Nihal Ranasinghe lays out the necessary fundamental changes
Independent Sri Lanka, now 71-years old, has embraced the talk of many development drives for very long, yet the country still has ample room for growth in many areas. Foreign Direct Investment, which is more conveniently known by its acronym, FDI is one major financial aspect that continues to grab the attention of development gurus. Just last year, Sri Lanka launched an online one-stop shop which facilitates investors in obtaining the necessary official approvals for making investments.
But the essential problem remains. Can Sri Lanka be expected to reach its financial goal with such steps?
OSL – THE Investment Magazine spoke to Nihal Ranasinghe, a senior public servant, to ascertain the nitty-gritty of Sri Lanka’s preparedness to attract FDI. A former Controller-General of Immigration and Emigration, and currently Secretary to the Ministry of Education, Ranasinghe is in a position to comprehend both needs and the means for fulfilling them.
He draws attention to three elements which play equally crucial roles in attracting investment: geographical location, size of the country and the volume of its labour.
The focus on FDI requires the understanding of the composition or the type of the entire investment in the country. It applies to both local and foreign investments. This component is essentially the government’s commitments to FDI.
“We need to focus on the future of investment,” Ranasinghe says, emphatically. “We have to look at it from that perspective. We are inviting capable, tested and proven investors into Sri Lanka and requesting them to reside in Sri Lanka with their assets. When we consider this, we need to be familiar with the investor’s expectations. It is the most important element.”
“Expectations” is the keyword. Sri Lanka is not the only country available on the investor’s market. The investor has many other options spread across the globe offering better convenience and myriad other temptations. Ranasinghe emphasises the need to understand – or refine, rather – the Sri Lankan context in this regard. Sri Lanka’s incentives need to be determined on that terrain.
“First and foremost, from our side, a government strategy must be formulated. The government strategy, of course, depends on the country’s location, size and its volume of labour. These are the vital factors for the investor in terms of calculating the investment cost or the cost of finance,” he explains.
Unlike other countries, Sri Lanka is confined to certain areas of investment. In it the labour volume is limited. Ranasinghe points out how disadvantaged Sri Lanka is in this respect, in comparison to Malaysia, Singapore and Vietnam. Malaysia and Vietnam, in particular, offer an appropriate volume of labour. That vital factor remains at a low ebb in Sri Lanka, which creates natural friction.
“It leads us to consider other paths. First, we need to structure. It means, basically we need to ensure that law and order have to be maintained to the entire satisfaction of the investor. The investor certainly looks for legal protection. Introducing new statutes itself would not suffice. Law must be applied on a practical stage,” he elucidates.
This is where commercial law comes to play. The investors are required to enter into agreements prior to the investment. It is another area that needs streamlining.
“When it comes to contracts and administration, we must have a clear and effective arbitration procedure to ensure fast and smooth passage for the investors. That is very important. The investors must be made happy ensured that their investment rests in a safe domain. That can be guaranteed by law and order as well as special law procedures that protect the investors. The government must ensure effective execution of law and order,” he notes.
As investors observe these factors with eagerness, the investment policymakers must revisit the system in such lines to assess how and where the country is moving forward. Such an assessment will build a healthy rapport and motivation that magnetises more investors to the country.Ranasinghe then brings up the cost of infrastructure, another vital element in FDI. Cost of infrastructure comes in diverse forms: transport, power, telecommunication and labour among them. The potential investor also weighs this factor against other available markets.
“Most countries have attractive packages in terms of infrastructure cost. Compared to Sri Lanka, their infrastructure cost is marginal. Naturally, the investors weigh in this factor. Remember, they are operating in a competitive market. And you are supposed to be competitive. But you cannot afford to be competitive if the cost of production is high. So we need to ensure that our investors – not only foreign but the local as well – are producing something more than what they need. And make it affordable for masses. The surplus can be channelled for exports. We need to produce more,” he explains.
The attraction for investors may well rest in many other elements. The overall stability of the country’s political and social set up is one. This is significant, as such stability paves the way to proper handling of infrastructure. In that vein, the government needs to adopt a concrete policy structure and implement it.
“These instruments must be world-recognised. It must function hand in hand with the global parameters. Then only can the investors compare the Sri Lankan situation and the situation in other competitive domains. For instance, Sri Lanka’s policy is different in comparison to most other countries. Most FDI-friendly countries follow an almost similar economic policy. The drawback is clear. We lose the potential investors who will settle down elsewhere more conveniently,” he points out.
Such a phenomenon is unavoidable, however heavy the advertising may be that would be carried out for FDI. The lack of inducements and a commonly-framed basis for investment appraisal evaluation are among significant aspects that hinder FDI. However, it does not mean the country must follow one national policy on investment once and for all. A policy must rather be procedural, supported by monitoring, evaluation, feedback and research. Every aspect needs to be assembled and considered before implementing a policy.
“We have to study the markets in other parts of the world, especially their competitive edges. They develop their systems daily. We need to be mindful of that, and accommodate whatever changes are possible in Sri Lanka. When it comes to an investor, we need to have packages to international standards. The investor compares and contrasts before taking a decision. Even if there is a government policy, it needs to be aligned with the international markets, export promotion and the cost of production. And basically, the entire situation should avoid or eliminate the uncertainty,” Ranasinghe elaborates.
What are the prospects in the near future in such a platform?
Many efforts accelerating FDI attraction have taken place in the past. Some were successful. Some were partly successful. Some were not successful at all. On the other hand, the country is facing a chaotic situation, where the state officials are concerned. It hampers the investor’s decision-making.
“This is crucial from the investor’s point of view. They test how the ruling administration will handle or manage in the country. We have to manage all these situations to the entire satisfaction of the local and international community of investors. Otherwise, keeping certain issues without being resolved for a long time will create a negative impact, not only in the local but the foreign domain too. So the approach should be how we are engaged in the industry. It has a significant impact on creating a conducive environment for foreign investors,” he claims.
Political stability, administrative efficiency policy consistency, and a quiet and peaceful environment are key pillars in promoting investment. The responsibility to maintain such decorum rests in everyone’s shoulders. When it comes to developing a country like Sri Lanka, the identification of the right instruments is essential to create value.
“Value creation is a conceptual framework. How to create? Take foreign employment for instance. Sri Lankan citizens go abroad for employment, and remit a huge amount of income in return. Why can’t we create other avenues? Similar instruments that can be used for the betterment of the country? But for that matter, you need to generate people who can promote. We need to identify the areas and the resources that can lead to better knowledge,” he explains.
With foreign technology and other resources at play, the country needs to have a strong set of rules and regulations. However, rules and regulations – let alone laws – cannot be changed overnight without the consent or consultation of the parties concerned. If you have an agreement or if you are in contract with two parties, both must conclude to change the existing system.
“Capitalise on world development. We need to attract international trade into Sri Lanka. The attitudes, technological advancement, impact of the facilities must be made available. The legal systems must be in place. All these conform to one in the country,” Ranasinghe points out. With such steps in action, Sri Lanka can at least think of being smart enough to capture the attention of beneficial investors.