Financial Times

Investment by the private sector

By Lloyd F. Yapa

The Sunday Times FT should be congratulated for starting a timely debate on investment by the private sector at the end of the conflict. It is timely because it is investment which would help to resolve the eternally simmering problem of poverty among a large section of the population in the country, through the creation of employment opportunities.

In the writer’s opinion there could be several major reasons for the reticence of the private sector to invest. They are a) poor governance and the serious deterioration of the quality of services rendered by public institutions in Sri Lanka including the law enforcement agencies, b) the impact of the global recession which has seen a serious decline in demand for goods and services mostly in the developed countries accompanied by a decline in the availability of credit from banks, c) the continuation of deficit budgeting which has created macro economic(fiscal and monetary) instability in the form of inflation and fluctuations in the value of the rupee, d) poor physical infrastructure , especially in the rural areas, e) the system of education that does not produce employable persons and f) the small size of the domestic market, 40% of the population being considered poor as they earn less than US$ 2 a day.

Seen above are two tables- the first dealing with international rankings with regard to competitiveness and the second dealing with flows of Foreign Direct Investments (FDI), both mainly in the Asian context.
It will be seen from the second table that the flow of FDI to Sri Lanka has been a trickle compared to the torrent for instance to Malaysia and Thailand.

The first table indicates the reasons for the trickle of FDI; they confirm some of the reasons listed earlier, in addition to indicating some others. The second column in the first table with regard to institutions relates to the level of governance. It will be seen that besides Malaysia and Thailand even Botswana does remarkably well in this respect. It also reveals that the other Asian countries listed are far ahead of Sri Lanka with regard to the rankings in respect of infrastructure, macro economy, higher education, quality of business environment and even the other efficiency enhancers.

These rankings indicate the load of work Sri Lanka has to put in, to attract investments both from local and foreign investors.

Governance is a key issue. There is good governance in a country when the various public institutions and the democratic processes in a country function efficiently and lead to public services of the highest quality possible. For instance it gives rise to good law and order conditions as the agencies concerned become efficient at serving the public since recruitment and promotion of officials are done on the basis of merit. This is possible due to their independence where management of the institutions is concerned. But they are finally accountable for their acts of omission and commission to the people through the President and Parliament.

When all institutions function in this manner there is good governance, the overall effect of which is socio political stability. It could also lead to macro economic stability as the institutions concerned would be independently managed. Socio-political and macro economic stability is a basic requirement for attracting investment of the long term kind and not the ‘foot-loose’ type.

The reasons for the non existence of good governance in Sri Lanka are due to certain weaknesses in its (1978) constitution. The most fundamental of weaknesses is the absence of separation of powers among the Executive, the Legislature and the Judiciary. In other words the public service including the fiscal and monetary authorities as well as the judiciary is not independent of the Legislature and the President of the country.

This was why the 17th amendment to the constitution was passed; unfortunately the independent Constitutional Council to be set up under this amendment is inactive at present leading to a serious deterioration of the quality of public institutions as they are unable to recruit and promote officials on merit, without politicization; this is no doubt a serious blow to good governance.

Another weakness in the constitution is that it does not insist on any qualifications required of Members of Parliament although they have to formulate policies on various national issues and sit in judgment over their implementation by highly qualified and experienced public officials. Still another weakness is that it does not contain provisions to safeguard the rights of the minority communities in the country; good governance cannot exist if a section of the citizenry feels that it is discriminated against in the provision of public services. This is why the 13th amendment was passed. Whether it adequately deals with the problem is full of controversy, in the light of the ethnic and religious tensions that have prevailed in the country for several decades.

In conclusion it has to be stated that the private sector including locals and foreigners would start to invest in all seriousness (in long term projects as well) at least when socio political and economic stability could be ensured. It does not mean, however, that the other requirements mentioned here are not important.

(The writer has been involved with agencies connected with investment promotion).

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