Sri Lanka debate: Sri Lanka seeks to be the centre of Asia
The island’s geographical position has always given it a natural advantage as a trading centre. Now the country is keen to boost its private sector and draw in foreign investment.
• Government is forming a public-private partnerships unit aimed at channelling more capital into infrastructure
• The state aims to privatize non-strategic assets, turning the private sector into the main engine of growth
• Sri Lanka is a great launchpad to India, and is finalizing or extending free trade agreements with China, Singapore and India
• Tax incentives based on investment relief are drawing more capital into the region’s cleanest and most liveable country
• Key port and infrastructure projects are transforming Sri Lanka into an Indian Ocean power
• Sri Lanka is promoting itself as a destination for fund managers, with the aim of marketing Colombo as a regional securities trading hub
Elliot Wilson, Euromoney Minister, you have said that the key to permanently high levels of growth is to build on strong foundations. With growth set to top 6% in 2017, do you feel you have achieved what you set out to do, and what would you like to accomplish in the year ahead?
RK, MoF We are improving financial discipline, growth is on the rise and we are tackling the debt we incurred in recent years and bringing our finances into a more healthy state of affairs. That allows us to show the market how professional we are. We are forming regulations to promote public-private partnerships [PPPs] and, compared to the growth figures we faced in 2015 and 2016, we are extremely happy. In 2015, government revenues comprised 10% of GDP, which rose to 13.8% in 2016 and is on track to hit 15.1% this year. It’s a positive picture compared to the turbulence we see elsewhere in the region.
Euromoney And in terms of long-term growth?
RK, MoF The wider market is certainly facing turbulence, stemming from the likes of the new US president. And we’re looking at rising interest rates in the US, which is causing some outflow of capital from emerging markets, which we are all grappling with, but feel we are in a very good place and making progress.
Euromoney You spoke before about the importance of a robust and stable currency. Does the rupee now have the stability and strength you want?
RK, MoF Our fiscal policy is definitely paying off; our monetary policy is still a work in progress. We are looking to privatize all our non-strategic assets in the years ahead, so on that basis we are moving toward our key targets.
Euromoney What have been Sri Lanka’s greatest recent economic achievements and what can be done to encourage more investment in and by the private sector?
DA, BISL This government has clearly stated it will focus on encouraging the private sector and on creating an environment where local and foreign investors feel they are part of an environment conducive to investments. From a foreign direct investment [FDI] standpoint, we have seen serious inquiries rise as we move away from an incentives-driven growth model based on tax holidays. If you invest more in capital and technology, Sri Lanka is an increasingly great place to invest. We feel 2017 will be a strong year and 2018 stronger still. From an FDI standpoint I am optimistic about the positive momentum.
KDR, CBSL To achieve our full growth potential of 7% to 8% growth in the medium to long term, we definitely need to encourage far more overall investment. Investment as a share of GDP is around 30% at present; that needs to increase to around 35%. At the same time, as well as rising investment, we need to improve productivity, so the government is improving the country’s soft infrastructure, including skills development.
MP, HSBC One of the keys to growth is trade. Sri Lanka occupies a strategic maritime location and is fortunate to have not one but three viable port facilities. Half of the world’s merchant fleet capacity passes just to the south of our shores each year. The country is in a good place right now, with strong international relationships with key trading partners, such as the US and the EU, and ongoing discussions on free trade agreements [FTAs] with the likes of Singapore, Bangladesh, Thailand and Turkey.
AW, CCC One of the key things in terms of how investors perceive Sri Lanka is how we are rebalancing our growth model. Before, we had a very debt-driven and public infrastructure-heavy growth model that depended on consumption in sectors that don’t work in a small economy of 20 million people. Under this government, we have made a timely shift toward more FDI, more international trade and more private sector-driven growth. We are boosting investment in infrastructure by bringing private capital into major new projects, with the government launching a specialist PPP unit.
NM, WRMPP We spent last year figuring out how to help the economy to flourish. Large structural pieces are being configured and put in place, from new business zones to the introduction of a mass transit system in Colombo. Five years from now, you will find a fundamentally different capital city. We are electrifying our rail system, building new metro lines, expanding our main port and airport – all big changes that will alter how we all live and work. We do need to deal with our housing problem, and the new PPP unit will help us channel fresh private capital into much needed infrastructure projects.
RK, MoF We are transforming the private sector into the main domestic engine of growth and transforming government into a regulator. In the past, government tried to run the business sector, but those times are gone. We need to show the world that Sri Lanka is on the move. We had our problems, self-made as well as imported and beyond our control, but we are navigating ourselves successfully through these choppy waters and coming out the other side.
NM, WRMPP There is also one important thing you cannot neglect: all the background work that has gone on in terms of reconciliation and maintaining peace after 30 years of war. A lot of time and energy has been expended by government on creating solid foundations that ensure we never again revert to conflict.
Political and social stability, as well as the creation of a PPP division, gives investors confidence that 20 or 30 years from now, a toll road or power plant is still up and running and providing profit to investors.
RK, MoF In the 18 months or so since taking office, you can see the confidence that has been created as a result of the main political parties working together. International investors are much more comfortable deploying their capital there.
DA, BISL On a recent visit to Thailand, I was amazed at the level of interest on investing in Sri Lanka. Investors are keen for us to provide land and basic infrastructure and for them to bring the capital and the technology. Investors are now asking themselves: ‘How can we not be in Sri Lanka’. We are working with two Thai industrial zone developers who want to set up large joint ventures in Sri Lanka through the BOI [Board of Investment]. We also need to be opportunistic.
There are positives coming out of the election of the new US president. The CEO of a Sri Lankan apparel multinational told me that before the US election, some of their partners were putting investments on hold as they were looking at TPP [Trans Pacific Partnership] countries such as Vietnam to access the US market. But post-election, his phone was ringing off the hook as they were looking to invest in Sri Lanka. And don’t forget, we will have duty-free access to the EU with the GSP [Generalised Scheme of Preferences] Plus programme too.
RK, MoF Market access is vital but so too is geographic location. Companies are relocating their production bases here. Many see us as a shining example of pro-business policy, which is helping create a better business environment, something that global corporates and investors can see.
We hosted a major investor conference last year, in which we ran a survey asking participants what factors compelled them to invest in Sri Lanka. In almost every case the answer was that they were drawn to our place on the map. They saw the benefits of using Sri Lanka as a launch pad, say, for India, or due to our forthcoming FTAs [free trade agreements]. And more types of investors are looking to put their money to work here. The range of industries in which we specialize, once narrow, is widening.
Euromoney Could you offer an example?
AW, CCC A big automaker from Japan said they were keen to talk about a portfolio of their companies investing here. In the past, Sri Lanka wasn’t able to provide a definitive answer to the question: ‘What does Sri Lanka specifically offer?’ We can point to rebalanced foreign policy, new FTAs, an improving infrastructure, a more business-friendly environment. Investors are getting the picture.
NM, WRMPP We’ve had a great strategic location for 2,000 years – but how do you take advantage of that? One key is FTAs and another is what happens at the border. So, how smooth are trade transactions and how do you make Colombo’s port as efficient as those in Dubai and Singapore? We are working on improving connectivity between the port and the highway network and being able to allocate land to consolidate logistics operations. The last missing piece of the highway, linking the airport to Colombo to the port, an eight kilometre stretch of road, will be completed within three years. Then you will have the airport and port within 25 minutes’ driving distance of each other.
One of the reasons we have folks coming and talking to us is that Sri Lanka is hands down the best place to live in South Asia. If we are successful in completing some of the big planned infrastructure projects, it will really improve the city’s liveability factor.
RK, MoF With the southern expressway to the new port of Hambanotota, you have seamless connectivity in getting from A to B, so while we have Indian production coming into Colombo’s port, there is also plenty of Chinese and Japanese trade coming into Hambanotota and Trincomalee.
The International Financial City being built in Colombo will be crucial in enabling us to showcase our credentials and attracting capital that would otherwise have been invested in Dubai or Singapore. Many people who live in Mumbai like to relocate here, and we pride ourselves on that. Exchange controls are being abolished and we are handing out extended visas, two of the ways we are attracting fresh capital to our shores.
Euromoney Liveability isn’t always mentioned when we talk about attracting long-term capital, but it is vital. What makes Sri Lanka liveable?
RK, MoF As part of the Commonwealth, we have inherited a financial and legal system that is acceptable worldwide. We have an excellent level of spoken and written English, plus Sri Lankans are, by their very nature, friendly. We are building a clean society and have made a meaningful start at eradicating corruption. These things help to attract more capital. You don’t need to have 25%, 30% of a project’s capital in hand before starting a project. The big concerns that people had about investing here over the last decade are no longer there.
Euromoney Are you seeing rising wealth translating into more companies wanting to list on the Colombo Stock Exchange?
VK, CSE We are shifting our economic model so it is geared toward creating exports, boosting trade and generating more private-sector investment and growth. Our macroeconomic setup isn’t perfect – currency instability remains a problem. From a capital markets point of view, we want more listings to take place on the Colombo Stock Exchange. In the long term I’d like to see more state-owned enterprises being listed on the bourse, which will encourage more fund managers to come here. The big local family-run firms need to list too.
RK, MoF The problem with our private sector is they still want the government to do their job. I must be honest here. The private sector wants to be described as the country’s key income generator, but they don’t believe or realize it yet. They want free fuel and oil to be handed to them. I know the challenges that still exist, the bottlenecks that have been, but we want and need big Sri Lankan firms to become flag carriers for the country. We need a unified and strong economy, and well-run and purposeful corporate leaders.
Euromoney Which industries will be key growth drivers over the years to come?
RK, MoF Tourism is a sector that is set to enjoy a rebirth, with SriLankan Airlines set to be privatized in order to become a genuinely powerful national carrier. In future, Sri Lanka will become a hubbing point between China and South Africa, and Australia and India. Sri Lanka will become a natural stopover destination for passengers flying between, say, Australia and Europe, as we are right in the middle of that route. These are great selling tools that can be used in the future.
Finally, the financial sector can really accelerate over the coming years, whether that means the expansion of the insurance and reinsurance sectors, or in terms of an expanding banking sector, or in terms of new listings taking place here. We need more bank consolidation, with our main lenders emerging with stronger and healthier balance sheets.
Euromoney You implemented a series of key tax cuts in last year’s budgets. How did they work out? What is your current thinking on tax relief as a tool to encourage more inward investment?
RK, MoF We looked at tax holidays but past evidence suggests it doesn’t attract new investment. We want to attract capital and the best way to do that is to offer tax incentives based on investment relief: invest here and you get it back later. It’s a better approach than offering 20-year tax holidays. Laggard economic regions like the north of the country have been given a 200% investment allowance – it’s an area of the country that really needs to be developed and encouraged. When you really look at giving tax holidays, it is not a convincing selling point.
KDR, CBSL In order to maintain a sustained high rate of quality economic growth in the medium term, we need strong governmental institutions. The state has taken major steps toward the establishment of independent commissions spanning from the police to public services. This raises the transparency of policymaking and boosts confidence in government policy.
Another major development is SOE policy. We have a clear government policy now, which is that operations of non-strategic public enterprises will be improved with private sector participation; PPPs will be rolled out and strategic public enterprises will be run in a far better and commercially viable manner, reducing the financial burden on government.
Euromoney What has been your impression of Sri Lanka, Mark? You head a bank that has been here for 125 years, but you have a fresh set of eyes, having arrived six months ago.
MP, HSBC It is difficult not to be optimistic about Sri Lanka over the long term. Sri Lanka has a lot to offer. The country is blessed with natural beauty, and tourism has seen a rapid increase since 2009, with 2 million arrivals in 2016 and a plan to grow that to 4 million by 2020. Significant infrastructure projects are already under way and the finance minister referred to the privatization of the national airline, and hopefully new routes connecting Colombo directly to key cities in Europe will materialize rather than having to connect via the Middle East.
NM, WRMPP Around 30% of India’s cargo is transshipped through Colombo, and while Sri Lanka makes up just 0.25% of the world’s population, 12% of container shipping tonnage calls at Colombo’s port, according to McKinsey.
VK, CSE And that is because of our place on the map. One of the great advantages we have is our location, which is right in the heart of several major shipping lanes.
AW, CCC Key developments in terms of boosting trade include the South Asia Gateway Terminal, the Chinese-owned CIC Terminal that can accommodate mega-ships, and the new East Container Terminal that is coming up. These major projects have cemented our position as a serious commercial and business hub.
DA, BISL For the first time, countries are competing to put their capital to work here. Sri Lanka now allows local non-strategic firms to be bought by foreign investors. This is important, as some foreign investors like to buy an existing bricks-and-mortar company before they make green-field FDI projects.
Existing investors are expanding their operations. Shangri-La Hotels and Resorts, which has projects in Colombo and Hambantota, is planning a third project, pushing total investment to over $1 billion.
Discerning investors see Sri Lanka as a slice of southeast Asia in south Asia. It’s less chaotic, with cleaner streets. Many of the negatives associated with south Asia aren’t here. Diplomats always ask for extensions – they don’t want to leave. The fact that Sri Lanka is a highly liveable, peaceful and friendly place helps us immensely when pitching to CEOs and expatriates.
MP, HSBC The president has made it clear that reducing bribery and corruption is a key ambition for the government, and this is a vital issue for investors. Sri Lanka’s FDI inflows have historically been modest, given the size of the economy, with inflows rarely exceeding 2% of GDP. There have been several factors in the past that have not helped, such as red tape, limits on land ownership and poor infrastructure, but the government is actively looking to address these areas, and we should see material improvements in FDI inflows in the coming years. Also a PPP unit has been established, and there will be many tenders for new projects in the next couple of years as the country embarks on several ambitious projects.
Euromoney Is Sri Lanka unusual in having so many free-trade agreements in place, but in also being focused on bigger pan-regional trade deals?
AW, CCC Actually Sri Lanka is unusual in not having many. For the past 15 years, Sri Lanka had a freeze on PPPs, inward FDI was low, exports declined and it was almost like we de-globalized, being more protectionist. That period is over, with new trade deals being signed or planned or expanded with China, India and Singapore. But we have much still to do: many of these FTAs are first-generation trade deals, and the world is moving toward far more comprehensive deals and a greater focus on trade facilitation. And while we are building strong trade links, aided by our position on east-west trade routes, we should also be trying to redefine ourselves as an ‘Indian Ocean’ economy.
KDR, CBSL In the 1980s, our total trade volume as a share of GDP was around 70%, a number that has since fallen to around 35%, so something clearly went wrong. Our share of trade with the outside world fell just as most countries were seeing their trade numbers soar. The 30-year conflict didn’t help, but peace is here now and we need to boost trade with other countries.
VK, CSE Another benefit we have is our cordial relations with all regional nations. No other nation has healthy relations with every other sovereign state in south Asia, so Sri Lanka is the obvious place to hold regional summits and conferences.
NM, WRMPP We are the only country in south Asia where you can trade with every other nation in south Asia without preconditions.
Euromoney What needs to be done in the next few years to transform Sri Lanka’s potential into reality?
KDR, CBSL The economy has to grow and the right policies need to be set in place to realize the maximum possible rate of growth. That is being done, but we won’t begin to see the results until late 2017 or 2018.
Euromoney What challenges do you face in terms of convincing investors to come here?
DA, BISL It’s a very competitive global environment. We all compete for the same investment dollars, so we need to be better than the competition. We position ourselves as the ideal place to invest in south Asia. If an investor has an investment-related problem or bottleneck, we promise it will be resolved fast. There are high-powered committees appointed by the prime minister that look into new investment approvals and facilitation, and any outstanding issue will be addressed with the assistance of government agencies.
VK, CSE Capital markets have a huge role to play in the development of the country. The challenge is transforming our capital markets so that there is enough liquidity and depth to serve the country. We are going to New Zealand and Australia in a few weeks to promote Sri Lanka as a destination for fund managers. Our aim is to market Colombo as a regional securities trading hub. We expect Maldivian firms to start listing on the main board soon, trading in US dollars.
NM, WRMPP The main challenges are improving institutions, getting the right people in the right places and ensuring public services are run more efficiently. We have a very large public sector – it’s too large really. We need key institutions like the Board of Investment, the Urban Development Authority and the Port Authority to be run leaner and more efficiently.
MP, HSBC Over the years, we have exported a significant amount of Sri Lankan talent to other parts of HSBC. Sri Lanka has so much talent and ability, but they leave the country and rise to senior levels, so even if they want to come back, the kind of pay grades and positions they would demand and be great for are in limited supply.
NM, WRMPP That’s true even when it comes to technical positions. We are trying to build a metro rail system in Colombo, so we are looking for Sri Lankans who have built metros around the world. And the pickings are rich; there are senior Sri Lankan engineers helping to run metros in London, New York, Dubai, Istanbul and Hong Kong. But the question is how we get this army of talented people to come home.
DA, BISL Sri Lanka has highly skilled and adaptable human resources, as well as the highest literacy rate in south Asia. We have the second-largest group of UK-qualified chartered accountants outside Britain. Where there are gaps, such as in securing manual labour for large construction projects, the BOI secures visas for foreign workers. We are in the early stages of development as a middle-income country, but we are building foundations to become a higher-income country with advanced industries and services, in part using our strategic location.
Euromoney Is the brain drain, which has been going on for decades, now being reversed?
NM, WRMPP We have a couple of senior engineers with whom we are in talks, and we believe a few top engineers will come and join Megapolis. On the public sector side, you begin to see some more talent coming back to Sri Lanka.
AW, CCC Some people want to return – they like the idea of getting a job that expands their role, gives them more power and the chance to really build something. Plus they have emotional and family ties here.
Euromoney The island’s infrastructure is far better than it was, and though gaps still exist, you’re working on them. How important are the likes of the Western Region Megapolis project to Sri Lanka’s future?
NM, WRMPP Megapolis is all about creating a framework that allows Sri Lanka’s economy to evolve. Public transport use in south Asia, while high, is on a downward trend, in part because the quality of buses and trains hasn’t kept pace with wages. Much emphasis is placed on building a rapid transit system, introducing electrification and modernizing the bus system.
We have an 80% home-ownership rate, the highest in the region, but a key challenge is to give more people affordable and high-quality housing within a reasonable distance of the main centres of business. Manufacturing is scattered across the western province, making it hard to impose environmental regulations and making logistics expensive, so we are consolidating everything into two industrial zones, which firms will gravitate to.
NM, WRMPP We have the broad structural stuff in place. The southern and central expressways are being joined up. The broader railway system we need to work out, but the urban light rail system is planned and funded and on track.
DA, BISL Channelling more private-sector capital into foreign and local tourism, IT, knowledge services, infrastructure, manufacturing and logistics projects is key. There are a lot of countries competing for the same investment pie. The good news is Sri Lankan firms are very good in specific areas, being among the world’s most advanced apparel designers and manufacturers. One of the world’s largest high-end sports shoe manufacturers built a state-of-the-art facility right here, because this is a culture that respects patents and trade secrets.
Sri Lanka is a 100% safe and secure place to do business in. I invite anyone thinking of investing in south Asia or southeast Asia to visit Sri Lanka and experience our conducive business environment, including a pro-business government, and highly capable and friendly people at the crossroads of Asia.
AW, CCC We have one or two years to get some really serious reforms completed. That will convince investors that Sri Lanka is a great place to put their money to work – and will differentiate our country from the likes of India and Bangladesh. No one expects big projects like Megapolis to be completed by 2020, but they are expecting clarity around new tax policies, around new reforms, on the pace of development of infrastructure. So if we get some of the big things done, it will send a big message out to investors.
KDR, CBSL The key to the future is maintaining economic stability. Our historically high fiscal deficit has been a brake on macroeconomic strength, but we’re dealing with that. The government is committed to maintaining fiscal consolidation, and monetary policy is geared to maintaining inflation in single digits.