Credibility, it is said, is hard to gain once lost. Perception, on the other hand, is hard to change, once formed. This is the dichotomy Sri Lanka is now facing in trying to escape from the debt trap set by the previous regime and the negative sentiments that flowed from the actions taken by that government.
Sunday Observer´s INSIGHT team last week spoke to a plethora of investors, regulators, bankers and others to find out why the country is sliding backwards in the World Bank´s Ease of Doing Business Index and Transparency International´s Corruption Perception Index, both of which dealt a double whammy to Sri Lanka this year, despite the government´s firm commitment towards making the country business friendly and getting rid of corruption.
According to some (See BOX – Mark Pawley) it has to do with the perception that Sri Lanka´s business environment is ambiguous and ridden with bureaucratic issues, others pointed to issues with the banking system, which again highlights the need for clarity and unambiguity in implementing regulations (See BOX – SIA), while one investor commented on constantly changing tax and other regulations, calling for consistency and a long term business plan for the country. (SEE BOX – Sanjiva Weerawarana).
We also came acrossevidence of lack of efficiency and poor communication at the Board of Investment (See Box – Senaka De Silva) where after publishing a list of strategic investment opportunities earlier in May this year, it had only received “more than ten” expressions of interest for this list (SEE Graphic – BOI List of investments). Our attempts to get a firmer picture of investments received since the change of the Presidency in 2015 January came to naught – with officials passing the buck from one to another and no reply to our calls to the BOI Director General, the generally affable Duminda Aryasinha.
Credibility and Perception matter, especially when it comes to inward investments. Government´s lack of communicating its policies clearly and succinctly has negatively impacted its efforts at changing these perceptions and regaining the credibility the country lost due to the actions of the previous regime.
For example, take a look at the following graphic (SEE FDI Inflows). In reality, Foreign Direct Investment to Sri Lanka has increased, thought only slightly, from the highest inflow ever in 2014. However, the total inflow figure is inflated in 2014 due to a massive intake of US$808 million as loans. This government is now forced to pay those loans, creating a very large outflow of US$237 million in 2016, pulling the net inflows figure drastically lower. We are yet to see any government minister communicating what we depict in this graphic.
Last week, launching the Roadmap on investment climate reforms at the Temple Trees, Prime Minister Ranil Wickremesinghe was to note that Sri Lanka has slid back 31 positions, from 79 in 2012 to 110 in 2017, in the Ease of Doing Business Index (EDBI), a report card compiled every year by the World Bank, reflecting a negative trend in the investment climate in Sri Lanka.
The Roadmap, a document prepared by the Ministry of Development Strategies and International Trade, with support from the Australian Government and the World Bank Trade and Competitiveness Group, outlines a number of steps that Sri Lanka must take to reverse this negative trend and progress back up in the EDBI ranks.
According to the Roadmap, while Sri Lanka’s ranking on the overall ease of Doing Business index dropped one position from 109 in EDBI 2016 to 110 in EDBI 2017, this is mostly due to other economies having improved, dropping Sri Lanka’s relative position in the ranking.
The Roadmap acknowledges that shortcomings in the investment climate have limited the growth potential of established firms, while creating strong incentives for informality, which, the document states, has in-turn stunted private sector growth and poses a drag on competitiveness of the Sri Lankan economy.
The Roadmap comes out of US$100 million loan provided by the World Bank to Sri Lanka in September 2016, the Sri Lanka Competitiveness, Transparency and Fiscal Sustainability Development Policy Financing (DPF), aimed at supporting the government’s reform agenda by “reducing obstacles to private sector competitiveness, establishing transparent and well managed public institutions and improving fiscal sustainability.”
While noting that Sri Lanka has dropped one position due to other economies improving, the Roadmap has failed to acknowledge that Sri Lanka has also slid back in the EDBI Distance to Frontier score, which look at the absolute level of regulatory performance over time.
It measures the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005.
One can both, see the gap between a particular economy’s performance and the best performance at any point in time and assess the absolute change in the economy’s regulatory environment over time as measured by Doing Business.
For example, a score of 75 in 2016 means an economy was 25 percentage points away from the frontier constructed from the best performances across all economies and across time. A score of 80 in 2017 would indicate the economy is improving.
In 2014, Sri Lanka was 38.2 marks away from the perfect score that could have been achieved. However, despite all the good things that have happened, Sri Lanka is now 41.21 points away from that perfect score, increasing the distance to the perfect score by 2.59 points.
(See table Distance to frontier score...)
According to senior Central Bank officials who coordinate with the World Bank in providing the background information necessary to compile the index, Sri Lanka will now have a game plan when it comes to investments with the publication of the Roadmap. “Although successive governments have tried to reform the investment climate, proper guidelines as to what reforms should be introduced were lacking,” the officials, who spoke to the Sunday Observer on conditions of anonymity, said.
“As a government we didn’t know exactly what reforms need to be implemented coming under the component of doing business; what they are and most importantly how do you do it.
So, whatever was done before, was done in a haphazard way by looking at what other countries were doing but not knowing whether what other countries have implemented is relevant to Sri Lanka or will that really help us and the local entrepreneurs.”
“What the road map intends is to increase the effort of encouraging and increasing investments. When considering the current investment environment in the country, it’s evident and common knowledge that the current setup is not the most conducive. The need to improve therefore, was very much in demand if the country was to attract more investments.”
“The World Bank works in almost all the countries on investment climate reforms and they have the technical knowhow and they collaborated with the government and relevant private sector officials to come up with this document defining what the reforms are that need to be pursued.”
The reforms that the Roadmap speaks of, both regulatory as well as procedural reforms and intends to remove unnecessary aspects of laws and other bureaucratic regulations.
“As an example, at the starting of a business component the reforms suggested addresses two aspects. The Roadmap introduces a single window for business registration. If all reforms suggested in the action plan were implemented, the end result would be that an investor would not need to visit multiple regulatory agencies like the Registrar of Companies, Labour Department and the Inland Revenue Department. Therefore, the time spent in starting up a business will be reduced by a great deal. Because through this single window system you just sit in front of your computer and apply for a business registration-online,” one official said.
Unnecessary laws that are laid down in the companies’ law Act should be removed. The Roadmap proposes that these regulatory steps, for example, the public notice of incorporation, could be made available within the Registrar of Company’s website taking away the need for separately publishing in papers and the gazette. “At the moment the requirement is to publish it in three papers in all three languages. All these are additional and burdensome requirements that are specified in the law. The Roadmap suggests revisiting the companies’ law Act and removing unnecessary steps involved in the way to ensure that the investor/entrepreneur doesn’t have to deal with these things.”
Although the government takes positive initiatives and decisions, it is important that they are communicated to the public and most importantly to investors locally and internationally. As you can understand this launch was mainly to give adequate publicity as to what the government initiatives are, the official said.
The government is looking at having continuous dialogue with the public basically by having all these information available online at the Ministry of Development Strategies and International Trade (MODSIT) website. “That is one way of communicating. And we are planning to organize another forum somewhere in September/October where we can do some sort of a stock taking so that there is a continuous flow of information on what the government is doing, how well the government is progressing towards improving the business climate in the country,” the official said.
Bureaucracy Stymies investing
“Everyone is after capital. The more attractive you make the market and more easier the processes of investing, whether its help from government agencies, tax breaks and benefits, that is what will decide who gets the money,” Mark Pawley, an international investing professional, based in Singapore, told the Sunday Observer.
Pawley is the CEO of Oxley Group, a private investment firm specialising in multi-family office services, private equity, and real estate investments across the Asia-Pacific.
Based in Asia with Credit Suisse since 2000, Pawley served as Chief Operating Officer of Asia Pacific Investment Banking and Head of Asian Real Estate, Gaming and Lodging and Financial Sponsor Coverage Industry Groups. According to Pawley, his attempts at entering the market have not been the easiest and he has been trying for the past nine years to secure an investment.
“We are a group of ex bankers, we invest in real-estate, non-real-estate, all over the Asia Pacific and Europe. We have been looking at investing in Sri Lanka for the past nine years. We have had some interesting and challenging projects and they faced hurdles, political and otherwise. Nevertheless, we understand that the nature of these markets is such. And, these issues are not particularly specific to Sri Lanka,” Pawley said.
Sri Lanka, according to him, is emerging in terms of international appeal but there are still serious concerns about regulatory restrictions of transfer of currency.
“We recently faced an instance where our partners in Sri Lanka experienced some very long lag times in getting a major investment approved and issues remitting the investment capital through the international banking systems to a bank in Sri Lanka. We believe this to be a significant issue in Sri Lanka and not isolated to our own experience,” Pawley said.
“In terms of general bureaucracy and getting things done, we have experienced time frames and slowness that are unique to Sri Lanka. I have come across other investors who have either won tenders or done stuff with the government and then subsequently had issues, post award, significant issues which have cost them money as investors,” Pawley said.
Speaking on the Securities Investment Account (SIA) Pawley says, although it’s great as a concept, there are practical issues with individual banks when it comes to these special accounts.
“The use of SIA account, as a concept, is great where investors are allowed to bring in money, transfer it in and then take it out. However, unfortunately even international banks based in Sri Lanka are seen to have different interpretations on this. For example, certain banks state that they provide the services of SIA accounts on their website but when you approach them for the service they say its not provided anymore. So it’s good as a concept but there are practical issues with the banks,” Pawley said.
“Inventors have this perception, especially, in currency restriction type issues where putting money in the local banks may not be as secure as putting it in an international bank, based in Sri Lanka. The banking world is constantly evolving and Sri Lanka needs to be on par with them,” Pawley said.
In spite of the setbacks, Pawley is still interested in investing in Sri Lanka and sees greater potential in the country.
Every country has its own issues. Sri Lanka is an emerging market. It is a beautiful country and there is a lot of interest in investing in it. Its just that I have heard too many stories how the bureaucracy stymies investing,” Pawley commented.
“When you see the recent development in infrastructure in the country, as a foreign investor, it makes you keener. Money chases money, so when people see progress it attracts others. When you look at the new international hotels and other infrastructure you cannot help but feel that the country is at an inflexion point. Therefore, the quicker Sri Lanka resolves these setbacks, the easier it will be for investors to come in. Free movement of capital is something you should look at. Sri Lanka is an island competing for capital. So, the easier you make it the more you will attract,” Pawley said.
All stop-not One-stop
“The Board of Investments says it’s a one-stop shop for investors, but they are more likely to stop investors from coming into Sri Lanka,” Senaka De Silva, a Sri Lankan entrepreneur who is one of the largest exporters of leather goods from Sri Lanka and also the Honorary Consul for New Zealand, told the Sunday Observer.
De Silva is of the view that the country has a long way to go in order to improve its business environment.
According to him, practical issues faced by an investor spreads through an array of departments and agencies, starting from banks.
“The problems begin at the banks in the simple act of opening a bank account, when we make investments of large magnitude in Sri Lanka. There are many questions and requirements at the initial stage that it becomes very discouraging. It almost pushes an individual to a point of not opening an account, this has happened to us,” he said.
It is the same with the BOI. “BOI asks thousands of questions. With all the red tapes, the procedure becomes very cumbersome. People actually get frustrated to bring this much of investments into Sri Lanka. In one of our projects, it took us two years just to sign the BOI approval. BOI says, it is a one-stop place for investors but they are more likely to stop investors from coming into Sri Lanka,” De Silva commented.
Speaking on how the BOI can improve in being more accommodative towards investors, he said, it should detach itself from the bureaucratic nature. Too many steps required in the BOI itself will discourage investments and most importantly, the amount of time spent on getting to the final point appears to be too much. For investment purposes time is a crucial factor. “However, I must mention that the BOI chairman looks at this in a very positive way. At last we managed to sign the agreement,” De Silva said.
Speaking about the intention and the drive that was the basis of introducing such a body as the BOI, De Silva is of the opinion that the agency is not driven by its vision. He also commented on the importance of appointing suitable personalities with a business background to higher positions within the agency to ensure its smooth operation.
“When the BOI was first introduced it had a vision to serve the country and at that time the government appointed the right person as chairman of the BOI. Upali Wijewardene, one of the leading business persons, was its first CEO and Chairman. To date everyone respects him. People who can understand the nature and the needs of a business should head an organization like the BOI.”
“The employees at the BOI must understand the business and the mentality of an investor. The BOI is a mess since it has gone under so many changes and has been operating under so many Ministries. Everyone involved in this process should understand why it is important that Sri Lanka gets investments and they have to be focused on the same objectives, which is unfortunately not the case.” De Silva said.
“The SIA account is a good concept. The best part about it is that irrespective of the currency that you bring in you must withdraw and spend in rupees. Then people will benefit from this. Because, at the end of the day once the cash is brought in that respective currency, it must be spent in rupees allowing money circulation within the society. This is a good thing,” De Silva said commenting on SIA.
“At the moment the country needs money and it is important that everyone works with this understanding in order to take the country forward. There are enough people interested in coming to Sri Lanka for investing. Sri Lanka is located in a strategic point. We have to make use of this opportunity. And we have to invite investors of a bigger scale and make sure that the business environment of the country is conducive and more encouraging for such investors to come,” De Silva said.
Country needs a long-term business Plan
Tax and regulatory consistency over a period of at least 10 or 20 years is essential for attracting high quality investments, according to Dr. Sanjiva Weerawarana, CEO of enterprise software provider WSO2.
WSO2 Inc. headquartered out of California, with a large employee presence in Sri Lanka, provides an open source enterprise middleware platform for enterprises. The company serves health, financial, retail, logistics, manufacturing, travel, technology, telecom, and other sectors worldwide. WSO2 Inc. was founded in 2005 and is based in Mountain View, California.
Dr. Sanjiva Weerawarana, founded WSO2 in 2005. Before starting WSO2, Weerawarana worked for nearly eight years in IBM Research, where he focused on innovations in middleware and emerging industry standards. He is an elected member of the Apache Software Foundation and in 2003 founded the Lanka Software Foundation, a non-profit organization formed with the objective of promoting open source development by Sri Lankan developers.
“We started WSO2 12 years ago. I would have loved to start the company as a Sri Lanka led company, but there was no way that we could have raised funding. We have raised 40 odd million US dollars over the last 12 years and it was impossible certainly at that time to generate any kind of money including the six hundred thousand rupees that we raised at the start. The reason for that at that time, was a lack of global understanding of Sri Lanka as a country that had tech startups,” Weerawarana said.
“No one who had money wanted to put it in here since they wouldn’t risk putting their money into a legal system that they didn’t know. You need to have some evidence that people can invest without hindrance and there is a fair process running it.
One key aspect of it is policy consistency. One cannot have tax changes in every fiscal year, because investments take much longer than just one year. If the tax rules in existence when you came into the business are going to change every year it is going to be very difficult.
Weerawarana called for some thought to be put into the business architecture in the country “ which should remain in place for at least 10,20 or 50 years. “
Land, according to Weerawarana, is another issue. “Every government has introduced new laws on land. Still there is no clarity whether foreigners can own freehold land or not,” Weerawarana said.
According to Weerawarana, the BOI and other government agencies are being falsely accused of being corrupt. “We have had no issue working with the BOI. Sri Lanka is supposedly a corrupt nation. However, this is not the case. We have done business for 12 years and we have never had to engage in any corrupt activity. We do not ask for favors and we do not do favors, Weerawarana said.
Ambiguities and Uncertainties
Last week, the Sunday Observer´s Political column highlighted an instance where branches of three foreign banks showed reluctance to open a Securities Investment Account, or a SIA account, which is necessary to bring in investment funds to the country.
Local banks welcome opening of these accounts. However, corporate investors prefer to work through international banks such as the HSBC, StanChart, and Citibank.
Deputy Finance Minister Eran Wickramaratne was to comment to the Observer that while the government should not get involved in stipulating what services foreign banks must offer in Sri Lanka, the Ministry would need to inquire from the Banks the issues involved in opening these essential accounts.
Ravin Basnayake, Country Head for Sri Lanka at Citigroup Inc. since February 2012, knows the system well. Basnayake joined the Citigroup in 1988 and served as its Head of Sales and Marketing, before being appointed Country Head and CEO.
“While there are no serious structural issues concerning SIA,” Basnayake said, “there are commercial considerations that may at times influence a bank´s decision making process in opening an SIA.”
According to Basnayake, one structural issue that banks have to contend with is the fact that once an SIA is opened, even if there had been a single transaction, the bank has to maintain that account until the client repatriates the money. “ This has become a headache as there is a large amount of inactive SIAs. But, we have to continue to service them at a serious cost,” Basnayake said. At times, branches of international banks like Citi may not open an SIA dependent also on the individual risk profiles of the account opening entity and the international “ Know Your Customer (KYC)” regulations that are in place to prevent money laundering and other illicit activities.
Among the three international bank branches with full banking licence, operating in Sri Lanka, only Citi and StanChart will open an SIA. StanChart is also reluctant to open an SIA for an individual investor while at least one investor who spoke to the Sunday Observer commented that Citi initially imposed a “weird” condition, where they wanted the investor to have a local (Sri Lankan) entity, registered and operating, before an SIA could be opened. “This is a chicken and egg situation,” the investor commented, “We are sending funds to Sri Lanka to open a local entity and we want those funds to go through an SIA as we will need to repatriate the funds back to the origin at the end of the investment project. As a corporate entity, we cannot hand carry monies to Sri Lanka to start the business.”
A spokesperson for the HSBC told the Sunday Observer last week that HSBC has suspended opening SIAs while they will continue to service existing SIAs.
Another investor who approached the state owned People´s Bank to open an SIA related even a “weirder” experience.
The investor wanted a clarification regarding the repatriation of money, credited completely through an SIA, through the international banking system.
“Our question was two-fold,” the investor said. “First, we explained to the bank that we are considering sending two tranches of money to be used for two different purposes. The first tranche is merely insurance or a guarantee to our project partners that the second tranche will follow during a stipulated period of time,” the investor explained.
The two questions asked were:
For the initial stream of money bought through an SIA, if the Bank issues a Bank Guarantee (BG) or Standby Letter Of Credit (SLOC) for us, against the cash, and in 12 months, the foreign lender calls the BG or SLOC, is there any exchange control regulation that will prevent the debiting of that money from the SIA and remitting the same, including any interest or dividends the money may have earned during this period to the original remiter?
If we bring in a sum of money and wanted to send it back in 3 – 4 months, without applying it to the project, as by that time, the second stream of investments will be in place, is there any exchange control regulation that prevents the remittance of this money as per directives issued covering SIA.
The answer from the bank baffled the investor. “Where as per the direction issued to Authorised Dealers by the Central Bank on June 12, 2013, in so far as any credits (as defined in the directive) to such accounts, including inward remittances received from abroad directly through international banking channels (paragraph 3.i of the directive) can be remitted back as per paragraph 4.i of the directive, and with the exchange control department´s website clearly stating that the returns of investments made through the SIA such as sale proceeds and profits can be remitted back without referring to the Exchange Control Department, subject to the terms and conditions stipulated in the directive, the bank replied saying that regulatory restrictions will apply,” the investor said.
According to the document that’s being cited by the investor, the bank states that the regulator may stop if so deemed necessary in answer to the first query. In reply to the second, the bank said if the sum of money is for purposes of meeting the equity requirement, then there could be restrictions on transfer. The Sunday Observer has not been able to reach the bank officials concerned to clarify their position.
Investors while applauding the government for setting out a definitive roadmap for improving the investment climate, also point out the need to have unambiguous directives that must be implemented in exactly the same manner across institutions without creating ambiguity and uncertainty.
Graphic: Manoj Nishantha