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.

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.