Dr. PB exposes what stifles investments

• Finance Ministry 2011 Annual Report lists key factors
• Raps promotional agencies BOI, Sri Lanka Tourism, EDB Tea Board and others for bureaucracy and lack of coordination
• Private investment needs to be increased to 30% of GDP from 24% in 2011

Despite the end of the war three years ago, the full potential for higher investments in the country is yet to be realised and if the usual case is private sector complaining of bottlenecks, then for a change the Finance Ministry has joined the chorus.

The recently released 2011 Annual Report of the Ministry of Finance, a portfolio held by President Mahinda Rajapaksa himself, admits that private sector investment is constrained.

FT Quick Take

As per Finance Ministry, factors constraining investments are : a) Inefficient approval process that take investors to multiples agencies b) Lack of focus investment priorities and project proposals in priorities. c) Price controls on some selected commodities such as milk, poultry, and cement etc instead of using pricing formula and regulatory supervision. d) Inadequate flexibility by line ministries and agencies to promote private sector into commercial activities. e) Inadequate long term funds and institutional support to SMEs. f) An absence of coordinated promotional effort by BOI, Tourism Authorities, EDB, Tea Board and Foreign Employment Bureau due to highly compartmentalised operations and bureaucracy. g) Outdated institutional setting in investment promotion agencies and inadequate professional skills.

“Despite policy reforms towards private sector development, the private sector investment is constrained by several factors which need urgent corrective actions by strengthening institutional set up,” emphasised the 2011 Annual Report of the Finance Ministry, whose Secretary is Dr. P.B. Jayasundera.
The critical analysis of constrains and causes is after highlighting the key achievement of a record $ 1.06 billion in Foreign Direct Investment last year and private investment increasing to 23.7% of GDP from 21.4% as well as a host of incentives made available during the past few years.
For Sri Lanka to achieve double digit growth, private investment has to be increased to around 30% of GDP. Given Finance Ministry's role and with Dr. Jayasundera being Economic Development Ministry Secretary the tone and contents of the Report are expected to stir much debate, according to analysts.
 “As promotional agencies particularly in investment, tourism and export have operated under traditional institutional framework with red tapes, lack of investor friendly institutional environment, poor coordination with other Government agencies and lack of conclusive decision making process,” the Finance Ministry Report said, adding, “Reforms to make them a private sector friend has become an urgent to promote investment.”
The Report includes an interesting table listing core functions of select organisations as well as expenditure allocation, alluding to the fact that they could make substantial contribution in investment, tourism, foreign employment and exports.
The Report said that in the context of expected private investment of around 26-30 per cent in addition to public investment of around six per cent of GDP, promotional agencies are required to re-strategise their role on a priority basis.
“As the country is endowed with improved infrastructure, improved skilled and productive labour force, favourable tax and incentive environment and emphasise on a number of activities for export development and import replacement industries together with new opening for infrastructure development with the participation of private sector, the promotional agencies are expected to develop new strategies with strong commitments,” it added.
The Finance Ministry also said a Cabinet subcommittee on investment is expected to coordinate this task in addition to reforming the respective organisations to deliver better results.
Whilst the Report lists various incentives for private sector investments, the Finance Ministry said key imports indicate a large market scope for investment in order to reduce foreign exchange outflows.
“The need for private investments in these areas has been recognised and a wide range of tax incentives have been incorporated into tax laws including the Strategic Development Project Act of 2008. The Board of Investment (BOI) in collaboration with relevant line ministries needs to focus on such investments for which specific project proposals and required domestic arrangements need to be firmed up to exploit potential areas of investment.
“The Government expects the economy to move from a consumption-oriented one to a savings and investments driven real economy. To achieve this, there is still ample space to investments in Sri Lanka’s growing economy,” the Finance Ministry Annual Report said.
Accordingly, the levels of inflows are expected to increase significantly in such areas as hotel and tourism, infrastructure development, IT/BPO services, renewable energy and pharmaceutical industry. Complementing to this, portfolio investments are also expected to increase in the future.
Meanwhile, the Government is also committed to continue the infrastructure development move by mobilising a large amount of project related funds from development partners. The increased fixed capital formation will enable to maintain desired level of investments to sustain higher economic growth in the future, it added.
In 2011, the report said the private investment was mainly encouraged by the low interest rates prevailed in the country in the backdrop of relaxed monetary policy stance as the cost of funds was relatively low for the investments in real assets.
The improvement in the private sector investments was reflected in the significant growth in the credit to the private sector and the expansion in the importation of investment goods in 2011. Hotels and tourism, manufacturing, trading, construction, and infrastructure, including telecommunication and petroleum, were among the key areas that attracted private sector investments during the year.
Within the private investment, the Foreign Direct Investment (FDI) inflows increased by 107 percent to US$ 1,066 million in 2011 from US$ 516 million in 2010 due to the enhanced investments by the foreign investors to establish their presence in an economy with diverse opportunities.
The Board of Investment (BOI) incentive regime was revisited to move towards a broad based low tax regime and to provide an equitable incentive regime for private investment. Accordingly, the tax regime under the BOI Act was harmonised with the Inland Revenue Act (IRA) in relation to Section 17 of the both Acts and all the tax incentives were brought under the IRA.