By Vijaya Kumar –

Prof. Vijaya Kumar

Every developing country is keen on attracting Foreign Direct Investment (FDI) and I am sure the manifestos of the candidates contesting the Sri Lankan Presidency will be assuring the people that they will attract FDI to develop the country.

However, there is some misunderstanding about what FDI is. Some wrongly think that the Japanese Light Rail project was an FDI. It was Japanese aid to Sri Lanka – aid in very generous terms which was rejected by the Gotabaya government as the Rajapaksas for personal pecuniary reasons always prefer to deal with the Chinese. FDIs are substantial lasting investments made by foreign companies or governments into joint ventures or firms, which are often managed by them as they plan to recover their investments from the profits they generate. We have had a few examples of FDIs such as investment in Dialog and Sri Lanka Telecom (SLT) and Adani’s investment in the Port and Wind Power.

Greenfield FDI is where the investor’s FDI is directed towards establishing a new enterprise. Being a developing country, we should prefer to attract greenfield FDI in an area new to us, preferably involving high technology. We have been able to attract very little FDI of this type.

Even the petroleum distributing companies which were nationalized by Sirimavo were not FDI. Shell, Mobil and Caltex were subsidiaries of British companies functioning before we became independent. There were two reasons why they were nationalized. While providing the semblance of competition, there was evidence of collusion in price-fixing and they resisted plans to establish a refinery in the country. The nationalization of the petroleum distributing companies did have a bad effect on our ability to attract FDI, especially as the government did not pay any compensation to the companies. The investment in highways was also not really FDI although shown as such as they were not investments by foreign companies, but funded by loans given to us on high interest. The same is true for the airport and harbour at Hambantota although the harbour subsequently became an FDI when it was was handed over to the Chinese company as we could not repay the loan. If the attempt to find a foreign company to run the airport is successful, then that too would be an FDI.

There are very few successful FDIs which we have been able to attract. One was the Trelleborg solid tyre factory established here after Sri Lanka decided to regulate the export of raw rubber. This was a Greenfield FDI investment but after several years, it went through a few owners ending up with a Rajapaksa crony company. There was also the USD 26.5 million FDI by ‘Volkswagen’ in Kuliyapitiya which would have been Greenfield FDI, but sadly never materialized. Dialog although not in a new area has brought in some new technology which spurred SLT into seeking foreign investment and technology in order to compete. There has also been some FDI in the IT service sector and in Banking. We have however been able to attract only very little Greenfield FDI and none of that in high technology.

There are several reasons why we have failed to attract such FDI. One of the causes is demonstrated by the FDI attracted by the Ranil Wickramesinghe government – the lack of transparency in the FDI selection process. During 2010-2015 and the last four years, the government has made its investment decisions based on unsolicited bids and even when a tender is called, disqualifying tenderers on technical reasons so that only the preferred tenderer remains. The Adani investments were unsolicited offers but in this case the culprit may have been the Modi government using its financial hold on us to promote its crony capitalist, Adani. Most Western countries have strong laws that prevent their companies paying bribes and unlike in our country, these are enforced e.g. the action taken against Airbus for paying bribes to sell 15 aircraft to SriLankan Airlines – nothing done to recover this money from the recipients although details of the transaction have been available to the Sri Lankan government after Airbus was found guilt. The reluctance of reputed firms to get involved with Sri Lanka is therefore not surprising.

The second cause is the absence of rule of law in our country, although there appears to have been some improvement in the last few months. We had a Chief Justice who boasted he saved Mahinda while he was ‘Helping Hambantota’ and another who offered favourable decisions to the incoming new government if he was allowed to continue in office. Our courts (and our Attorney General) seemed to have special rules for corrupt and murderous politicians. Investors other than those in partnership with crooked politicians, would not consider investing in a country unless they are assured of fair treatment by courts. Furthermore, even if the courts rule in your favour, the whole process is far too long. Legal processes to punish defrauders and wrongdoers or recover payments owed take several years in our country and for businessmen, time is money.

The third cause is the smallness in our market. Any investor in Sri Lanka cannot hope to survive if he caters only to the local market. An investor who already has an export market may be enticed by the availability of raw material as we saw in the Trelleborg case. It may be possible to attract FDI to manufacture Titanium products from Ilmenite or Phosphate fertilizers from Eppawala apatite, but such investments may not always be acceptable to our people. We do have a large market nearby, the Indian market and if we are able to have agreements that permit the export to India of the product manufactured here, this could attract FDI.

Could we try to make our Port City a new Singapore as some claim ? Singapore encouraged investments in identified potential high-growth sectors such as skill and technology-intensive sectors, machinery, pharmaceuticals and aerospace by offering incentives to investors and has over the years become a centre for business and financial services. Moreover, it provides an attractive living environment which encourages multinationals to site their enterprises there. It is unlikely that Port City would be able to replicate Singapore given its heavy Chinese involvement and the political problems between China and the US. It could have attracted Chinese industry seeking an alternate location to export to the West (the China Plus One policy) but that too seems unlikely as Chinese industry is presently facing problems of oversupply.

Unless our new President is able to install a transparent procurement system, guarantee the rule of law and speed up our courts, we are not going to attract any worthwhile FDI.

What else can our new President do to attract Greenfield FDI ? We should provide incentives for  pharmaceutical FDI from India to produce generic medicine but we should also encourage the manufacture of active pharmaceutical ingredients (API) as this could give a boost to our technological capabilities. The other areas for FDI worth exploring are semiconductor manufacture, tooling industry and software development. We should work towards obtaining Indian concurrence to permit us to access to the Indian market and use it to attract industrial FDI from multinationals and leading international firms. This will improve the technological learning of the workers employed in these industries and help them start their own spin-offs (small industries supplying parts to big factories) and later on even start their own competitive industries.

We have a large diaspora who could get involved. Special concessions over and above that offered to other industrialists can be provided to dual citizens who are prepared to invest their funds and knowledge in manufacture for the export market provided their investment and number employed exceeds a specified threshold.

FDI is essential, especially Greenfield FDI, but it is not going to fall onto our laps. We have to work hard to attract it.

*Vijaya Kumar is a Professor Emeritus in Science of the University of Peradeniya and a former Chairman of the UN Commission on Science and Technology for Development.