission Act) the provisions of this part will prevail. However, it is not practicable or lawful to exercise this kind of authority over and above other valid laws of the country in the process of granting approval to FDI projects due to the fact that it would tantamount to violation of the basic principle of Rule of Law and equality before law. Conflicts should be settled amicably or amending obstructive laws to make easy the approval process. The amendments detrimental to the national interest or human rights in this process should be avoided. Twisting Environmental Impact Assessment Reports on FDI Projects to satisfy politicians could be cited as a classic example in this regard. 

Attracting FDIs to Sri Lanka

However, attracting FDI to Sri Lanka basically depends on two major factors namely, global situation and local situation. It  may be noted that the ongoing political crisis in this country has paved way for economic and social instability which in turn have caused a non-conducive environment in the process of attracting FDI to Sri Lanka. In addition, procedural difficulties in the process of granting approval to FDI, continuity of strike wave, hostile labour laws, unwarranted political interference are considered some minus factors.
The global situation entangled with global power politics, economic recession, polarisation of economies, wars and global terrorism, etc. are considered non-conducive factors to motivate investors transnationally. The non-conducive local and global situations above referred to seemed to be beyond control of the mechanism set out in ET Act. There is no provision in the Act to control or minimise above deficiencies.

Impact of ET Act on internal and external customers of BOI

As far as the impact of ET Act on internal customers of BOI (BOI Staff) and its external customers (FDI Investors and BOI Enterprises) concerned, chapter 38 of the ET Act provides for absorption of entire staff of BOI without reduction or any change of their terms and condition of employment to the Economic Commission of Sri Lanka and the Investment Zones Sri Lanka and continuity of agreements and business as in hands of BOI by Economic Commission and Investment Zones Sri Lanka. If any employee is not willing to continue his employment under Economic Commission or Investment Zones Sri Lanka, there is an option for him/her to retire with compensation under Voluntary Retirement Scheme (VRS). In that context, there is no need for internal and external customers of BOI to bother.
However, there is a possibility to build up another layer of staff consisting of experts, consultants, advisors etc. over and above the status enjoyed by senior staff of BOI at present under structural changes proposed in the ET Act, and also there could be constructive retrenchment of staff on the pretext of voluntary retirement scheme proposed in the Act.  
ET Act is based on the directives given by the IMF in the process of restructuring debt owed by the Government. The enacting of this Act by Parliament does not mean the people of this country have endorsed it wholeheartedly. Ruling party in Parliament had no option but to support it for their survival. 
Wickremesinghe says that the ET Act is a law which cannot be changed by successive governments at their whims and fancies. This is misinformation due to the fact that stability and continuity of any enactment is possible only if the majority of members of Parliament support it. It is a well- established premise in Constitutional Law that “Parliament is not bound by its predecessors as regards prior legislations and as to the manner and form of legislation”. Any successive Government could change, amend or repeal it subject to the majority of votes it requires and methodology of change as stipulated in the Constitution.
The effective implementation of the ET Act solely depends on political and social stability of the country in the long run. It may be noted that political stability seems to be a dream as far as divisive party politics based on self-agendas disregarding national agenda are being continued in this country. There is no solution to this deficiency in the ET Act. However, Wickremesinghe has set out an example on how to get rid of this deficiency by contesting the elections independent of Party politics. However, this strategy is not feasible in Parliamentary Elections.
W.A. De Silva is a retired Executive Director of BOI and was a Lecturer in HRM and HRD at the American College of Higher Studies (2002/2003). De Silva holds a BA Spl Degree from the University of Ceylon 1967 and MBA from Sri Jayawardenapura University