Colombo Telegraph

On Investment Promotion & Protection Agreements

By Mangala Samaraweera

Mangala Samaraweera -Minister of External Affairs

This government was elected on a mandate to create one million jobs within five years by increasing investment and boosting exports.

It is now the responsibility of the government and this House to make that vision a reality. The Prime Minister’s Economic Policy Statement delivered here on November 5th last year, as promised, outlined more detailed plans to boost investments, exports and growth so that Sri Lanka could meet this target by 2020. He said that:

“In order to achieve these results, we have to encourage foreign investment and investment by individuals. We lag behind the other countries in the region when it comes to meeting investor requirements.”

This echoes President Maithripala Sirisena’s election manifesto which says on page 20

“I will prepare the Sri Lankan economy….by diversification of investment and non-reliance on investments from a single country.”

Achieving this vision for job creation, raising standards of living and reduced dependency on single countries is not an easy task.

First, the previous government had left the economy in a state of crisis. The number of unemployed Sri Lankans basically remained the same between 2009 and 2014. There was no investment – FDI was at war time levels. Exports fell to 16.7 percent of GDP from 33.3 percent in 2000. The growth we had, according to the previous government’s cooked up statistics, was fueled by unsustainable and poorly negotiated borrowing.

Second, we are now heading into a period of global instability and economic uncertainty. George Soros, one of the most farsighted investors in the world, speaking at the Economic Forum in Colombo, warned that the world could be on the verge of another serious economic crisis. So investors are increasingly reconsidering expansion abroad – especially in frontier markets like Sri Lanka. So we will have to stand out – we will have to compete harder and smarter than the others.

So the question for the government is, in such a difficult domestic and international climate, how do we attract investment, generate jobs and growth while also ensuring that we reduce our dependency and risk? How do we do this when governments across the emerging world are asking the same questions and taking concerted action to answer those questions?

With over-borrowing and low tax revenue there is little leeway for government spending to generate jobs and growth. Already 1 in 3 jobs in the country are directly provided by the public sector. As a middle income country, the prospects for securing further aid are also minimal.

Therefore, the only choice available to Sri Lanka is securing FDI and enabling private sector led growth. As the experience of many countries, especially our East Asian neighbors shows, FDI is the common feature of every major development success story – from capitalist Hong Kong to communist China and every stripe of governance system in between. And as a result, investors are the key to moving from a low productivity poor plantation economy to a high productivity upper-middle income manufacturing and services economy.

Investors building factories, opening hotels and bringing in new technology, opening up access to markets abroad, improves our productivity and Sri Lanka’s competitiveness. They are the only way we can deliver the jobs and economic development that the people of our country need.
In the last year we have taken concerted and consistent steps to secure investment. We have re-established the independence of the judiciary and the rule of law; we have restored relations with many key economies including the US, EU and India – which are vital trade and investment partners. For example, just the day before yesterday, Mr. Speaker, the EU Ambassador to Sri Lanka said that Sri Lanka was on track to regaining GSP+, perhaps even in a few months. This was reiterated by the EU’s Deputy Head of GSP who said, “I am confident that Sri Lanka will receive the scheme again.”

But, Mr. Speaker, as you know, regaining investors’ confidence in Sri Lanka after the wasted and corrupt last five years will not be an easy task. We must remember that for every reform we initiate, other emerging economies are completing ten.

Therefore, one quick and important way of demonstrating our good faith and signaling that Sri Lanka is open for business is by signing investment promotion and protection agreements. Signing these agreements helps ensure that there is a transparent and level playing field for all investors. There is nothing to fear from these agreements: all they do is protect investors from expropriation, ensure fair compensation and ensure that companies can repatriate their profits.

Let us look at the effect of the investment agreements that were signed in the past. Between 1970 and 1976 Sri Lanka didn’t secure a single cent in FDI, but with broader economic reforms – including the signing of such investment promotion agreements – in the five years between 1979 and 1984, Sri Lanka obtained nearly 250 million dollars in FDI. Let me illustrate this with an example, after ratifying an investment agreement with Australia investment more than doubled in the three years after the ratification when compared to the three years before the agreement was ratified.

This is why when these agreements come up for renewal every 10 years, no one has ever made an issue about renewal as they only brought benefits.

In fact, a study of investment agreements around the world shows that Sir Lanka is lagging and is thus at a disadvantage when competing for investment. There are around 3000 such investment promotion and protection agreements in effect around the world. China, according to UNCTAD, has 138 such agreements. India has signed 97. The UAE has 61, Singapore has 71 and Vietnam has signed 81. Until the House passed the 12 agreement in Parliament in December, Sri Lanka only had 28 investment agreements in effect. But, we are still behind: we need to remember that countries like Vietnam and India are twice as far ahead of us.

To be clear, the problem is not that Sri Lanka is behind on the rankings, the problem is that being an uncompetitive investment destination has a direct effect on the number of jobs available to our citizens, the quality of their jobs and their income levels. These agreements are just one tool that the government is using to bring those jobs and that growth to Sri Lanka.
Before winding up my speech I would like to briefly outline three other benefits to the people from the government’s decisions.

First, these agreements are not one sided – investor protection cuts both ways. They also cover investments by Sri Lankan companies abroad – which amount to a total stock of over 600 million US dollars. Ratifying these 12 agreements means that Sri Lankan investors who own apparel factories in India, hydropower plants in Uganda and plantations in Indonesia will have greater protection from expropriation and unfair business practices in those countries.

Second, these agreement will help us secure accesses to investment from some of the fastest growing markets. Mr. Speaker notice that Sri Lanka has had investment agreements with the US, UK and Germany for decades. But this government has ratified agreements that will help secure investments from rapidly growing China and India as well, which as emerging as investment super-powers, while also building up prospects for investments from other friendly countries like Pakistan, Malaysia and Thailand. Obtaining diverse sources of FDI is also important for reducing our dependence on apparel and tea which account for over half the value of our exports.

Third, we need international competition to create world class companies. Look at our companies that are truly globally competitive: our apparel firms, our IT firms, our hotel management companies, even our banks. They are all in sectors that are open to investment from abroad – so they learn, adapt and compete. By contrast, wherever we have closed the economy inefficiency and lethargy have set in.

As Sri Lanka expands it ties with countries, investors and organizations around the world, the Foreign Ministry will have to both improve the quantity and quality of its work. When this government came into power, both quantity and quality were in a state of crisis.

The Foreign Ministry had over 100 officers missing from its 264 cadre, that is forty percent of the staff it needed to function were not hired. The Foreign Ministry exam was not held regularly: most foreign ministries have intakes every year which was also our practice in the past, but in the last ten years there were only two intakes until this government was elected. Within six months of office, we recruited 25 new officers on the basis of open competitive examination.

But even the approved cadre is insufficient. We have 67 missions abroad, which means that even if we have no one at the Foreign Ministry that is just four officers per embassy. We currently have just over 70 officers at the Republic Building in Colombo which means that for every officer in Colombo we have three in missions. This is far from best practice: for example Singapore has an equal number of officers abroad and at home. To summarize, the Foreign Service cadre isn’t large enough and it is still only two-third full.

On the quality side, we have made three main changes. First, we removed all the unqualified and corrupt political appointees of the previous government – people who used embassies for tea trading and gun running. We replaced many of them with officers from the Foreign Service – the ratio of foreign service heads of mission doubled within a single year from a third to two-third. Third, because of the lack of qualified officers of the appropriate grade, we appointed business people, academics and other eminent and qualified persons to be Heads of Missions.

In the longer term, we are restructuring the foreign ministry to ensure that our resources are developed, deployed and managed as efficiently as possible. This is why we are closing down missions where there is no clear rationale for existence.

We are also studying the Foreign Ministries of other countries to transform our foreign ministry into a globally competitive service. In fact, a team just returned from studying the Singaporean Foreign Ministry, and based on their recommendations we are about to introduce a scheme for non-resident ambassadors to increase representation while cutting costs; a human resources division to ensure that members of the Foreign Service are selected rigorously, trained regularly and rewarded for results.

Perhaps most importantly, we are putting in place the necessary checks, balances and controls to ensure that the service is accountable. We will soon roll out a scheme of regular inspections at our missions abroad that will not only audit financial matters but will also ensure that all aspects of a missions operations – from building maintenance to customer service – are all in order. Each mission will also be given annual targets for their political, economic and consular activities and this targets will be strictly and regularly reviewed and monitored.

Mr. Speaker, allow me to conclude by saying that there are many issues where debate and deliberation by the House is important. There are many issues where I respect the Opposition for their reasoned disagreement with the government’s policies – even though I still disagree with them.

But in this case, I am sad to say that the Opposition is being mischievous. These agreements are clearly in the interest of the country and its people, ratifying them is clearly based on the mandate of the people and they are a long-overdue measures that need to be taken if we are to move the country forward. What should be a mere formality has been sensationalized. There are many valuable and important issues the Opposition can take up and that should be debated, but this is not one of them.

*Speech made in Parliament on 26 January 2016

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