Changing pillows for FDI headache won't do
TSUNDAY, JULY 16, 2017
he sudden resignation of the Board of Directors of the Board of Investment (BOI) this week was not so sudden in a sense; it was a long time coming. Friction within the country’s ‘One stop shop’ for Foreign Direct Investments (FDIs) and the Minister in charge had dogged the Government’s desperate search for foreign investors.
The anticipated dollars, sterling and euros were not flowing in as the new Government of 2015 anticipated, forcing it to rely on state-backed investments from China and India.
When President J.R. Jayewardene initiated the Free Trade Zone in 1977, he famously proclaimed “let the Robber Barons” come. He took a practical view of the commercial world and the flow of capital, that many ‘developed countries’ opened their doors to - money, black or white.
At the time, Sri Lanka was a pioneer in inviting FDIs, and the pro-West Government was an attractive proposition for investors looking for markets in the region. However, the JVP insurgency of the 1980s sent jitters down the initial investors, the Koreans mainly, and they all started pulling out.
In the intervening years since, other countries in the region began liberalising their economies and turning from socialism to market economies – Cambodia, Myanmar, Bangladesh, Vietnam and even India. Sri Lanka is no longer the ‘only girl on the beach’ and today, is trying to play catch up as others forge ahead.
The ‘Robber Barons’ looking at Sri Lanka today are unfortunately those of Sri Lankan origin themselves. They had parked their monies elsewhere and want to bring it in as clean money. The name of the game is for slush money in the Asian region to be laundered and ‘invested’ elsewhere, but close-by. Recently, the Government has had to come to terms with several questionable projects where Government VIPs have been associated with ‘sweetheart’ deals.
While it is not the BOI’s role to check the credentials of prospective investors -- a responsibility which lies with the Central Bank and the commercial banks in view of international money laundering laws in force -- due diligence of a potential investor is a sine quo non. And yet, those laws are mainly aimed at the narco trade and terrorist activity, not so much the monies siphoned away by corrupt political leaders. See what happened to Sri Lanka’s efforts to recover money from Sri Lanka in Dubai – it fell on deaf ears.
In this climate, ask potential investors why Sri Lanka is not an attractive country for FDIs anymore and they will give you five major reasons viz., 1) the high cost of labour, 2) kickbacks demanded by VIPs, 3) bureaucratic red tape, 4) lack of tax incentives forced by the IMF and 5) political policy inconsistencies – not necessarily in that order.
On April 27, 2016, the Cabinet of Ministers decided not to extend tax holidays and other incentives offered since 2006. Applications for BOI approval dropped from 20 a month to six.
An ill-fated Agency for Development Bill was mooted to neutralise the BOI amidst the tug-of-war between the BOI and the Line Ministry by taking away BOI’s powers to enter into agreements. The new IMF proposed Tax Bill further emasculated the BOI curtailing the powers left to it to grant whatever tax holidays that were available and raising certain thresholds in core areas of investment, such as in IT. Changing pillows at the BOI directorate will not be enough to cure Sri Lanka’s FDI headache.