In The Press

Key to greater FDI and development - (PART II)

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The definition for a separate state was stipulated in the Montevideo Convention which came into force in December 1933 among Latin American countries and the United States and is now considered a part of International Law. The criteria for statehood according to the Convention are that a state must possess a permanent population, a defined territory, a Government, and the capacity to conduct international relations. As far as the Colombo Port City (CPC) is concerned none of the conditions required to fulfil this has been found.

Justice Minister Ali Sabry, PC, claimed that the Port City is very much a part of the Colombo administrative district but then there are arguments that the Bill should go before the Western Provincial Council for approval. Gamini Marapana, President’s Counsel, however, rejected this contention when he said since the Provincial Councils are not in operation the argument does not arise with regard to the Colombo Port City. This is a point that the Supreme Court, the Apex Court looking into the constitutionality of the Bill, will look at.

In the meantime, the Government should also take a close look at Clause 7 and Section 4 subsection 2 of the Colombo Port City Economic Commission (CPCEC) Bill which respectively states that

The Bill provides for the establishment of a Commission consisting of five to seven persons appointed at the sole discretion of the President;

The Commission shall, in consultation with the Project Company, and with the concurrence of the President or in any event that the subject of the Colombo Port City is assigned to a Minister, with the concurrence of such Minister, identify any amendments to the Master Plan, and if such amendments are considered necessary in the national interest or in the interest of the advancement of the national economy, to ensure through its viability the enhancement of the businesses carried on, in and from the Area of Authority of the Colombo Port City.

These apart, the former Central Bank Governor Dr. Indrajit Coomaraswamy took a closer look at the CPCEC Bill and emphasised the need to compare it with the provisions of the Greater Colombo Economic Commission (GCEC) which had more autonomy in terms of infrastructure, taxation, customs etc.

Dr. Commaraswamy’s observations are as follows.

“Several countries have overcome ideological, political or capacity-related constraints to improve their business climate by creating special economic zones/ enclaves. Foreign Direct Investment (FDI)-driven export growth has often been the key to accelerate the growth and employment generation trajectory of an economy. This has been the case for countries as large as China or as small as Singapore and also, for more centrally-planned economies such as Vietnam, or more market-oriented ones. Special zones have been a useful mechanism for attracting FDI and promoting exports as they present a more manageable prospect for pushing through policy, structural or institutional reforms which are more difficult on a national scale.

Shannon, in Ireland, provided an initial template for setting up special zones. Sri Lanka was one of the early movers in the developing world when it implemented the GCEC Act.

The GCEC had a great deal of autonomy in terms of infrastructure provision, taxation and customs. It would be good to compare the GCEC Act with the current CPCEC Bill in terms of their respective provisions concerning these matters.

An important dimension of this comparison should be how matters related to public finance (both revenue and public expenditure) are handled in terms of Parliamentary oversight. Any resources that have an impact on the Consolidated Fund would normally involve Parliamentary oversight. One would need to examine the constitutionality of avoiding Parliamentary oversight in such circumstances.

In a country where revenue collection is severely challenged (less than 12 percent of Gross Domestic Product (GDP) when peers mobilise over 20 percent), it is questionable whether such generous tax concessions are necessary.

There is a large volume of research which demonstrates that tax concessions are not an important determinant of the location of investment. There are several other more significant considerations. Sri Lanka built up its vaunted social indicators by consistently collecting 20–21 percent of GDP. In a recent op-ed, Professor Mick Moore pointed out that revenue constraints lead to loss of sovereignty as Governments are forced to accept external conditions to raise the financing they require.

Careful consideration should be given to the provisions in the Bill relating to the legal and regulatory functions of the Commission and the entities under it. They should be aligned with good practice elsewhere, particularly about the nexus between oversight functions within the zones and outside it.

The Bill should set out the mix of expertise and experience that should be reflected in the composition of the Commission. It should be built into the Bill as much as possible to ensure that the appointments are based on professional merit rather than political favour. One way of doing this is to provide for bodies such as the Charted Accountants of Sri Lanka, Bar Association of Sri Lanka, and Association of Professional Bankers to recommend (or even nominate) representatives for the Commission. This may not be perfect, but it is better than leaving it to individual politicians.

Entities such as the Central Bank of Sri Lanka, Attorney General’s Department, Securities and Exchange Commission and Financial Intelligence Unit should have senior ex-officio membership of the Commission or key entities under it.

All provisions of the proposed Act should be carefully screened to ensure that they do not discriminate unduly against the rest of the economy.

I should also point out that taxation serves to transfer some of the benefits accruing from the Colombo Port City to the population at large. This is important given that tax collections would have assisted in financing the infrastructure and educating/ training workers for the CPC.”

A recent Price Waterhouse Coopers (PWC) report states that the Sri Lankan economy stands to gain from the proposed Colombo Port City.

Extracts from the study -

“At present, Sri Lanka receives around US$ 1–1.5 billion through FDI annually. Hence the expected flow of FDI would be sizable and it is expected that Sri Lanka will be well-positioned for attracting FDI due to Port City Development. Moreover, it is expected that there will be a spillover effect as well where the Port City may encourage FDI flows outside the project. Taken together, the Port City should be a key driver in attracting FDI in future Sri Lanka.

Government revenue will be derived through several channels during the development of the Port City. At the land reclamation and common infrastructure development stage, the Government may incur some costs for providing certain infrastructure facilities to the outer border of the Port City namely electricity, water, and road access etc.

Some concessions and exemptions given on import duty may have a negative impact on Government revenue (in terms of loss of royalty payments for sands, and import of material etc).

Besides, in each operational year, the Government could receive revenue worth US$ 800 million from income taxes, import duties, and license fees etc. Taken together, the Port City will be a good source of revenue generation for the Government and would certainly support the Sri Lankan Government in increasing its expenditure on development and welfare activities elsewhere, along with reducing the dependency on borrowing. However, it should be noted that the estimates were based on the prevailing/proposed tax rates and any exemptions or concessions provided for the operators within the Port City may lead to a reduction in tax revenue.

The economic impact assessment which captures both direct and indirect effects clearly indicates that the Port City would have a significant impact on the national economy in terms of employment generation, attracting FDIs, GDP contribution, BOP (Balance of Payment) and Government revenue when it progresses as envisaged.

The Port City could be classified as a strategic investment project and a potential source and driver of economic growth and development for Sri Lanka. Such investment projects elsewhere in the world have historically played a significant role in transforming developing economies into more advanced ones.

One of the key determining factors in achieving the expected result would be the pace of the city development process and the enablement of its smooth functioning. Delays in construction, as well as the red tapes to functioning, could significantly lower the economic potential. In this context, it would be beneficial to have a clearly defined regulatory policy framework for the Port City, as this would support the achievement of the aforementioned economic targets. It is important to highlight that in addition to the impact on economic growth, any negative developments and barriers could affect the attraction of FDIs to the Port City project and other investment projects in Sri Lanka.”

The Port City in short gives an explicit picture of how Sri Lanka could develop its economy to go forward in the global economic melee and stand as a steadfast economy in the developing world.

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