Looming political and economic challenges ahead of elections

By Dhananath Fernando

Originally appeared on the Morning

“We know what should be done to get the country on the right track, but we don’t know how to get power back after implementing the policies.” This is a popular statement I hear often when I meet quite a few politicians. The truth is that politicians do not know how to get back power because it’s not an attractive solution.

The popular policies that bring politicians into power are the very same that inspire their ousting at the very next election cycle. People hardly object to good policies unless the same politicians instigate false propaganda. The Right to Information (RTI) Act was just one such instance.

As an election is due next year, it is vital to understand and remember our priorities, otherwise our politicians are likely to take a wrong turn and pass the buck back to the people.

In an election year, the behaviour of any political party is to completely abandon rational economic reforms and play to populist narratives that result in outcomes that are the complete opposite, with the motive of coming to power.

Bringing down fuel prices and announcing other types of subsidies are common tactics. This is harmful, especially when those benefits cannot be financed sustainably, or in some situations, brought into life in the first place.

Even if it does not retain power, the newly-elected government will have a tough time preventing plans that have already been put in place and enacting better policies.

Political risk

In the current context, we run a very high risk of our politicians bringing us back to square one; i.e. another economic crisis. This, given the fact that 2024 is set to be an election year, is a recipe for disaster.

All political parties will shift their focus to slowly becoming more populist rather than being driven by objectivity. Therefore, the real risk is going back to another debt restructuring if we fail to grow the economy and our exports.

There are many politicians who do not understand the gravity of the need for reforms. Regardless of which party or coalition comes to power, there are fundamental issues that need to be addressed.

The process is more or less the same as handing over a house with structural issues from one tenant (government) to the other. The new tenant cannot function because neither the previous tenant nor the owner (people) is willing to fix the fundamental problems.

Risk of a second debt default

Given the unstable political environment coupled with a country already going through debt restructuring, the risks of a second debt default are astronomically high. As we are still struggling with finalising the first debt restructuring, adding a second one into the mix will leave us in dire straits.

The second one will undoubtedly be harder, especially given the significant increase in interest rates and being unable to print money with the new Central Bank Act. If we fail to raise money through markets in order to roll over debt and if we are not open to increasing interest rates, the only option we will be left with is to default again. At that point, most likely there will be pressure once again to amend the newly-enacted Central Bank Act to allow money printing.

Of course, that would be an inflationary measure and we will be back at square one with a balance of payments crisis, debt crisis, humanitarian crisis, and likely a banking crisis too.

Solutions: A common minimum programme for reforms

Reforms are easier in the first 100 days of any government. If we fail to enact reforms within the first 100 days, more often than not, no reforms will take place. Failing to undertake reforms in 100 days means a cost of a five-year delay plus many bad policy decisions in the middle, which are costly and difficult to reverse.

Ideally, if key political parties come to an agreement before an election on selected reforms and execute them regardless of who comes into power, it will at least ensure some stability for Sri Lanka. There are many ideas that all political parties have in common.

Regarding State-Owned Enterprise reforms, there is no political party that says the Government should run an airline. Even National People’s Power Economic Advisor Dr. Anil Jayantha, in an interview with Advocata, noted that they did not believe the Government should do any business with hotels.

Accordingly, there are many other similar areas where we can arrive at an agreement with little difficulty. Therefore, regardless of who wins elections, people can win and sustain some of the economic reforms.

The truth is that reforms are inevitable if Sri Lanka needs to move forward and for any political party to sustain its power. Implementing bad policies, especially considering the status of our country, will make it very difficult to sustain power, because then we will be setting the standard for a new normal in economics and politics.

Fiscal path amidst promises and uncertainties

By Dhananath Fernando

Originally appeared on the Morning

Starting from the second week of November, every minute in Parliament will be focused on the national Budget. Fortunately or unfortunately, many of the promises outlined in the Budget are unlikely to be implemented or fulfilled.

At the same time, items that are not in the Budget may be implemented midway through the year, based on the direction of the wind. Things are especially likely to take a completely different turn in an election year.

A key criticism against this Budget is that the revenue proposals to cover up the expenditure proposals are not adequately mentioned. A revenue of Rs. 4,100 billion is expected for an expenditure of Rs. 6,900 billion. It’s akin to wanting to spend Rs. 69 while only having Rs. 41 in hand. The challenge is that we are uncertain as to how we will earn even Rs. 41.

An earlier proposal to increase VAT by 3% and remove the exemptions on VAT can be seen as a measure to increase revenue. There are a few proposals to increase the tax base, which is a step in the right direction, such as the requirement of a Tax Identification Number (TIN) for opening a current account, obtaining a building licence, and for revenue licences for vehicles.

The question that arises is what would happen if we fail to generate even the expected revenue and I think there are three scenarios that can occur if we fail to achieve the revenue targets in the middle of the year.

Scenario 1: Cutting down on capital expenditure

Approximately Rs. 1,200 billion has been allocated for capital expenditure in the 2024 Budget. This includes some proposals such as a new airport and building a few universities. So we will likely have to rechannel some of the capital expenditure to recurrent expenditure if we fail to generate revenue.

What is important to note is that, compared to last year, capital expenditure makes up a lower percentage of total expenditure. So in a context of starting with an already lower capital expenditure base, cutting capital expenditure from key areas of growth such as health or education further will maim our growth in the long run.

Slower growth is also not favourable for Sri Lanka because the need of the moment is growth. Only growth will increase our tax revenue and create more employment opportunities and business opportunities.

Scenario 2: High inflation

The second scenario would be the Government exploring the opportunity to get finances from the Central Bank to bridge the deficit. With the new Central Bank Act, the space for doing this is very low, but if past experiences hold true, anything is possible. There is a transition period of about 18 months and we should not underestimate the crafty nature of our politicians to find legal loopholes.

If the Budget deficit is being financed through the Central Bank (money printing), further increases in cost of living and high inflation are unavoidable. It will also drain our forex reserves and build additional pressure on our currency and likely end up with a currency depreciation after a few months’ cycle: a cycle not so distant in memory.

The Central Bank financing this Budget deficit will also challenge the sustainability of the IMF programme. As the next year is an election year, politicians will mainly think about the elections before the economy, despite promises made. While the new Central Bank Act tries to stop this from taking place, the possibility cannot be ruled out fully.

Scenario 3: Hike in interest rates

The third scenario is where the Government borrows money from the market to bridge the gap and allow interest rates to move. This will not cause inflation as the Budget deficit is not being financed through the Central Bank, but the cost of money will go up (interest rates moving up).

When the cost of money goes up, growth will contract. When this happens, businesses start winding-up operations and expansions become difficult. Also, banks will lend more money to the Government at higher interest rates, slowing down credit for the private sector.

When the economy slows down there may be an impact on the tax revenue on one side. On the other side, with limited growth, achieving debt sustainability will be challenging.

Solution

In order to prevent these scenarios from taking place, it is imperative that we reduce wasteful expenditure. The key solution is to focus on reforming State-Owned Enterprises (SOE). SOE reforms can increase revenue, cut down expenditure, bring down our debt, and attract foreign investments.

The bank recapitalisation of Rs. 450 billion, mentioned in the Budget, is due to the debt owed by two SOEs that have losses which amount to Rs. 1,800 billion. The taxpayer is now expected to pay the bill. It amounts to about Rs. 20,000 per citizen from taxpayer money for bank recapitalisation. That is a staggering Rs. 80,000 per household of four members.

Boosting tourism is also another option. While there is a fund for tourism promotions which has to be utilised well for building our brand image, it will all be in vain if we do not do things as simple as removing regulatory barriers to tourism.

The final bird in our hand as a solution is the Colombo Port City. We have to accelerate the process and attract investments.

If we play our cards right, we can at least move a step ahead in 2024.

Are we getting the Port City Right?

Originally appeared on The Morning, Daily News, Lanka Business, Daily FT

By H. Dabarera and K.D. Vimanga

The Supreme Court determination on the Colombo Port City Economic Commission Bill will be announced by the Speaker to Parliament today (18) and the Bill will be debated in Parliament tomorrow (19) and Thursday (20).

Over the last few weeks, Sri Lankans have contemplated if the proposed Colombo Port City is the messiah that will rescue the country’s economy or whether it is another Trojan Horse that will throw firewood into the already smouldering regional geopolitical furnace. 

The Port City as a model has the potential to be a driver of growth. For that, it must be governed well within a globally accepted, transparent and accountable regulatory framework. The project can bring in much needed foreign investment and kickstart growth especially at a time when the state of public finance is weak with a looming risk of default of debt. 

The major part of the investment for the Colombo Port City is already made, hence there’s no option other than making use of it and making it work. However, it must be done in a manner that does not compromise the best interests of Sri Lanka and our regional partners. 

The proposed bill aspires to have a financial centre within the proposed “special economic zone” in the likes of financial centres such as Singapore, London and New York. Then it is crucial that such a centre maintains a separate legal and regulatory framework that is unhindered by the delays and loopholes in the local court system and is established in accordance with international norms and practices. If implemented correctly, a financial centre can open up opportunities in investment banking, insurance, off-shore financial services, hedge funds, institutional investors, clearing houses, etc. A financial centre combined with international living standards and financing options can also be attractive for tech startups especially those aspiring to operate in the South Asian region. This creates opportunities for ambitious Sri Lankans for jobs they have to now go overseas. 

However, this is a process that is protracted over a longer period of time and is dependent on the confidence and trust that the project invokes for investors. The key to building trust and confidence is dependent on two main factors. One, having a sound financial regulatory system. Two, having global recognition and acceptance for the governing law. As a matter of fact, most financial centres resort to a framework based on English Common Law. 

Challenges 

The comparative advantage Sri Lanka has compared to regional financial centre’s such as Dubai, Mauritius, Singapore, Hong Kong, etc. is limited in its strategic location, hence attracting investors to bypass established financial centres will take significant effort. The comparative advantage Sri Lanka offers must be unique to attract the global investor! 

The island’s geographic proximity to the sub-continent and the present geopolitical landscape of securing friends and off-shore assets by the regional super powers makes a compelling case for many to develop the Colombo Port City as a regional hub to manage money from the heavy rollers in the region. 

However, becoming such a magnet for investment can only be done by building bridges with our regional partners. But the question is, is that simply enough? One might argue yes, as Sri Lanka’s economy is only a shade above $ 80 billion. However, the question arises if the global financial elite such as HSBC, Deutsche Bank, Citibank, Bank of China, IOB, JP Morgan etc, will enter Colombo Port City to do business. 

Is providing tax concessions simply going to bring in these reputed banks? Observing the behaviour of these banks simply illustrate that a vast majority of these banks make big investment decisions such as opening onshore operations by assessing a whole range of factors including the regulatory environment, especially in the case of emerging markets. 

So, is the proposed financial regulatory arrangement sufficient? At present the act vests power onto the proposed commission to regulate and monitor and steer banking operations within the area of the Colombo Port City with the concurrence of the identified national bodies such as the Minister of Finance and the Monetary Board. Therefore, the bill lacks a regulatory framework conforms with international best practices set out by institutions such as the Basel Committee on Banking Supervision and the Financial Action Task Force (FATF). This is done in order to facilitate such capital flows due to the serious concerns on money laundering. So, it is vital that this issue of a lack of a supervised financial regulatory system is addressed, if the Port City is to be operated as a productive financial centre. 

A second serious drawback of the drafted bill is the lack of an accepted global recognised governing framework such as English Law. If we are going to benchmark ourselves with established financial centres such as Singapore and Dubai, the said financial centre must be framed around English Common Law. The rationale for this stems from the fact that, English Common Law underpins the legal systems of the world’s four top international financial centres – London, Hong Kong and Singapore. This is further exemplified by how the Dubai financial centre functions as an independent jurisdiction governed by an English Common Law framework which is distinct from the rest of the UAE. Such a framework will bring in operational and cross jurisdictional mobility. This is because the global financial sector already functions on an English Common Law dominated platform. Moving to complaint jurisdiction with the same legal norms is the standard best practice. 

In fact, Sri Lanka ranks poorly in the World Bank’s Doing Business Indicator (99 out of 190 countries), due to the country’s fledgling legal system related issues and has fallen behind regional peers such as Nepal and India. 

So to attract the global banking elite such a framework is preferable and will not only open the core financial sectors such as banking, securities and derivatives, but also related sectors such as insurance, shipping, international trade, commodities and logistics. 

The legal framework for settlement of disputes 

For resolution of disputes the Commission is expected to establish an “International Commercial Dispute Resolution Centre.” Any dispute that arises within the Port City between the Commission and other entities within Port City shall be resolved by way of arbitration. Further, all agreements made by every authorised person with the Commission should have a provision on mandatory reference to arbitration for any dispute that arises within Port City. The International Arbitration Centre shall be the sole authority to hear all such disputes within the Port City. 

However, with regards to disputes that authorised persons within Port City can face over business activities carried out with other entities from all over the world, they will have the discretion to resort to any form of conflict resolution; litigation or any form of Alternative Dispute Resolution (ADR) mechanism in any jurisdiction of the world. Hence, the reputation of our International Arbitration Centre will matter immensely. Especially if we are to ensure that these disputes can even be heard within the Port City in the form of ADR. This will bring in much needed business to the arbitration centre while reducing the cost to the investors within the Port City as other centres such as London, New York, Singapore, Hong Kong, Dubai, etc. will be a costlier option than Colombo. 

International Arbitration Centres in Singapore and Hong Kong have gained worldwide recognition as leading arbitration hubs. They have made a significant contribution to the economic growth of these countries and helped them attract international business, trade and FDI. Thus, if strategically utilised, an international arbitration centre can be complementary to the growth of international business within the country. However, in order to ensure such results, it is essential that the International Arbitration Centre has in place a proper set of rules and principles to ensure swift resolution of disputes and ease through predictability and consistency to the business community. 

The current International Arbitration Centre in Sri Lanka, despite being based upon the UNCITRAL model law of Arbitration, has ultimately failed in winning over the confidence of the public and investors due to the arbitration proceedings dragging too long (as long as three years in certain instances). In the world of finance, time is money as money never sleeps. So special emphasis must be placed on maximising efficiency within the arbitration centre. Additionally, constant political instability in the country and the failure of the judiciary to uphold rule of law has also acted as hindrances to propel Sri Lanka as a global hub for International Arbitration. 

Drawing from these failures, it is evident that if the Port City is to become like Singapore or Hong Kong as an International Arbitration Centre it needs to introduce sound principles that are able to win over the confidence of the business community. 

A case for legal neutrality and jurisdictional independence 

It is also important for the International Arbitration Centre at the Colombo Port City to establish legal neutrality in the eyes of international stakeholders. Legal neutrality is of utmost importance for a financial centre as impartiality is key to attract investors and reputed financial institutions. Hence, ‘trust’ in resolving disputes impartially and transparently will be a deal maker for the Colombo Port City to become a success. Especially as it will be competing with financial centres in the region, of the likes of Dubai and Singapore who enjoy reputational synergies due to the merits of maintaining neutrality and also efficiency. This further makes a serious case for the Colombo Port City to be an independent jurisdiction within an English Common Law framework. 

An International Arbitration Centre, manned by local expertise may not deliver the credibility investors seek from a virgin financial zone that has to compete with established facilities that operate with a proven track record on efficiency, transparency and infrastructure. Hence, the International Arbitration Centre can be opened to accommodate foreign professionals with a proven track in arbitration. The addition of such provisions to the existing Bill can make the International Arbitration Centre at the Colombo Port City attractive and marketable to become an alternative financial centre for the South Asian region. Further the inclusion of English Common Law which the international financial markets are very well versed in can bring in significant benefits when functioning as a financial centre. If this fundamental issue is not addressed the Colombo Port City will yet again be a case of missing the bus yet again. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The way forward for the Proposed Colombo Port City Economic Commission Bill

The Advocata Institute carried out an independent analysis on the proposed Colombo Port City Economic Commission Bill.

Following observations and analysis were formulated using insight from key public policy experts and scholars. We have written to all members of Parliament, highlighting these observations and made recommendations to maximise the economic outcome of the Colombo Port City Project.

To read our analysis and the elaborated outtake of the issue.

To read the letter in Sinhala

To watch the video on PORT CITYය චීන කොලනියක්ද?

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03 May 2021

Honoured,

Member of Parliament / Minister

The way forward for the Proposed Colombo Port City Economic Commission Bill

The Advocata Institute wishes to make the following observations on the proposed Port City Economic Commission Bill (the "Bill"). The Bill in its present state has weaknesses that should be addressed in order to maximise economic opportunities and outcomes. We would like to emphasize that the Port City could form an important step forward for the country but to be successful it must address the shortcomings highlighted below.  We call upon all parliamentarians from all parties  to work together to address these issues.

1. A Case for Special Economic Zones in Sri Lanka 

1.1 Special Economic Zones (SEZs) are a tried and tested means of bringing in positive value addition to an economy. They also have the potential to accelerate economic growth. This is best reflected in how SEZs such as Shenzhen in China, the Dubai International Financial Centre and Luban IBFC in Malaysia have grown into booming global financial, manufacturing and technological hubs. If implemented with the right policies and a globally accepted regulatory framework, the Colombo Port City is capable of achieving such outcomes.    

1. 2 According to our analysis SEZs benefit an economy by acting as:  

1. A magnet to attract Foreign Direct Investment.

2. A laboratory of experimentation to achieve a particular objective and then scale it up. 

3. A catalyst for structural transformations and ultimately diversify the local economy.

4. A regional pressure valve to increase employment in disadvantaged areas. 

1.3 However, the success of an SEZ can only be determined by evaluating the linkages generated within the local economy.  In other words, they can only be considered a successful policy tool if they encourage technology spillovers or knowledge diffusion that enable the local economy to acquire new productive capabilities. Following this rationale the Colombo Port City must be developed as a stepping stone to enhancing productivity, upgrading industrialization, and achieving export diversification. 

1.4 The productive capabilities of SEZs lie in how they allow governments to provide all the conditions necessary to attract investment within a limited budget. In their ideal form, SEZs are places that have all the facilities that firms need to thrive. Since each industry needs many complementary (public) assets to succeed, SEZs can play an important role in creating the right conditions for industrial success. This might include suitable land plots, hard infrastructure, and site-specific policies or clearances. Moreover, firms in SEZs can benefit from each other’s proximity – they can be each other’s suppliers and customers – thereby making a strong case for Sri Lanka to utilise SEZs to achieve economic growth.   

1.5 Given the thicket of red tape in Sri Lanka, in order to become truly effective SEZs require a degree of plenipotentiary powers. Following the literal rule of interpretation, plenipotentiary powers can be defined as “someone who is fully authorized to represent a government as a prerogative or having full powers”. The provision of such powers allows SEZs to operate independently and achieve productive targets without having to deal with tedious and time-consuming  processes that hobble businesses in the  rest of the country. This is why SEZs can effectively accelerate economic growth, while also being an incentive for Foreign Direct Investments.  

1.6 Sri Lanka has resorted to the use of plenipotentiary powers as a policy tool in 3 previous legislations. These are the Gal Oya Development Board Act No 51 of 1948, River Valley Development Board No 4 of 1975 and Greater Colombo Economic Commission Act No 4 of 1978. To understand what these plenipotentiary powers are, see Annexure 1. Hence, the use of plenipotentiary powers as seen in the Bill is not new to Sri Lanka. The Greater Colombo Economic Commission Act, which forms the precursor to the current BOI Act, provides the legal framework for these economic zones to act independently and prerogatively to achieve economic outcomes. According to a study by Boyenge (2007), in 1980 the zones accounted for only 8.8 per cent of total industrial exporters, however, by 1991 their share had risen to 44 per cent. By 2007, Export Processing Zones (EPZs) were contributing 38 per cent of the country’s total 9 exports in terms of value. A more recent overview of EPZs in Sri Lanka (Japan Development Institute, 2011) showed that 1,726 projects were in operation in the 12 zones, generating 346,516 employment opportunities. Therefore in our view the Colombo Port City Economic Commission having plenipotentiary powers streamlined towards the achievement of economic goals, satisfies a timely requirement.

2. Tax concessions

2.1 Taxes are the most important source of revenue for the government to fund essential public goods and services. However, in 2020, tax revenue fell to 8.1% of GDP exacerbating Sri Lanka’s already precarious fiscal situation. With a history of fiscal deficits, the compounding effects of debt financing has snowballed into serious concerns regarding debt sustainability. In 2020, central government debt is estimated at 101% of GDP and is expected to worsen in the coming years. 

2.2 The tax concessions as provided for in the Bill can create distortions within the economy while seriously impairing fiscal sustainability. For instance, in the labour market, it could lead to higher attrition rates in enterprises located outside the Port City due to tax concessions to local employees not being offered outside the SEZ. Businesses located within the Port City will also benefit from agglomeration effects of being in the Port City and having access to world class transport systems, utility services, preferential access to the highway and maintenance services. Therefore an investment in the Port City  should yield a much higher return, thus not requiring further fiscal incentives. There is of course a need for the zone to be competitive vis-a-vis other zones but the generous tax incentives being offered over and above the tax concessions already provided for under the Inland Revenue Act No.24 of 2017 will further compromise the progressivity of the tax system and affect competitive neutrality. 

2.3 There are however, instances when fiscal incentives (tax credits, grants etc) may be warranted, for example where private returns are below the cost of capital but social returns (positive externalities) can be generated. However, the existing Inland Revenue Act provides for such incentives- we recommend that the power to grant fiscal incentives be retained within the Ministry of Finance. Hence, we call upon the government to make the necessary amendments to the Bill to establish fiscal accountability under the Ministry of Finance. 

2.4 Research also suggests that the effectiveness of tax incentives in attracting FDI is low. The list of priority factors for investors is highlighted in Annexure 2. Tax incentives are marginally effective in terms of attracting FDI in comparison to other factors.

3. Financial Regulations

3.1 Developing a fully fledged OFC (Offshore Financial Centre) requires the relaxation of  capital controls to permit free movement of capital improving the ability to compete globally. However, given Sri Lanka's current status of debt sustainability, sovereign rating downgrade, and foreign exchange crisis, it may not be the most appropriate time to set up an OFC. Stringent foreign exchange controls in place as of now may not allow the relaxation of capital controls. Hence, it is prudent to delay the setting up of an OFC within the Port City, or risk the entire project failing.

3.2 The success of a financial center depends on the confidence and trust that it evokes in investors and customers. The key to building this trust and confidence is dependent on two factors. First, the governance structure in place, i.e., the laws, rules and regulations governing financial products and services. Second, the way in which the regulatory authority/ies apply and enforce the regulations. Further, these regulations must conform to international best practices set out by institutions such as the Basel Committee on Banking Supervision (BCBS) and Financial Action Taskforce (FATF) recommendations on anti-money laundering and combatting the financing of terrorism and proliferation (AML/CFT), to ensure global acceptance.  Any attempts to circumvent these standards could have adverse impacts on financial institutions operating in the rest of the country as well. There is, however, a case for moving from a rules based financial regulation, as is currently in place, to a more principle based financial regulation. Such a move encourages financial innovation and facilitates the expansion of  financial services in a dynamic global environment. There is also a case for unified regulation of financial services (a single omnibus legislation which has been adopted by other financial centres). The Bill only refers to regulation of banks and capital market institutions. It is silent on whether insurance companies would be allowed to operate within this jurisdiction and who would regulate that sector. It is of vital importance that this issue be addressed if the Port City is to be operated as an OFC.

3.3 According to the draft Bill, licensing (Section 42(4)) and regulating (Section 45) for offshore banking businesses is done by the Commission with the concurrence of the Monetary Board under the Banking Act No.30 of 1988. However, as per the bill the examination of such entities would be undertaken by a “competent authority” appointed by the Port City Commission (Section 49) and the Monetary Board may only call for information and reports from these entities through the Commission (Section 51).  But the Bill is silent on the expertise and experience of those who would be appointed by the Commission to undertake examination of these entities. Our recommendation is that until a separate financial regulatory framework for the OFC is set up in the Port City, and until persons with the necessary capabilities are recruited, the existing regulators must undertake both the regulation and supervision of financial institutions set up within the Port City.  

3.4 We also call upon members of Parliament to make an addition to clause 5, as subsection (k) reading “Uphold laws and regulations on anti-money laundering and terrorism financing” in light of the above mentioned AML/CFT issues.

4. Labour Regulations

4.1 The Colombo Port City expects to operate as a service-oriented SEZ that propels Sri Lanka to be a major trading and services hub within the Indian Ocean. It hopes to attract top-notch IT, financial service firms and types of businesses and economic activity that will be highly innovative. In order for such firms to thrive and grow, a labour environment that accommodates failure, mistakes and high rates of experimentation is crucial. 

4.2 This requires a flexible labour market with low redundancy and restructuring costs that promotes swift adaptability to market changes. Prioritizing labour solutions over capital will result in job creation that will ultimately benefit the country. However, the labour regulations in operation in Sri Lanka does not facilitate the same.

4.3 For instance, the Termination of Employment of Workmen Act (TEWA) was enacted in the early 1970s when the government in power at that time promoted inward-looking economic policies. It regulates the termination of workmen by employers with 15 or more workers employed and applies to only around 15% of the labour force in Sri Lanka. TEWA has been identified to pose two main issues: making dismissal of employees too difficult and expensive. The high severance costs TEWA imposes along with EPF payments for the formal sector are prohibitively expensive for employers. Hence, TEWA is challenged as an impediment to healthy development of the labour market, preventing the private sector from adjusting to the globalized economy. The rigid conditions imposed by TEWA has acted as a catalyst for the creation of a large informal sector that amounts to almost 70% out of total jobs in Sri Lanka. 

4.4 The formal sector offers many benefits, in comparison to the informal sector, that outweigh its costs. They are higher productivity, lower capital costs, increased access to finance, social insurance benefits like health insurance, pensions and most importantly higher pay. Hence, formal jobs need to be encouraged within the Port City by making its compliance standards more flexible. Unemployment is a social problem and its burden and economic costs must be borne by the society in totality instead of the retrenching firms alone. Such costs weaken them and leave less room for them to restructure and expand their firms. Therefore, the option of an Unemployment Insurance Scheme is a better mechanism to provide unemployment benefits funded through monthly contributions similar to the EPF and ETF.

5. Recommendations on Parliamentary oversight and Accountability

5.1 At present, the Bill states that the Commission should submit to the President or Minister in Charge, an annual report setting out the status of operations, income and expenditure of the Commission. Alongside this, it also provides for the audit of accounts of the Commission.

However, as the main parliamentary oversight mechanisms in place to examine the activities of the government bodies responsible for public accounts and public enterprises are the COPA and the COPE, we recommend that the Port City Commission be made accountable to these committees. 

5.2 In relation to the composition of the Commission, it is our recommendation that the Secretary to the Treasury be appointed as an ex-officio to the Commission since this would allow for fiscal accountability.

5.3 We believe that the nationality of the Commissioners should not be prescribed to avoid the exclusion of global talent. However, at the maximum, to only have it restricted to the appointment of a majority of Sri Lankan nationals. We also believe that the Director General of the Commission should be the best executive talent and therefore, should not be restricted to being a Sri Lankan national. 

5.4 We also believe that staggered appointments to the committee would ensure institutional stability, preserve institutional memory and political representation. This process entails the availability of a vacancy every year, allowing the government in power to make an appointment subject to procedures whilst ensuring that there is continuity as well as working across party lines. 

5.5 To be in line with the international governance standards, Advocata also recommends affirmative action to ensure that the Commission mandates a minimum of 1, preferably 2, qualified women to be appointed to the Commission. 

By approaching the Colombo Port City Economic Commission Bill from such an analytical perspective, and with the specific conditions of Sri Lanka in mind, at the minimum, the Advocata Institute recommends the consideration of the reforms outlined above to achieve maximum economic outcomes.

Yours Sincerely,

Signed by,

Murtaza Jafferjee  (Chairman, Advocata Institute)
Dhananath Fernando (Chief Operating officer, Advocata Institute)

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Annexure

Annexure 1 

1. Gal Oya Development Board  Act No 51  of 1948

By way of Plenipotentiary powers the Gal Oya Development Board could: 

Article (5) -  The Board being given  absolute power to appoint officers and servants. 

Article ( 9) - Authority over roads and irrigation 

Article ( 10) - Determine fees and levies over the supply of water. 

Article ( 14) - Establish own departments 

Article (15) - Power over crown land 

Article ( 16) - Power over the acquisition of land. 

Article (21) and Article (22) Power to make laws and bylaws. 

1. River Valley Development Board Act No 4 of 1975 

By way of Plenipotentiary powers the River Valley Development Board could 

• Article (4) - Power over the appointment of  officers and servants

• Article ( 20) - Special powers over the administration of underdeveloped areas. 

• Article (21) - Power to make rules 

• Article ( 22) - Power to make laws 

1. Greater Colombo Economic Commission Act No 4 of 1978 

By way of Plenipotentiary powers the Greater Colombo Economic Commission could 

Article  16 

•  Implement the objectives of the commission

• Acquire, lease or sell land 

• Lay out industrial estates for sale or lease

• To enter into agreements with enterprises 

• Exercise, discharge powers and duties. 

• Carry out general duties 

Article  17 

• (1) Power to enter into agreements with any enterprise in and outside the authority and to grant exemptions from any law referred to in schedule B. 

Article 25 

• (1) Power to authorize any enterprise carrying on the business of banking. 

• (2) Authorize the operation of the banking business. 

Annexure 2

List of factors that are  more important than tax incentives for investors -  study done by the United Nations Industrial Development Organisation (UNIDO) in 2010:

1. Economic stability

2. Political stability

3. Costs of raw materials

4. Local markets

5. Transparency of legal framework

6. Availability of skilled labour

7. Labour costs

8. Quality of life for expatriate staff

9. Availability of local suppliers

10.  Bilateral agreements and treaties. 

Missing the boat again

Originally appeared on The Morning

By Dhananath Fernando

The many wasted opportunities to capitalise on Port City

This is just a funny story I have heard before; not a true one. Once upon a time, a man was caught amidst a flood, and his life was in danger. This man was extremely religious and believed that his God would rescue him from any threat to his life. A boat came to rescue the man, but he refused, saying that his God was going to help him. Then an emergency rescue team arrived, and he rejected them as well, saying: “I don’t need you. My God is coming to rescue me soon.” Flood became very serious and a helicopter arrived, but the man said he didn’t want anyone’s assistance and the same answer was provided.

Unfortunately, the man died in the flood and he met his god after death. At the very first meeting with his God, the man said: “I am very disappointed with you my God. You didn’t rescue me from floods”. God said: “I first sent a boat to rescue you, and then another emergency rescue team, and finally I sent a helicopter as the floods became severe, but you didn’t consider any of my attempts!”

When it comes to our economy, isn’t that the same case for Sri Lankans? Sri Lankans leave the country, claiming we do not have economic opportunities. Some Sri Lankans even risk their lives by attempting to go to Australia and Italy by boat. When Sri Lanka attempts to implement policies where we could navigate towards the same development as some of the countries they aspire to run away to illegally, the same Sri Lankans oppose and protest.

Think about the recent discussions on the Singapore Free Trade Agreement (FTA), the Millenium Challenge Compact (MCC) agreement, East Container Terminal discussion, and now, the Port City public debate.

Instead, many believe working with a foreign nation is a part of a whole conspiracy. We are overwhelmed with the belief that we can become self-sufficient in everything under the sun. We have forgotten that the global context has changed. Global supply chains have changed over the last few decades. We as Sri Lankans have forgotten the power of mankind when we share ideas with each other. Connecting with each other and sharing ideas is sharing and creating wealth.

It is true that working with other countries is not a one-way street; it has to have mutual benefits. The way forward is not to isolate ourselves and attempt to do things on our own, but to connect with the world. That is how small countries like Sri Lanka can succeed.

As of now, Sri Lanka is at the critical juncture of getting the fundamentals right with the Port City Bill, which is now being challenged at the Supreme Court. Of course, constitutionality and the legal aspects have to be considered and cleared before we move forward. What is missing in the discussion is the concept of the “Special Economic Zones (SEZs), and the ability to understand that Port City has to be a special economic zone instead of a real estate project, where we just sell land to investors without creating a business- and market-friendly environment.

“Special Economic Zones” are a concept where a separate and an easy regulatory mechanism is set up in a region to create a business-conducive environment. Businesses can be done easily and people can live conveniently only when markets operate right. We have to establish special economic zones because the rules and regulations in the mainland or other parts are so laid back that doing business or convenient living is difficult.

Take current Sri Lankan regulation as an example: 80% of our land is owned by the Government, where the citizens haven’t been provided property rights. Which investor would invest in a business when the ownership of the property is not secured? According to Minister of Justice Ali Sabry, contract enforcement takes 1,318 days on average, where it is just 164 days in Singapore. The average time to resolve a criminal case is about 10 years, while our business registration takes months. Small and Micro enterprises have tiers of regulatory barriers. Granting a permit for construction takes more than three months or so for accessing electricity. Those are the fundamental reasons why people leave Sri Lanka – because the rules we have set for ourselves are not supporting our aspirations.

What we need to do ideally is to make the rules of the entire country easy for business, and for people to live. Since we haven’t had the political will nor the knowledge to do it, we have to go with second-best solutions. One of the second-best solutions is “Special Economic Zones” such as Port City.

What ultimately decides whether a country and its people are going to prosper or not are the rules that it sets, because our opportunities for investments, doing business, employment, real wages, and quality of life will depend on what we set as rules to govern ourselves. Those rules cannot be excessive, but have to support markets.

While the concept of a “Special Economic Zone” is in the right direction, we should not think that Port City is going to solve all our problems. We can attract investments only if we set an example by allowing market forces to operate. Our immediate term debt repayment challenges, and our regulatory barriers in the mainland, remain as they are, and we have to take a holistic approach on serious economic reforms connecting with the world.

The tax concessions suggested have to be reconsidered, as these would not only further distort our markets by giving just a few politically connected businesses tax benefits, but also a serious burden on our balance sheet when the Government expects to develop infrastructure near Port City, such as the connecting roads to the airport highway and the tunnel connecting Port City and Marine Drive.

We have to be sensitive about the geopolitics coming into play with Port City, and we should not lose our friends internationally. It’s a long-term project, and things change very fast in this era of time.

Like the man who said no to his god’s rescue attempts, we too have missed so many opportunities that could have complemented the Port City project further. If we had implemented the projects with the MCC (after clearing all constitutional matters), it could have been a better attraction to investors. On the MCC project that was developed by local experts, the project on facilitating the proving of land rights could have attracted more investors to Sri Lanka to set up manufacturing plants, and the Port City could have served as the financial service center.

The traffic plan and the infrastructure projects could have added significant value to the entire project. At the same time we could have managed our geopolitics better.

The same goes for the Singapore FTA. We could have provided a strong signal that we are a nation open for business by creating rules that support industry and strengthening trade relations with countries like Singapore. Investors expected to come to the Port City could have tapped into global talent, taking Sri Lanka one step closer towards becoming a global hub for business.

Again with the East Container Terminal, where more Indian investors could have attracted and created a Port City, a truly multicultural, multinational special economic zone. What history teaches us is that we have been provided with so many opportunities, like the man who was provided the chance to save his life from the flood. How we managed and what we did with it is something we have to rethink.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The Port City We Need

Covered in the Daily Mirror, Daily FT, Daily News, The Morning, Lanka Business Online,

By Resident Fellows of the Advocata Institute

Better economic rules, not giveaways should be the focus of the new governance zone

Deng Xiaoping China’s great reform leader, faced a serious problem in the 1970s. Thousands of young Chinese were crossing to Hong Kong risking their lives. Rather than cracking down on the migrants, Deng sought to understand why they were migrating. Clearly the economic opportunities in Hong Kong were greater than in mainland China. Deng was also impressed by the rapid rise of the some asian economies, in particular the modernisation of Singapore.  Singaporeans, like the residents of Hongkong, were majority Chinese by descent and had even less natural resources. How did they achieve something that China couldn't?  

The answer was that these countries had better rules, better incentives, and a better economic governance system. Deng knew he needed to ‘reboot’ China with reforms that allowed markets to coordinate economic activity,  protect private property, and allow for Foreign Direct Investment: radical reforms in communist China at the time. He also knew that implementing these reforms in the entirety of the country would be a nonstarter. Entrenched interests who benefit from the status quo would fight to keep the existing order. To solve this, China demarcated the Shenzhen area as a special governance zone and implemented a new - more open - economic system. This was the start of the Special Economic Zones (SEZs) in China. It was promoted as a laboratory to experiment with market principles to serve “socialism”.  

The results are astounding. In the past forty years Shenzhen has been transformed from a fishing town of less than 30,000 to the third largest city in China with a population of more than 12 million. By 2018, the economy of Shenzhen was $366 billion, four times that of Sri Lanka. 

In some ways, Deng’s problem is now Sri Lanka’s problem. To be sure, emigration out of Sri Lanka is not as severe as it was in 1970s China. Sri Lanka’s business environment is also not as bad as the Chinese system at that time. Yet market based reforms started in 1977 have all but stalled.  

Like China, in “mainland Sri Lanka” too an entrenched elite who benefit from the existing rules lobby to maintain the status quo. The result is that very little progress has been made over the last 15 years on reforms necessary to boost economic growth. After a brief post-war spurt between 2010-2012, economic growth slumped and has remained stagnant.

This is visible in Sri Lanka’s low scores on various rankings that measure the efficiency of the business environment. In the World Bank’s influential Ease of Doing Business report, Sri Lanka is ranked 99 out of 190 jurisdictions. The country has fallen behind regional peers like India, Bhutan and Nepal, having once been an early economic reformer in the region.  

Take the legal system, where Sri Lanka is one of the worst performers in the world. In contract enforcement, the World Bank ranks Sri Lanka 164 out of 190, taking on average nearly four years to enforce a contract. In Singapore, it takes just over five months. It's no wonder that foreign investors prefer easier destinations to deploy their capital. 

This is the logic for the Colombo Port City. Poor governance is a barrier to growth in many developing countries but implementing broad reform for better governance is extremely difficult. The idea is that by building special governance zones, governments could adopt completely new systems that overcome the problems that exist in the rest of the country. These zones would operate like “one stop shops” with pre-approvals and fast-tracked court systems, making doing business easier and hopefully attract foreign investment.  

Special zones are not new in Sri Lanka. Much of Sri Lanka’s export industry resides in the country’s dozen or so Free Trade Zones. Colombo Port City is different by virtue of being the first special zone developed by an international operator.  Unlike the FTZs, the focus is on white collar jobs and financial services instead of manufacturing exports. It also has a broader remit: the proposed legal structure lists seven laws that don't apply to Port City, and a further 14 that could be exempted in the area by the proposed oversight body. The Port City masterplan promises world class living facilities, entertainment, financial services, and business.

Yet Port City’s success, and indeed its importance to the country at large, will only depend on its ability to provide a superior economic governance system. To be a success Port City will need to guarantee greater economic freedoms to its investors, have an efficient legal system with clear and predictable laws. It needs to minimise discretion of the commissioners and have a fair and transparent regulatory structure. These are the critical features that have made several small cities like Hong Kong and Singapore prosper. 

This is the Port City we need. A better governance zone that can attract FDI, skilled people, spread knowhow, and serve as a lab for policy experiments. Get this right, and Port City could create positive spillover effects and expand economic opportunities for Sri Lankans. By learning from it’s successes, we can hope to scale some of the policies in the enclave to the rest of the country.

What of the Port City we will get? In the coming weeks, the country will debate whether the specific provisions in the Port City bill are prudent.  The supreme court is already hearing 19 petitions that challenge its constitutionality.  Like any project of this nature, there are also political and economic risks that need to be considered.  

Managing the geopolitical risk is going to be an enduring challenge in Sri Lanka. Here there are no easy answers, except professional management of our foreign affairs and dealings. Big picture thinking is needed instead of the current win/lose mindset and transactional diplomacy.

Another risk is in the domain of economic distortions. Unlike in Shenzhen which was conveniently located far from the commercial centres at the time, Port City is on the doorstep of Sri Lanka’s capital. After the operation of the Port City, life as a businessperson could be very different depending on which side of the Chaithya Road your business is situated. You may be competing for the same resources but face very different rules and taxes. The latter is a deeper malaise.

Already stretched for revenue to cover even its debt obligations, the Port City may prove to be a leakage point of taxes for the State. Finally,  given its proximity to Colombo, there is a risk of capture of the regulatory framework of the same elite who have secured rents for themselves in the existing system. It’s no accident that successful SEZs tend to be away from the established power centres, such as Shenzhen was to Beijing. 

Only good rules, predictable policies, and oversight can overcome these challenges. A focus on better governance rather than tax breaks and giveaways would help keep the house in order.  

It would be better for the entire country to be governed by better rules and efficient systems that enhance ease of doing business. Given its size and scope, the Port City cannot perform miracles, but we can hope that Port City would be a catalyst in bringing about some of these changes to the country proper.

The project itself is an admission of failure in governance. Even when Sri Lankan leaders know what to do, a combination of backward ideology, political opportunism, vested interests, and lack of state capacity seem to hold back the vital growth oriented reforms. It is these reforms that are needed to expand economic opportunities for all Sri Lankans.  

The Port City can give the country a shortcut to attract foreign investments, provided it focuses on the right thing -- better economic governance.

The authors are resident fellows of the Advocata Institute, a free-market think tank based in Colombo. Learn more about Advocata’s work at www.advocata.org. The authors are grateful to the many useful conversations with the think tank’s advisors whose ideas helped this article.

In the Port City debate, hypocrisy is bipartisan

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

It is hypocritical for a political coalition that demonised the then Government and minorities by vigorously promoting the principle of ‘one country, one law’, to then propose to carve out the Port City development as a geographical area exempt from many of the laws and practices prevalent in the country. Those who sow the wind, reap the whirlwind. Because of this hypocrisy, the Government has great difficulty doing what it knows is the right thing for the country.

It is hypocritical for members of the dominant party in the previous Government (now split) to protest vociferously against the special treatment proposed for investors by the Colombo Port City Economic Commission Bill. They full well know the dysfunctions of the investment environment in Sri Lanka. The then Government was working on a bill on the same lines. There was discussion on placing the financial city within the jurisdiction of the English courts then.

It is not hypocritical for the Bar Association and other interveners to object to the proposal to establish an International Commercial Dispute Resolution Centre and to the associated legal workarounds. But it is wrong and self-serving. Members of the legal profession, more than anyone else, should know how dysfunctional the country’s legal system has become.

At the 47th Annual Convocation of the Bar Association, the Minister of Justice said that the average time to enforce a commercial contract in this country is 1,318 days (3.5 years). It is said to take one year to get a date for an appeal to be fixed for hearing on a criminal matter.

All of us who worked on improving Sri Lanka’s rank in the Ease of Doing Business Indicator know that the legal-system-related factors are a major factor in Sri Lanka being relegated to the back of the class. Poor performance in resolving insolvency and enforcing contracts are major contributors to Sri Lanka being ranked 99th out of 190 countries. On enforcing contracts, we are ranked 164th.

So, the previous Government was right when they considered placing contracts of investors in the Port City under English commercial courts. The experts who crafted the present bill were right in making arbitration by the International Commercial Dispute Resolution Centre mandatory and allowing for a fast-track engagement with the Sri Lankan courts as needed. Commercial arbitration is nothing new in Sri Lanka. To argue that it violates our Constitution is a little farfetched.

But of course, professional associations rarely allow logic and the national interest to come in the way of the financial and related interests of the members. The Sri Lankan legal system is one of the worst in the world, partly because the powerful private interests of the legal professionals are given priority over the interests of litigants and the country. It is not in their interest to admit how broken the system, they profit off, is. The Colombo Port City Economic Commission Bill is an indictment of that system. Lawyers, individually (as a prominent politician/President’s Counsel so vividly demonstrated) and collectively, are likely to oppose it.

The Port City bill is a workaround. It is needed because our systems are broken. President J.R. Jayewardene established the Greater Colombo Economic Commission (predecessor to the Board of Investment) as a workaround solution, by Act No. 4 of 1978 because our systems were a barrier to the attraction of needed foreign investment. We have the Katunayake and Biyagama zones and the various value-added manufacturing industries that are keeping our economy afloat, thanks to that workaround.

The tragedy is that 43 years later we are still doing workarounds. We need these stopgap measures, but we need to give the highest importance to fix all the systems that affect all our citizens, not just the foreign investors. Despite the specific mention of the doing business indicator in the Port City Commission Bill, the indicator is not done for enclaves but for the country as a whole. Improving the key systems across the country is what others are doing. India is now more than 30 places ahead of Sri Lanka, thanks to dedicated task forces. China is ranked 31st, more than 30 positions ahead of India and more than 60 ahead of Sri Lanka. I invite the readers to look at how well our competitor, Viet Nam, is doing.

If we do not improve the ease of doing business for all, we will be overtaken by Pakistan soon. They are taking concerted action to improve performance on the components and are now just nine places behind. Do the work around, but for God’s sake, focus on system improvements throughout. Define threshold levels in the Port City Bill itself when the workarounds can be discontinued, and we can celebrate living in a country where the legal system does not require bypass.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Port City more crucial by the day so don’t delay

Originally appeared on The Morning

By Dhananath Fernando

Debt repayments, human rights issues, credit rating downgrades and pandemic make Port City our big hope.

The company Google maintains the idea of “10X thinking”. What 10X thinking means is that if one is serious about innovation, one would ideally improve things by 10 times, rather than by 10%. While Google believes we have to move at 10 times the speed for real transformation, the Japanese believe in a business philosophy that goes by the name “Kaizen”. The Kaizen theory emphasises that small-scale productivity improvements, if done consistently, with the engagement of employees, will lead to effective transformational change over time.

In hindsight, looking at Sri Lanka’s development pipeline, our own 10X ideas or Kaizens are not something we can be too proud of. We’ve hardly had any 10X ideas, and have had little consistency in our policy. In fact, one could say that the only consistent aspect of our policy is that it is inconsistent.

One of the main 10X ideas for Sri Lanka that this column has extensively discussed is land reform, chiefly through building a digital land registry that could infuse capital into the economy and improve agricultural productivity. The other 10X idea we have on our table is the Colombo Port City, a project by China Harbour Company. 

The reclamation of 269 hectares of land was completed in January 2019. The construction of the water breaker was completed in June the same year. In this backdrop, it has been reported in the media that last week the Cabinet approved the Colombo Port City Economic Bill, which allows the establishment of a special economic zone within Port City.

What is so special about Port City? I am sure most Sri Lankans would say they know nothing much, other than the fact that it is a Chinese investment, and an ambitious project to build a city on the sea. Many view it as an infrastructure project to build a financial city with tall buildings, including hospitals, residential areas, hotels and schools, and many other ancillary services, to make Sri Lanka a financial hub. 

Then the main question we have to ask ourselves is: Why would investors want to come to Port City? The simple reason is that the Port City would act like a special economic zone with special laws and regulations. Therefore, it would be a more convenient place to operate. Secondly, reduced regulations would make it easy to connect with other centres, creating a conducive environment to make profits.

However, people are largely unaware that the new law in force in the Port City actually makes it a project with 10X additions, and gives it an opportunity to become a financial hub in the region. The significance is not in the skyscrapers or other physical infrastructure, but instead lies in its potential to create an easier operating environment with lower regulations.

The next question you may ask is: Why do we need a new law for the Port City? Why can’t it fall under existing Sri Lankan business law? The answer to that is simple: If businesses in Port City come under Sri Lankan law, and under the current jurisdiction and regulatory framework – starting from business registration to resolving a business conflict, or any transaction for that matter – then these businesses would experience the same inconvenient and cumbersome process of doing business that all investors in Sri Lanka presently have to endure.

To attract an investor to Port City, the laws and regulations it comes under should facilitate the creation of speedy business services, and have significant synergies in productivity, thereby significantly lowering business transaction costs. In addition, the laws incorporated will have to be competitive and on par with other competing financial hubs, such as Singapore.

The draft law will be a critical factor that determines the future of this multi-billion dollar project. It has to be competitive with other financial centres in the region if it is to succeed. If it fails to meet these standards, investors have no reason to bring their money, or to move their financial institutes and headquarters to Sri Lanka.

We cannot comment on this law until it is placed before Parliament, but we know for sure that this should have happened far earlier. The Port City project was launched in September 2014, but even after seven years, investors are yet to see this law. This is essential to their investment decisions.

Under the previous Government, it was reported that some attempts were made in drafting the law, but it was not presented to Parliament, and the project was on hold for renegotiation. While the Cabinet clearance of the Colombo Port City Economic Bill could renew hope for the project, we should not delay the process further. At the same time, we have to be absolutely confident that the law has been drafted with the right specifications to meet investor expectations. Because of the current delay in producing the legal draft to Parliament and getting it approved, a quick sale on land in Port City has been affected. Just by the sale of land, or 99-year lease agreements, the Government expects a minimum of $ 1.8 billion in revenue, and $ 3.4 billion for the China Harbour Company. However, in making an investment calculation, we look at not only the amount of money we invest, but also the time spent.

According to State Minister of Money, Capital Markets and State Enterprise Reforms Ajith Nivaard Cabraal, out of $ 32 billion expected in foriegn currency inflows to the country, $ 15 billion in exports and about $ 7-8 billion in remittances has been forecasted. More than $ 3 billion is expected in total only for this year in the form of Foreign Direct Investment, and the main investments are expected through the Port City project. Therefore, the development of the Port City is a significant source of income for the country.

With mounting debt repayments for the next three to four years, and now with the UN Human Rights Council’s human rights-related issues, we should understand the importance of the collective effort of maintaining Sri Lanka’s image as a credible global partner. In this backdrop, placing all our investment expectations into the sole basket of the Port City is going to prove risky.

Let’s think through this in the shoes of an investor. Imagine you have about $ 1 billion and you’re considering investing in the Port City project. But to date, you do not know the law that will be enforced, while concerns have been raised by the UNHRC. In addition, the country’s credit rating has been downgraded by rating agencies, particularly in the face of the pandemic. Would you, as an investor, confidently bring your $ 1 billion to Sri Lanka – or would you delay the investment and consider markets such as Singapore, Malaysia, and Vietnam?

On the other hand, the Government has to be very careful of the potential opposition from anti-competition lobby groups who will be affected by the Port City. A successful Port City project means the presence of international law firms, IT professionals, health care workers, and education experts; opening up competition with the best of talent and skill at the global level. Sri Lanka’s experience in the recent past has not been very positive when it comes to opening up to competition. Our strategy has always been to look inwards, rather than outwards.

Therefore, the Government has the twin challenge of first getting the legal draft right and getting it out fast; and providing investors with confidence and addressing investor expectations with a collective effort of easing businesses in Sri Lanka. Secondly, the Government will have to manage the resistance that is likely to pop up from lobby groups for changes in the legal draft, blocking international competition in certain sectors. 

If we are serious about a transformed Sri Lanka, we need a combination of Kaizens and 10X ideas; meaning we have to consistently implement 10X ideas for a significant period of time. But only time will tell what we will do.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The Colombo Port City: dealing with unsolicited proposals

By Ravi Ratnasabapathy

The Colombo Port City has generated a storm of criticism, the latest from the Friday Forum, which has called for systematic reviews of large state infrastructure projects. The Chinese Government is now reportedly weighing in on the side of the developer, The China Harbour Engineering Corporation.

Unsolicited proposals such as the Port City are controversial. How should a government deal with them? What should be done with the Port City project itself?

Public procurement, especially for infrastructure is a complex process. The general procedure is that a project, once identified and screened by the relevant line Ministry (in regard to the economic and financial viability), should be submitted to the Ministry of Finance for preliminary clearance. If Finance Ministry Clearance is obtained it must be submitted to the Cabinet for approval in principle. If this is obtained, the Finance Ministry will appoint a Project Committee to develop a detailed Request for Proposal (RFP).

The RFP is very important, since it is the foundation of the project. It spells out the project needs clearly and sets the framework within which competing bids can be evaluated. The RFP would include the following:

1. Criteria of assessment of technical and financial viability of the project.

2.  Details of specifications

3. Models of relevant Agreements as decided on a case by case basis.

4. Environmental data and information.

5. Any other relevant information.

An unsolicited proposal bypasses this process of vetting, which means a bad project can get through. Therefore, traditionally unsolicited proposals were viewed with disfavour. The United Kingdom for example does not permit unsolicited projects.

Many of the world’s most controversial private infrastructure projects originated as unsolicited proposals, such as the Dabhol Power Plant in India and many independent power generation plants in Indonesia. In some countries private companies submitting unsolicited proposals often did so in an attempt to avoid a competitive process to determine the project developer. If successful, they were then able to finalise project details with the government through exclusive negotiations behind closed doors, which is also the case in Sri Lanka.

Should Sri Lanka bar unsolicited proposals?

There are positive aspects of unsolicited proposals. Sometimes such proposals are based on innovative ideas and it is useful to obtain external input in conceptualising, designing, and developing projects.

The difficulty is in getting the right balance between obtaining innovative project ideas without losing the transparency and efficiency of a competitive tender process.

Therefore a proper written policy is essential. At a minimum, the principle should be that all unsolicited proposals are channeled into a transparent, competitive process where challengers have a fair chance of winning the tender.  

There are two main approaches that have been developed to deal with unsolicited proposals. These are:

1. In a formal bidding process, a predetermined bonus point is awarded to the original proponent of the project. Chile and the Republic of Korea have such a system. Problems may arise with definition of appropriate bonuses which is subjective and potentially open to manipulation.

2. The Swiss challenge system in which other parties are invited to make better offers than the original proponent within a specified time period. If a better offer is received, the original proponent has the right to counter match any such better offer. This system is practiced in the Philippines, South Africa and Gujarat in India. This is the preferred option since it does not require further analysis or subjective decision making.

Either of the above approaches can work with proposals that are still on the drawing board. How do we deal with a project where work has already commenced such as the Colombo Port City where the developer has already spent a substantial amount of funds? It cannot simply be cancelled, despite various contradictory claims emanating from the sections of the Government, nor can be easily be opened to tender.

A Developers fee approach – where the project is opened to tender but development costs to date are reimbursed, either by the government or the winning bidder, could be a solution. There will be difficulties in assessing the costs and it is not certain whether either the Government or another developer would be willing to take it on, but at least opening up for tender will give us an idea of the alternatives available.

The project will initially need to be subjected to an independent technical review to ensure that concerns in areas such as water supply, sewage disposal and power have been addressed. The city of Colombo is already overloaded in all these respects, adding the strain of the port city to the crumbling infrastructure of the capital could take it to bursting point.

The environmental issues are another can of worms, from the supply to sand, to the damage to corals, impact on marine life to altering of tidal patterns that may cause coastal erosion elsewhere. A full independent review is needed.

If both areas of concern can be addressed then it may proceed, after being opened to tender as discussed above.  If the project cannot proceed there is another headache as to what to do with the partially built site-a separate study on the best alternate use is needed.

What is tragic is that all these problems could have been avoided. There were processes and institutions in place to ensure proper procurement, but they were abolished in 2007.

The National Procurement Agency (NPA) of Sri Lanka provided the general framework for handling unsolicited proposals. Written guidelines on unsolicited proposals were in place. All unsolicited proposals were to be dealt with through the Swiss Challenge system.

 Set up in 2004 by then president Chandrika Kumaratunga the NPA was shut down in December 2007. All the more reason that the proposals in hand should be channeled into a transparent, competitive process.