The US, which continues to be the largest export market for Sri Lanka, has expressed keen interest in bringing in world-class technologies that will help the nation’s post-war development.
Despite its interest, the country still finds it challenging to set foot into the local business sphere in a seamless manner.
In a discussion with the Daily FT, US Embassy Counsellor for Economic and Commercial Affairs, Allison Areias-Vogel shared the positive and negative aspects of the local business environment and highlighted areas that call for immediate attention if the country is to effectively attract and retain investment from the US. Following are the excerpts of the interview:
By Shabiya Ali Ahlam
Q: What is the trade status between the US and Sri Lanka? What is the trend there?
A: The US continues to be the largest single country export destination for Sri Lanka and it is especially important for the apparel industry. That trend is continuing. Sri Lanka has a very large trade surplus with the USA where it is about 10 times the exports than the imports.
Data from the US Census shows that as of 2013 Sri Lanka exported $ 2.45 billion in goods to the US and imported $ 312 million. From January to July 2014 Sri Lanka has exported goods worth $ 1.56 billion and imported $ 199 million.
There is a large trade imbalance with Sri Lanka and that is something that at the embassy we are trying to address but we want it to be a win-win solution for Sri Lanka. For that we are trying to connect our companies to Sri Lankan companies.
The Sri Lankan private sector has a long working history with the US and has a very good reputation. Sri Lanka has some world-class companies that are leaders and are very supportive in their corporate social responsibility and pay good emphasis on labour conditions that are investing in innovation and R&D and are truly terrific partners for US companies.
Q: There have been a number of initiatives to increase trade and share best practices between the two countries. What has been the outcome of those efforts?
A: We have a Trade and Investment Framework Agreement (TIFA) and the upcoming one will be the eleventh meeting. At the last one which was held in 2012 we addressed a labour concern. There will be a fresh round of negotiations in October where there will be a business delegation along with a business forum.
What we do not have is an on-going technical assistance program with the embassy. The USAID has a number of programs to help economic growth and they have public-private partnerships (PPP) with some of Sri Lanka’s top companies. With that we have tried to bring some of our best practices and knowledge to those projects.
Q: Currently what is the area of focus in Sri Lanka to help address the imbalance?
A: We see potential in energy, tourism, food and beverage franchising (F&B), IT, education, medical devices and some commodities. Sri Lanka wants to become a hub and some of the medical devices and equipment needed is only made in the US. Our companies focus on higher value exports. It is not about the basic road construction and similar areas since that is not where we have the comparative advantage for this part of the world.
Q: Is the five-hub strategy an area the US is trying to capitalise on to reduce trade imbalance?
A: I think it is useful for the Government to put resources in certain sectors where they think they have a comparative advantage and it will certainly help our companies to focus. However, I would not say that our companies would definitely be self-limiting to that. The five-hub strategy is interesting and helps sort of guide our companies and publicises Sri Lanka, but it is not exclusive. They are still focusing on areas such as fast-moving consumer goods (FMCG), that is not a hub strategy but that is an area that companies such as Procter and Gamble (P&G) see has a very promising future in Sri Lanka. This is because Sri Lankan consumers have high demand for quality US products.
The market here is small compared to India, but Sri Lanka has much greater purchasing power. So companies like P&G still see a promising market here even though the market is small.
Q: What can be done by Sri Lanka to reduce this trade imbalance?
A: The main thing required in Sri Lanka is transparency, rule of law and clear investment regulations. The new Land Bill, which was in the works for over two years, we told on several occasions the Ministry of Finance and Ministry of Economic Development that if passed was a terrible sign to investors that Sri Lanka is closed for business to foreign investors.
We had an investor who wanted to bring a $ 100-million investment here and the Land Bill was a deal breaker and he left. It would have been an investment that would have created an ecosystem around his company and it was one that would have put Sri Lanka on the map for speciality tourism. He took his investment to another country.
Q: You are saying that the Land Bill will have a huge impact on foreign investment coming in?
A: Yes certainly. I think the Government feels that a nine-year lease is good enough, but for a number of US investors they only feel comfortable if they hold title. There are a number of recent examples where joint ventures have not worked out well for the foreign partner and for that they want free hold title.
Q: What is the view of US companies in the local business environment?
A: US companies view the Sri Lankan business environment as complicated, very difficult to get feedback from, difficult for decisions to be made, very slow-moving and frustrating.
Now that is for companies that are often working to get Government projects. Companies that work with the private sector generally have a more positive experience and there are some excellent partnerships and excellent feedback from US companies working with Sri Lankan companies. That is an area we are really trying to promote.
Q: Are US companies shifting from securing Government projects to working more with the private sector?
A: That is something that is happening. I think any foreign mission will say that the red tape is slowing down the investment process; this is common for any country. But for companies that are able to work in export-driven sectors, it is easier for them.
Q: What areas should the Government address to help bring in more investment?
A: The main issue is in tendering. Land, labour laws, judicial procedures and ensuring there is access to faster justice. And one issue we hear over and over is the lack of transparency; it is so difficult. We have so many companies bringing in world-class, outstanding technologies and when US companies bring such they also transfer that to Sri Lanka, they protect IPR and they have after-purchase service.
All the CEOs of US companies in the nation are Sri Lankans. We support local professional development. We have outstanding human resources and development. The projects also bring in their own financing so there is no burden on the Government.
We think everyone wins with our technologies as it lasts longer. The price points are also exceptional.
However, often our companies present a good product and we can’t seem to get past the process. There are other options in the region that are coming up fast and so people have capital to deploy and if they cannot do it efficiently and ethically in Sri Lanka, they will go elsewhere and that is what they are doing.
Q: So Sri Lanka is not making use of the opportunities that has been made available to it?
A: I can’t tell you how many people we have had come here and had the list of projects that we have, but things have stalled for no clear reasons. And those companies just aren’t coming back. We have a few that are really persistent and want to come into that market but even they are starting to express frustration. Frankly if you have other options you will go to an environment that is more facilitating.
These companies are not making an emotional investment. These are business people who are looking for options in South Asia and South East Asia. The have corporate guidelines they have to adhere to and have their own benchmarks and since such cannot be met here they will go elsewhere. Sri Lanka, in terms of a market, is not competing well in providing opportunity whereas other governments are doing so.
Malaysia is a good example for intelligent development. Everything was linked and market-driven. They were making sure they have the best project in the best location at the right time. They were lining up human capital 10 years out to ensure the industry has the necessary and required staff in the future. Sri Lanka is lacking the intelligent development, the planning-driven outcome that will give the most value for money and long-term quality.
Q: Could you elaborate on issues faced?
A: Corruption is one that has to be mentioned. US companies think we do bring good business ethics so our companies are governed by the Foreign Corrupt Practices Act and that prevents US companies and agencies from engaging in bribery and so forth. And companies have noted that such have hindered their ability to work in this environment.
Q: Has the Government acknowledged that it has such issues that requires effective solutions, or is the vibe more like they are convinced what they are doing is right?
A: The Ministry of Finance and Ministry of Economic Development will be first to say Sri Lanka needs FDI and export-driven growth but we don’t see many changes in investment laws. I cited the example of the Land Bill and the concerns over it. What we also see is the best technologies being turned away for inexplicable reasons. If our companies cannot compete because they are too expensive, that is just business, but we don’t get the sense that there is a level playing field.
Q: What will happen if the Government continues this way, where they are not facilitating investments and not addressing issues?
A: Sri Lanka will still get growth but it will still not reach its potential as quickly as it could. The Sri Lankan taxpayer will be burdened now since a lot of the projects that are coming in are not really value for money. There will be a big missed opportunity and the kind of development Sri Lanka may want will not be achieved as fast as expected. The potential of Sri Lanka to develop into these hubs may not take off since investors have other options. They won’t be attracted to this market when they have really attractive alternatives in this region and very competitive countries elsewhere.
Q: What is the outlook you have on trade for the medium- and long-term?
A: We hope it continues to be positive and I hope Sri Lanka will continue to be a market leader in apparel and, as the US economy recovers, that demand will pick up.
The companies here are highly-innovative and are good at finding good niches and are always providing a product that is a step ahead in the market.
We hope to take more advantage of the Indo-Lanka FTA and see if we could attract some US companies here to provide value-added manufacturing in Sri Lanka, but again that requires land and clear investment rules.
We try to raise the level of the business climate and American companies provide bell weather to other investors worldwide since they know that we do have a certain level of business ethics. If they can operate successfully in this environment it is an indicator that it is a healthy environment. We would like to see more investment here since it would create a snowball effect and indicate that Sri Lanka is a safe place for a global company with a global reputation to do business.