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Attracting FDIs: Where have we gone wrong?

30 Jan 2022

By Imesh Ranasinghe  Foreign Direct Investments (FDIs) are a vital component of a country’s economic development and uplift the country’s status in front of the world. But for Sri Lanka, attracting FDIs has been a difficult task, especially with the change of policies whenever the government changes.  FDIs into Sri Lanka decreased to $ 548 million in 2020, compared to $ 793 million in 2019 and $ 1.6 billion in 2018. Recent FDI was concentrated in real estate, mixed development projects, ports, and telecommunications sectors. According to the Board of Investment (BOI), as of November 2021, the BOI has signed $ 2 billion worth of investment approvals and during the first half of 2021 alone, $ 760 million has been invested in Sri Lanka, of which $ 400 million is FDI. Despite projects being approved by the BOI, only a few projects get actually implemented and the FDI component is very low. In 2019, where 113 new projects were approved valuing $ 1.1 billion, the foreign component value was only $ 400 million. In 2020, 128 projects were approved with a value of $ 2.2 billion, of which the foreign component was $ 1.6 billion.  In 2021, 117 new projects were approved to the value of $ 2 billion, of which $ 980 million was the foreign investment component.  Why has Sri Lanka failed to attract significant FDIs when compared to its peers in the region? Policy uncertainty and structural reasons  According to Frontier Research Economist Chayu Damsinghe, Sri Lanka has been having issues in attracting FDIs for some time due to structural reasons. For example, he pointed out there were some problems with land sales and the Land Registry in getting lands along with other Ease of Doing Business concerns for incoming investors. The other reason, he said, was that Sri Lanka had continuous depreciation pressures, which lead to a payment crisis once every four or five years. “Then it also means that there is some level of additional cost that will come to businesses, especially ones engaged in or associated with manufacturing, because they will have to deal with importing goods to Sri Lanka,” Damsinghe said. The economist also said that Sri Lanka’s policy uncertainty had traditionally made it difficult to attract FDI because in Sri Lanka when the government changes, unlike in other countries, there is a complete reversal of policies and investment decisions (e.g. the Japan International Cooperation Agency-funded Light Rail Transit project). He said unless the policymakers figured out ways and made sense of the political reality, there was no solution that would attract FDIs to Sri Lanka. He also noted that in the last two to three years, there had been a big drop in FDI due to the pandemic as most of the investors were weary all around the world and the debt crisis Sri Lanka was having right now made investing harder for investors. Damsinghe said that most of the FDIs Sri Lanka had received in the past were done after discussions with bilateral partners such as India or China as opposed to some international firms coming and setting up in Sri Lanka.  The economist said that Sri Lanka was not in a good place in the Ease of Doing Business Index: “Every government that came to power said that they would take action on that, but the issue is that some of the decisions that need to be taken are not politically easy,” he added. In 2020, Sri Lanka ranked 99th out of 190 countries in the Ease of Doing Business Index and it was ranked fourth in the South Asian region, behind India, Bhutan, and Nepal. The report on Sri Lanka on the Doing Business Index indicated that although it would take eight days to start a business in Sri Lanka, it would take respectively 86, 100, and 39 days to deal with construction permits, get electricity, and register property. Understanding what investors seek  Speaking to The Sunday Morning Business, a former Chairman of the Ceylon Chamber of Commerce, Chandra Jayaratne said that in order to understand why Sri Lanka had failed to attract significant FDI, the Government had to look at what the investors were looking for. He said investors would come if there were physical resources that could be developed, grown, and used for manufacture or to provide a service. For example, he mentioned natural gas in Mannar and a strategic airport or port with service opportunities. Secondly, he cited human resources, saying that if there were some very valuable people who could support technically at low cost, then investors would come to Sri Lanka. According to him, FDIs could also be attracted if there was a big market to serve or if Sri Lanka had concessions such as low taxes and tariffs compared to other big markets and also if there was a supply opportunity from which the investor could access a strategic supply chain. Jayaratne said investors would also come if there was a good Free Trade Agreement (FTA) which they could exploit and if the rest of the world gave us good ratings such as sovereign ratings and others. Others include effective and reliable power and energy, communications and transportation options, stable financial and banking freedoms, risk mitigation options, and entertainment and healthcare options. Finally, he said investors would come if there were people with innovative ideas to develop certain unique things and if they could provide some services and supplies to the local market itself in terms of building schools and hospitals. “In most of these things, Sri Lanka lacks quite a bit; we don’t have primary resources or very good human resources or many opportunities for services and manufacture,” he added.  Jayaratne said that commercial investors would not invest in countries with political and economic instability unless there were some connected opportunities. “A good example is Myanmar; with all the problems of political instability, investors are going there because they have resources and cheap labour and most importantly they have opportunities of strategically linking with the developing East Asian markets.” According to the Directorate of Investment and Company Administration (DICA) in Myanmar, the country managed to attract $ 3.7 billion in FDI between October 2020-June 2021 including  $ 428 million from 13 Singapore-listed enterprises, mostly into the manufacturing sector. The Myanmar military seized control of the country on 1 February 2021 in a coup d'état after detaining and finally imprisoning the country’s leader, Aung San Suu Kyi. Role of BOI The BOI, which is a facilitator of investments in Sri Lanka, has had many issues – some that go back to the ’80s. Speaking on the role of BOI, Damsinghe said that if tax, registration, or matters related to ease of doing business were the reasons FDIs were not coming to Sri Lanka, then the BOI by virtue should help the companies to pass those. “I think we do see the BOI continuing to give better and better results,” he noted.  Jayaratne said that the BOI’s inability in relation to land acquisition had become a major problem in attracting investors while policy inconsistency had also contributed to it. He noted that investors who were coming for Colombo Port City were now getting better benefits than those who came to Sri Lanka five or 10 years ago. This, he said, resulted in investors losing confidence in the country. Furthermore, the BOI is yet to take steps to develop the human resource base of the country. “Not focusing on developing human resources and inconsistency are the biggest two factors,” he added.  


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