Without Coherent Policies and Consistent Signals, Sri Lanka Will Continue to Struggle in Attracting Good FDI (‘Smart Future’ Article #8)

Nearly six years since the end of the war, Sri Lanka is struggling to get any impressive increase in FDI. The only notable increase in FDI has come in the property, leisure, mixed development and real estate sector, evidenced by projects like Shangri-La, Altair Tower, JKH Waterfront, ITC Hotels, etc. FDI targets have been falling sharply short of targets. The targets are already fairly conservative in my view, considering Sri Lanka is a post-war economy with plenty of green-field opportunity. The ‘good’ FDI that Sri Lanka desperately needs – the type that brings in technology, that helps boost Sri Lanka’s exports, and that links Sri Lanka to new markets has not really come to post-war Sri Lanka. But this is exactly the type of FDI for whom policy coherence and consistency matters.

 

Government to Review Previous Policies

According to news reports, the new government is keen to review prevailing laws affecting FDI, for instance the act on restricting foreign land ownership and the Strategic Development Projects Act. This is a good first step. As I had argued earlier, the Land (Restrictions on Alienation) Bill could severely hurt our investment attractiveness. This law was touted as being essential to ‘preserve our national interest’. There were legitimate concerns by certain domestic stakeholders with regards to land use by foreigners, but a blanket law that potentially affects our FDI attraction is not the ideal way to solve it. While reviewing existing policies is a good first step, it is time now for a more holistic look of the prevailing investment climate and FDI attraction regime.

 

Clear FDI Vision Linked to Overall Policy

With heightened global competition for investment, Sri Lanka needs to give a clear, futuristic policy direction with regard to FDI in particular, and industrial policy in general. Many of the successful East and South East Asian nations that used FDI has a key element of economic progress, ensured that FDI fitted in to a broader industrial and growth strategy. Singapore took the approach not of providing ad hoc incentives, but rather to attract investments to specific sectors, within a broader industrial policy framework and vision. The approach was not to merely increase total FDI, but rather to attract FDI that would positively influence the structural transformation of the economy. Very generous incentives, or more simply very low tax burdens, do not by themselves attract high levels of FDI. Fixing the regulatory frameworks, streamlining business procedures, and undertaking urgent reforms to improve the overall business climate will be the medium to long-term requirement to make Sri Lanka an attractive FDI destination.

 

Port City ‘Flip-flopping’

The speed and manner in which the government resolves the current Port City crisis will be a serious test of the country’s ability to manage large scale foreign investment projects, and indeed manage high-profile investors linked to influential governments. Following the election of the new President and the appointment of a new government, the mixed messages and conflicting policy signals that were sent regarding ‘investigating’ this project was far from ideal. It was remarkable how many different Ministers made statements on the Port City issue at different times and would point to different sets of concerns and make different allegations. Media statements were made by the Prime Minister, the Minister of Investment Promotion, the Deputy Minister of Investment Promotion, the Minister of Ports and Shipping, the Deputy Minister of Policy Planning and Economic Affairs, and the Minister of Health (who is also the Government Spokesperson), among others. This was an amateur approach to deal with an investment of such a large magnitude, an investment with serious implications on bilateral economic relations that have remained cordial for decades, and investment from a country that is – whether we like it or not – becoming a large and important exporter of capital and technology, globally.

The powerful signaling role that clear, coherent government policy provides cannot be underestimated, and this has been repeatedly noted by the private sector over the last decade.

 

Rethinking Institutional Structure

Like many countries have done with their FDI strategies, it might be time to rethink the state institutional structure that deals with foreign investment. It might make more sense now to separate the investment promotion aspect of FDI attraction and the policy, regulatory, and incentives strategy aspect. The former is best dealt with by people who understand global trends, understand how to deal with foreign companies, understand what they look for in a country, and understand what it is about Sri Lanka that needs to be marketed in order to attract them here. The latter is best dealt with by people who appreciate not only the country’s FDI needs but also the country’s fiscal pressures and overall policy priorities (in order to find a smarter balance on tax incentives); understand the overall industrial policy direction of the government and where FDI fits in; and understand the regulatory and other non-tax barriers that need to be overcome to improve the investment climate. Of course, the two groups need to work closely together and talk to each other to ensure coherence.

Sri Lanka is now undoubtedly a hot destination for emerging markets investors. The prospects are certainly bright. But we are not the only hot destination. Prospects are also bright elsewhere. Across Vietnam, Thailand, Cambodia, Indonesia, Philippines, etc., leaders are making economic reforms targeted at attracting foreign investment. ‘Good’ FDI often has a choice of many destinations to locate in. Making the right moves now matters more than ever before.

 

 

This is the 8th article in the ‘Smart Future’ column that advances ideas on economic reforms, innovation, and competitiveness. It appears originally in the Daily Mirror Business on Wednesday 1st April 2015.

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3 thoughts on “Without Coherent Policies and Consistent Signals, Sri Lanka Will Continue to Struggle in Attracting Good FDI (‘Smart Future’ Article #8)

  1. Well said. With the current flip flopping and mixed signals, I think a good many investors are putting things on hold until things become clearer. This is clearly reflected in the performance of the stock market.

  2. Interesting, but a painfully cursory analysis of attracting ‘good FDI’. If Sri Lanka wants to jump on the tech bandwagon now, it needs to simultaneously focus on internal institutions (eg – academics, research and development in our universities) which would facilitate the growth of a high skilled population. 1% of FDI in 2013 went into the tech sector, this is not going to change if incentives and policies are solely oriented outwards. We need to start looking in.

    • Thanks Econ Humbug. Agreed, this was a cursory analysis. Intentionally so. To keep it short and appeal to a wide readership without getting into to many specifics. I’ve written previously on the specifics, however, and would be happy to link to those. You have very correctly pointed out that to boost investment in knowledge based industries . And for that, reforming internal institutions matter.

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