Financial Times

Create land banks for Foreign Direct Investment

By M.H.M.Faizer Former Deputy Director General of the BOI
What sectors should be targeted for Foreign Direct Investment (FDI) attraction?
There are several approaches through which FDI may be promoted:
By looking at those sectors where the government has not made significant investments. For instance the government spends less than one percent of its GDP on higher education. There are hundreds of thousands of students who do not get entrance to our universities. Quite naturally therefore higher education sector including the medical studies must be opened for FDI. If the UGC sets out the required standards with the concurrence of the other relevant authorities, we may have nothing to get scared of, I believe. In fact we are well known for quality education in the region. Hence we may also attract foreign students particularly from the SAARC countries.

* Looking at those sectors where we have the comparative advantage.
Those sectors that offer national comparative advantages will definitely offer benefits to operate from Sri Lanka. We clearly enjoy comparative advantage in terms of value adding activities for tea, rubber, gems and some identified raw materials, such as ceramics. We may promote direct FDIs or JV arrangements with either existing manufacturers or with potential manufacturers. The quality of our labour coupled with its relative low cost also adds on to the comparative advantage.

* The sectors the country needs to look at to improve its national competitive advantage.
Perhaps national competitive advantage is more important than the national comparative advantages. The national competitive advantages is influenced by several factors such as the demand conditions as expressed by the Domestic Consumers, Factor Conditions, the role of the Supporting Industries, Industry Infrastructure , Strategy and the Nature of the Industry Rivalry. In addition to these factors competitiveness of a country is also influenced by the government policies and the business environment.

Sustainable competitiveness is created only through improvements in productivity. Higher productivity would enable a country to support higher wages as well as a strong currency while providing attractive returns on investments.

Of all these conditions, factor conditions have a direct influence on the FDI. Advanced factor conditions are far more important than the basic endowments. Advanced factor conditions include an impressive level of Infrastructure such as the Digital communication, Quality and dependable Transport, Airport and Sea Port services, Education and Training, Research and Development etc. We may promote projects in this sector on PPP basis. (PPP – Public Private Partnership).These are large scale infrastructure projects and need government support. However politics must be out of it. Look at our Colombo – Katunayake highway. We have taken more than 10 years and yet to start while our neighbour builds roads as if it is building roundabouts!

Maintaining an effective level of advanced factor conditions is a must if we are serious in achieving the Regional Competitive Advantage. This will explain why some countries have a large presence of MNCs. Singapore for example has thousands of MNCs operating from Singapore. National Competitive advantage will also facilitate domestic firms to successfully enter the global market. The government therefore may promote projects in this sector viz Port and Airport development, Roads and Railway, Canal Development R&D projects, Marinas etc. They could be PPPs and on the basis of BOO/BOOT and/or BOT.

* Looking at those sectors where relocations are desirable.
This may sound as a small sector. But it may be worthwhile looking at. We may consider relocation of our Borella Prison, Dehiwala Zoo etc. There are internationally recognized firms specializing in relocation programs. Sometime back a firm from Melbourne made a presentation to the senior governmental officials regarding relocating the Borella Prison. These relocation programs are not simple mechanisms and thus services of the experts must be obtained. The redevelopment of the location also must be considered. The government may consider building a “City” at this location such as the “Havelock city” that is already coming up in Colombo. Similarly careful consideration must be given for the selection of the site for the relocation and what other parallel activities must be developed in and around this new location.

*Looking at the international trade pattern within the region.
We have signed two FTAs - one with India and the other with Pakistan. There are three major benefits for those firms that operate with the BOI approval

* Imports into Sri Lanka can be duty free
* Exports from Sri Lanka into India or Pakistan are duty free at the ports of India or Pakistan assuming the said products are not in the negative or phased out list.
* Income earned by the firm is free of corporate tax for defined periods.

Take one example -- India imports around US $35million of ball bearings per year. The import duty on this is quite high. Germany and Japan are the principal exporters. Now if we can approach these firms in either Japan or Germany and convey the above benefits I am sure they can be attracted. Further the cost of production in Sri Lanka will also be lower vis-a-vis Germany or Japan.

* Promote construction of Industrial Zones
Industrial Zones must be planned to provide the maximum benefits to the investors as well as to the government. This again is very specialized. The connected government agencies are not competent enough to develop and manage zones. Thus FDI s must be encouraged on the basis of PPPs .These zones must be run and managed on the basis of their own merits.
The market mechanism will determine the development of these zones. A detailed feasibility study must be first carried out. There isn’t expertise within the country to carry out such feasibility. Bids could be called to select a firm with substantial experience to advice in this specialized field. The government should not be in a hurry to start developing zones on its own.

* Build more cities like the “Havelock City”
The number of apartment complexes promoted by the government is unequally distributed. They are by and large concentrated within the Colombo city limits - that again mostly in the Wellawatte area.

The individual apartment complexes must now be promoted in the outskirts of the Colombo city and even in other thriving cities like Kandy. However the government must actively promote FDI to build cities like the concept followed by the “Havelock City” This is real development. These are very large investments. It may cost around US$ 100 to 150 million dollars.

The government should provide the land. Perhaps the land available out of our relocation on the Dehiwala Zoo or the Borella prison can be considered for this purpose.

In any case the government must maintain a “Land Bank” so that it is in a ready position to offer lands to worthwhile projects.

This is done in some countries like China where the foreigners waste no time in searching and selecting lands. In Sri Lanka it is practically a nightmare.
The investors need not run from pillar (e.g. UDA) to post (e.g. BOI) if there is a land bank. This land bank will have lands with prior approvals from all relevant authorities. Land has become such a major issue that we have lost sizable investments coming into the country.

* Encourage Foreign Investment in Entrepot Trading and Export Trading Houses
Pressure group influences must not deter the government in carrying out those policy initiatives that will drive our economy to become the trading hub in the region.

We must learn to place the country first. We have been announcing that our mission is to place Sri Lanka as the No. 1 trading hub in the region. It will only remain as lip service if we on the other hand place restrictions on Entrepot trading for foreign investments.
FDIs must be allowed for Entrepot and Export trading houses without restrictions on ownership and items to be traded other than the standard restrictions that are usually applicable to this kind of trade.

*Liberalize retail trading for FDIs
At present the government allows retail trading for foreigners provided they bring in an investment of US$1 million. It is not clear whether this one million is equity or combination of equity and debt. Furthermore, it is unsure as to whether wholesale trading is allowed for foreigners or not.
We must have a clear policy on this. If retail trading is allowed for high capital why not open it up for all?

*Encourage and target Diaspora investments
The Diaspora will understand Sri Lanka much much more than any foreigner. Furthermore they will have some form of commitment and obligation towards the country. There are many successful and rich entrepreneurs among the Diaspora who as they are now may be not interested in Sri Lanka but if correctly convinced they will consider investments in Sri Lanka. They have the capacity to tap many other investors as well.

*Encourage and target existing investors
Let us believe in the essence of Relationship Marketing. Marketing involves not only searching for new customers (investors) but more importantly maintaining continuous relationships with the existing investors. In this regard one may notice with satisfaction that a significant portion of the annual investments received came from the existing investors. This indicates their good level of satisfaction and confidence. It must further exploited to attract more investments by way of expansions as well as new projects. The existing investors are our ambassadors. Their word of mouth must be taken seriously. Until recently the BOI offered a two year additional tax holiday for expansion programs carried by the existing exporters. This may have to be re- introduced.

Forward steps
We need to clearly define our mission and goals and then prepare relevant strategies to achieve them. That’s it.

Our mission is to attract $1 billion in FDI. This is not impossible provided we have the right people to plan and implement effective strategies. This Mission statement must specify the priority sectors and the overall mission figure must be broken into these sectoral targets.

This is important because strategies will differ depending on the sectors. Given the figures achieved for India (US$ 5.3 billion), Pakistan (US$ 952 million), Bangladesh (US$460 million) and Singapore (US$ 16 billion) one cannot say that it is impossible for us to achieve $1 billion.

Of course this targeted investment far exceeds both the current achievements (US$ 234 million in 2004) as well as forecast investments.
Generally, strategies are prepared to achieve forecasts but if the higher authorities have placed an ambitious target then new strategic options must be generated to achieve them while strengthening the internal core – competences. Without strong competences one may not achieve such ambitious targets.

The government must clearly express its firm stand for FDI. Factions within the government should not raise reservations about foreigners coming into the country to invest. We should not forget that we are an economy that depends substantially on foreign investments to promote economic growth and we should not forget that the foreigners have better places to go even within the region. The opposition must also act responsibly to recognize the role of FDI and support all efforts taken by the government to attract FDI.

The Executive, the Legislature and the Judiciary must all take note of the expressed Mission statement and take necessary supportive steps that will provide a conducive environment for foreign investments in the country. The country’s legal framework and public policies must be friendly to foreign investors. The judicial system must uphold the sanctity of contracts.
With regard to the investment climate we do have unfavourable conditions. But yet we must learn to be more confident to vehemently express the positive benefits while taking effective steps to marginalize these threats. A joint publication by the World Bank and Asian Development Bank in 2005 confirms that Sri Lanka has made big strides in reducing red tape, and has improved the governance framework to the point where it no longer poses significant obstacles to doing business, in sharp contrast with the neighbouring countries.

Therefore Sri Lanka stands out among developing countries for its good governance, and firms benefit from the low levels of red tape and corruption.
The BOI being a major player in this whole thing must announce clear investment policies.

This is an absolute must since we ourselves cannot be ambiguous in our own policies. The BOI must also clearly define the sectors targeted for concessions e.g. what is retail trading? What is Agriculture? How do you define Infrastructure? etc etc.

More importantly the existing Regulations must be seriously reconsidered for amendments deletions and changes. The BOI must be given a certain amount of power to negotiate its concessions with the prospective investors. The screening process must be more in depth than now. The section 16 approvals must be continued but with a different emphasis. In short the BOI must undergo a culture change!

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