FDI: facts, figures and the real flow

Sri Lanka is estimated to have attracted US $ 130 mn in foreign direct investment in 1997, the highest in recent times.

All foreign investment to the country except to the stock market is channeled through the Board of Investment.

"The definition of foreign direct investment according to accepted norms is foreign equity and loans and advances extended by foreign shareholders," says Board of Investment Chairman Thilan Wijesinghe.

"Loans by foreign banks and financial institutions are not included."

Gross investment is also adjusted for dividend outflows to arrive at the net FDI figure.

Though portfolio investment does not qualify as FDI, new issues of shares by companies such as rights issues are counted.

"It does not matter whether the company is listed or not, provided the shares are newly issued to the investor," Central Bank's Director of Economic Research Dr. R. A Jayatissa said.

The BOI approves investments qualifying for concessions under section 17 of the BOI Law while all other investments which do not gain any concessions but are merely approved to a permitted area, come under section 16.

Though foreign investment has been rising over the years, according to BOI data, the figures have been controversial. It was well known that most of the approvals did not result in actual investment.

The absurdity of the figures was finally demonstrated when Rs 157 billion worth of investments were approved including a Rs 100 bn oil refinery in Southern Sri Lanka, forcing the BOI to take pains to highlight refinery as an extraordinary item.

Only 35 per cent of all approvals ever result in implementation.

The agreements signed were at one time considered a better yardstick.

But only 63 per cent of agreements are ever implemented perhaps several years later. In a given year very few, if any agreements signed in the same year may actually be implemented.

A measure of implementation — the implementation ratio — for example measures the cumulative projects approved or signed over all the previous years against the projects implemented in a given year.

"What we have been doing in the past is taking the number of approvals, the agreements signed and quoted the figure that is in the application form," agrees Mr. Wijesinghe.

"This is far removed from the actual flow of investment."

The BOI then started to account for all companies that initiated activities. A company is classified as having begun implementation when it purchases land, or makes the first capital imports.

On this basis, 135 companies with a total investment (on the application form) of Rs 12.2 bn actually began to start work in 1995, 112 companies with Rs 34 bn worth of investment in 1996 and 131 companies with Rs 22.7 bn worth of investment in 1996.

Applied consistently over several years such a total could show the pattern of investment.

However the investment shown in the application is almost never made in the first year making it an inaccurate indicator of the real fund flows that are taking place.

In addition the companies may not actually invest the amounts stated in the application.

"We see people investing significantly less than what is in the application, and we also see people investing more than what is stated in the form," he says. The BOI only ensures that the minimum amount that qualify the company for the approved concessions is invested.

Even earlier attempts had been made to calculate the actual investment flows but without very reliable results.

The BOI now has a computerised information system devised by its information technology department that captures capital imports as soon as the relevant customs entry is posted, showing how and when funds are actually used.

"Even capital imports do not give the total picture because they do not cover local procurement of lands or any other movable or fixed assets," admits Mr. Wijesinghe. "A company's investments will also go into financing working capital requirements, which are also not reflected in capital imports."

"So we have to inflate the capital imports figure based on certain assumptions to arrive at an investment figure."

The BOI has now amended the application form to show the planned investment implementation programme broken down on a half years basis.

Companies will also be required to file quarterly reports on actual progress, to enable the BOI to keep track of the companies.

But there are further complication to arrive at a reliable investment flow. Not all BOI companies are foreign owned. Some are joint ventures, others are totally Sri Lankan.

The BOI now classify companies according to ownership, to analyze foreign components and weed out the local component.

"To calculate an exact figure, one would have to go through the balance sheets of all the companies concerned, and compare the figures of Dec. 31 the previous year against the Dec. 31 figure of the current year to arrive at the actual FDI flow," says Mr. Wijesinghe.

Last years' capital imports were Rs 22 bn ( US $ 360 mn) by all BOI companies, far higher than the final FDI figure for the year.

A further complication also comes in at this point.

Though capital imports do reflect the actual economic activities and therefore investment flows, half or more of the investment is financed by debt, in spite of the fact that actual investment is taking place with the total capital being employed in the company. The amounts stated in application forms include the debt as well as equity capital.

"By counting the debt we would misstate FDI, despite the fact that it is invested in the company, because debt is deflected in the country's external accounts as debt. So we have to adjust the figure to find the US $ 130 mn dollar FDI figure."

In 1996 and 1997 investment flows have risen largely because of investment in infrastructure projects such as telecommunications and power, resulting from government initiatives, outside the BOI. There have also been questions whether certain projects were investment projects or not.

"The telecommunications operations, whether wireless local loop operations or cellular phone operations, are regulated activities," says Mr. Wijesinghe. "They need to be regulated because they need a scarce resources, that is the frequency spectrum."

Frequency bands for example are auctioned. Then the operators are licensed by the telecommunications regulator.

"After the regulator has done his job the project becomes an investment project. The investor has to invest his own capital, run market risks and compete against other operators."

The BOI says such investors have come to the country with the specific promise of BOI concessions. The BOI was even represented on the panel that selected the two wireless operators. In the past investments into cellular operations have also been counted as direct investments.

In 1995 total capital imports of telecom operators were 14.5 per cent of total imports by BOI companies mostly by cellular and payphone operators. This had gone up to 21 per cent in 1997 with the growth due to wireless operators. Total imports by the manufacturing sector were 59 per cent in 1995 and 57 per cent in 1997.

"There has not been a significant component of structural imports in capital imports," argues Mr. Wijesinghe. "There has been consistent growth in manufacturing, telecommunications and power. However there has been a decline in housing and property development."

"These are straightforward investment projects, unlike a tender where a government purchases a product," says Mr. Wijesinghe. The buyers do not run a market risk, regulatory risk, commercial risk and country risk."

There was difference in the case of power projects, where the power purchase agreement ensured that there was no market risk. But the down side of such a deal is that the investor is locked into fixed cash flows with no chance of increasing his profit.

But even power projects run the other risks, of a privately owned project.

"The BOI can take the credit for assisting the government to attract investors to infrastructure," says Mr. Wijesinghe. "We facilitate the line ministries concerned in attracting private sector investors. We cannot have an individual role in attracting investment, unless it was an unfettered market."

The BOI at an early stage identified infrastructure bottlenecks as a major impediment to investment into productive sectors. As a result it had been involved in advising the government on fast tracking investment into infrastructure especially power.

It also created a special unit — the Bureau for Infrastructure —from the old Secretariat for Infrastructure Development to speed up the legal issues involved in getting infrastructure investment, with technical input from the line ministry.

Despite the FDI in going up in 1997, several planned projects especially from Malaysia had fallen through due to the East Asian crisis. Of the four MOUs signed by the President when she visited Malaysia three have been suspended.

Economists have predicted that foreign direct investment will be one of the hardest hit sectors in the Sri Lanka due to the East Asian crisis.

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