The Study on the FDI Promotion Policy Review and

SEZ Development Strategy for Sri Lanka -Half Million Jobs Creation Plan 2011-2020-

Study Report

March 2011

Engineering and Consulting Firms Association, Japan

Japan Development Institute (JDI)

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PHOTOS

Colombo Port Expansion Project Colombo Port

Katunayake Export Processing Zone

Cement Factory in Trincomalee

Prima Jetty in Trincomalee

International assistance in the Northern Province

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Destroyed Water Tank during the Conflict Demining Project in Jaffna

Proposed Industrial Zone in Jaffna

Meeting with HE Basil Rajapaksa, Minister of Economic Development

Port Development in Hambantota

Hambantota Port Development Plan

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MAP

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ABBREVIATIONS ADB Asian Development Bank BOI Board of Investment BOO Build Own Operate BOOT Build Own Operate Transfer BOT Build Own Transfer BPO Business Process Outsourcing CEA Central Environment Authority CECA Comprehensive Economic Cooperation Agreement COC Certificate of Conformity DMU Diesel Multiple Unit EC Environmental Clearance ECFA Engineering and Consulting Firms Association EDB Economic Development Board EIA Environmental Impact Assessment EPL Environmental Protection License EPZ Export Processing Zone EU European Union FDI Foreign Direct Investment FEZ Free Economic Zone FIAC Foreign Investment Advisory Committee FTA Free Trade Agreement GCEC Greater Colombo Economic Commission GDP Gross Domestic Production GII Gender Inequality Index H&M High and Medium Polluting Industries HDI Human Development Index HPI Human Poverty Index HSBC Hong Kong Shanghai Banking Corporation ICT Information and Communication Technology IDB Industrial Development Board IP Industrial Park IT Information Technology JCT Jaya Container Terminal JDI Japan Development Institute JETRO Japan External Trade Organization KKS Kankesanturai LTTE Liberation Tigers of Tamil Ealam MW Mega Watt N&E Northern and Eastern

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ODA Official Development Assistance OSS One Stop Services PPP Private Public Partnership PUC Public Utilities Commission Q1 First Quarter Q2 Second Quarter RFP Request for Proposal RMG Rail Mounted Gantry Crane RTG Rubber Tired Gantry Crane Rs Sri Lankan Rupee SAGT South Asia Gateway Terminal SEZ Special Economic Zone SLPA Sri Lanka Port Authority TEU Twenty-foot Equivalent Units UCT Unity Container Terminal UDA Urban Development Authority UK United Kingdom UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Program UPFA United People’s Freedom Alliance US United States USD US Dollar

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INDEX

PREFACE ................................................................................................................................... 11 EXECUTIVE SUMMARY......................................................................................................... 13 1. Background and Objectives .................................................................................................... 19

1.1 Background ....................................................................................................................... 19 1.2 Study Objective ................................................................................................................. 19

2. Political Stability & Economic Development Trend ............................................................... 19 2.1 Political Situation .............................................................................................................. 19

2.1.1 Political Developments .............................................................................................. 19 2.1.2 “Mahinda Chintana – Vision for the Future” ............................................................. 20

2.2 Economic Structure ........................................................................................................... 22 2.2.1 Basic Economic Trend and Data ................................................................................ 22 2.2.2 GDP Growth and Prospects........................................................................................ 24 2.2.3 External Sector ........................................................................................................... 25 2.2.4 Foreign Direct Investment.......................................................................................... 27 2.2.5 Donor Financing......................................................................................................... 28

3. Challenges and Opportunities of Sri Lanka ............................................................................ 29 3.1 Challenges ......................................................................................................................... 29

3.1.1 Migrating Workers ..................................................................................................... 29 3.1.2 Unemployment ........................................................................................................... 30 3.1.3 Labor Regulations and Higher Wages........................................................................ 31 3.1.4 Problems of Doing Business ...................................................................................... 32

3.2 Opportunities..................................................................................................................... 32 3.2.1 Budget 2011 ............................................................................................................... 32 3.2.2 Agro-Forestry in Business.......................................................................................... 33 3.2.3 Up-Skilled Garment Sector ........................................................................................ 33 3.2.4 ICT/BPO Sector ......................................................................................................... 34 3.2.5Tourism ....................................................................................................................... 35 3.2.6 Cooperation with India............................................................................................... 35

4. Industrial Park (IP) and Export Processing Zone (EPZ) Development of Sri Lanka.............. 36 4.1 BOI Regime ...................................................................................................................... 36 4.2 BOI Incentives .................................................................................................................. 37 4.3 EPZs/IPs............................................................................................................................ 38 4.4 Environment Aspect of SEZ in Sri Lanka ......................................................................... 40

4.4.1 Environmental Impacts by SEZ ................................................................................. 40

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4.4.2 Environmental Consideration for Attracting Foreign Investors and Diffusing Pollution Control Technology ............................................................................................. 40 4.4.3 Environmental Impact Assessment (EIA) in Connection with SEZ .......................... 41 4.4.4 SEZ Location in Conformity with a Land Use Plan .................................................. 42

5. Global Trends of SEZ (Special Economic Zone).................................................................... 45 5.1 Asian Experiences in SEZ ................................................................................................. 45 5.2 Necessary Factors to Implement SEZ Program ................................................................ 45

5.2.1 Investment Laws ........................................................................................................ 45 5.2.2 Organization ............................................................................................................... 45 5.2.3 OSS (One Stop Service) ............................................................................................. 46 5.2.4 Basic Infrastructure .................................................................................................... 46 5.2.5 Services ...................................................................................................................... 46 5.2.6 Market-Oriented Skilled Workers .............................................................................. 46 5.2.7 Tax Incentives ............................................................................................................ 47 5.2.8 Relationship with neighboring Regions ..................................................................... 47

5.3 Assessment and Proposal of Sri Lanka’s SEZ Development ............................................ 47 6. Six Potential Areas of SEZ (Special Economic Zone) Development...................................... 48

6.1 Jaffna ................................................................................................................................. 49 6.2 Mannar .............................................................................................................................. 53 6.3 Trincomalee....................................................................................................................... 54 6.4 Kalpitiya............................................................................................................................ 56 6.5 Colombo............................................................................................................................ 57 6.6 Hambantota ....................................................................................................................... 58

7. Infrastructure Development..................................................................................................... 59 7.1 Airport ............................................................................................................................... 59 7.2 Railways............................................................................................................................ 60 7.3 Roads................................................................................................................................. 62 7.4 Ports................................................................................................................................... 63

8. Roadmap for Sri Lanka FDI Promotion & SEZ Development Strategy for Creating Half Million Jobs (2011-2020)............................................................................................................ 68

8.1 Opportunities and Challenges of Sri Lanka ...................................................................... 68 8.2 Development Scenario ...................................................................................................... 68 8.3 National Target “Mahinda Chintana”................................................................................ 68 8.4 Development Strategy ....................................................................................................... 68 8.5 SEZ Program..................................................................................................................... 68 8.6 Priority Projects................................................................................................................. 69

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8.7 Review the Existing FDI Regulations ............................................................................... 70 8.8 Action Plan........................................................................................................................ 70

BOX I. Trade Facilitation in Sri Lanka....................................................................................... 71 BOX II. PPP (Private Public Partnership) in Sri Lanka .............................................................. 72

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LIST OF FIGURES Figure 2.1 Quarterly GDP Growth (%) Figure 2.2 GDP by Province (2008) Figure 2.3 Trade Figure 2.4 Major Export and Import Products in 2009 Figure 2.5 Direction of Trade in 2009 Figure 2.4 FDI Volume (1978-2009, mii USD) Figure 2.5 FDI by Country in 2009 Figure 3.1 Workers’ Remittance Figure 3.2 Foreign Employment by Categories Figure 3.3 Unemployment Rate (1993-2009) Figure 3.4 Monthly Wages of Workers and Engineers (USD) Figure 3.5 Proposed Highly Productive Agricultural Area Figure 3.6 Top Ranking Destinations in ICT/BPO Figure 3.7: Tourism Development in Sri Lanka Figure 4.1 EPZs/IPs in Sri Lanka Figure 4.2 Site Approval and EIA Procedure Figure 5.1 FDI in ASEAN Countries (1995-2009) (bil USD) Figure 6.1 Projects in Jaffna Figure 6.2 Map of Proposed Atchuvely Industrial Zone Figure 6.3 Economic Corridor between India and Sri Lanka Figure 6.4 Development Plan of Mannar Figure 6.5 Map of Trincomalee Figure 6.6 Development Plan of Kalpitiya Figure 6.7 Hambantota Port Plan Figure 7.1 Map of Airport Development Figure 7.2 Existing and Proposed Railway Network Figure 7.3 Existing and Proposed Roads Network Figure 7.4 Existing Ports to be Expanded Figure II: Private Sector Participation in Projects

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LIST OF TABLES Table 2.1 Social Indicators of Sri Lanka Table 2.2 Economic Indicators of Sri Lanka Table 2.3 Balance of Payments (mil USD) Table 2.4 Projects with Disbursements over USD 10 million in 2010 (up to end of

September) (mil USD) Table 3.1 Unemployment Rates by Age Group Table 3.2 Payment of Compensation Table 4.1 BOI Incentives Table 4.2 EPZs/IPs Statistics Table 4.3 FDI by Sector (2005-2009) (mil USD) Table 4.4 TOP 25 Investors

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PREFACE Japan Development Institute (JDI) is an independent consulting firm specializing in economic development and policy in Asia, Middle East and Africa, with substantial portfolios in developing Special Economic Zones (SEZs). The Chairman of JDI, Dr. Shoichi Kobayashi, was invited to Sri Lanka by a former diplomat and the inaugural director of United Nations University Mr. Lal Jayawardena during 1980s to set up SEZs in the country, however, taking the offer was not possible due to the political instability caused by the civil war between the government and the Liberation Tigers of Tami Eelam (LTTE). Upon the end of the 26 year long military campaign and the achievement of the political stability as the most important factor to bring foreign investment and set up SEZs, JDI has decided to conduct a study on setting up SEZs with a special focus on the conflict affected Northern and Eastern Provinces. In these purposes, JDI has made a request to Engineering and Consulting Firms Association (ECFA) for supporting the Study. JDI has dispatched the study team twice from 24th October to 4th November 2010 and from 22nd to 28th January 2011 consisted with the experts below:

1) Dr. Shoichi Kobayashi: Project Leader and Policy Planning 2) Mr. Chinpal Rauniar: Logistics 3) Mr. Kiichiro Sakaguchi: Environment Assessment 4) Ms. Yuka Kato: Economic and Financial Analysis

Although the study had concentrated on the SEZ development of the Northern and Eastern Provinces at the initial stage, it has shifted the coverage to the investment strategy review and the SEZ development of the whole nation after having intensive discussions with the Board of Investment (BOI) and Ministry of Economic Development. While the Study needs a further development to implement proposed projects, we would like to express our sincere gratitude to the following government officials and private institutions of Sri Lanka for providing us the valid information and kind supports greatly contributed to the study.

1) HE Mr.Basil Rajapaksa, Minister of Economic Development 2) Mr. Nihal Somaweera, Additional Secretary of Ministry of Economic Development 3) Mr. Jayampathi Bandaranayake, Chairman of Board of Investment 4) Mr. Mr. Sunil de Silva, Executive Director, Technical Services of Board of Investment 5) Mr. Sumith Nakandala, Director of Ministry of Foreign Affairs 6) Dr. Priyath Bandu Wickrama, Chairman of Sri Lanka Port Authority

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7) Mr. Udaya Sri Kariyawasam, Chairman of Industrial Development Board 8) Dr. Saman Kelegama, Executive Director of Institute of Policy Studies

This study is limited in time and resources to investigate all aspect of FDI and Foreign Trade related legal system, infrastructure, SEZ/EPZ system and strategic SEZ candidate sites. Therefore, a more detailed study covering all related aspects will be needed for finalization of the SEZ Program in Sri Lanka in the near future. Nevertheless, we are hoping that our limited study will be useful for Sir Lankan Government as an initial guide for development of a SEZ Program which will attract more FDI to Sri Lanka helping to achieve the “Mahinda Chintana – Vision for the Future”. We are looking forwards working together with Ministry of Economic Development and BOI and for finalizing the SEZ Program soon. Sincerely Yours,

Shoichi Kobayashi Ph.D. Chairman of Japan Development Institute (JDI)

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EXECUTIVE SUMMARY 2009 was a remarkable year for Sri Lanka by ending the 26 years of the Civil War which left the country behind the global market competition. Upon the end of the armed conflict, the government has announced several reconciliation and reconstruction packages and the national strategy “Mahinda Chintana – Vision for the Future” to target doubling the national income from the current level of USD 2,000 to USD 4,000 and become a middle-income country by 2016. Sri Lanka has a good chance to achieve the Vision for the Future; however, considering still weak FDI related system and under developed infrastructure, Sri Lanka must improve the FDI and Trade related aspects and infrastructure sector quickly. As a possible solution, this Study recommends the tools in setting up a roadmap to guide these ventures to an economic realization. The roadmap focuses on employment creation by attracting FDI and promoting exports by developing Special Economic Zones (SEZs). Sustainable economic growth can be achieved by creating “Ponds” (SEZ) and attracting “Migrating Birds” (investment especially FDI) which we call “Ponds and Birds” theory. The roadmap shall be set as follows: Development Strategy For creating a consensus among ministries/agencies and showing a strong political will to the public, we recommend the government to set up the Presidential Task Force on “FDI Promotion & SEZ Development for Creating Half Million Jobs” with several line agencies/ministries. Competitive benchmarks should be established to start the program:

• Target to increase the FDI volumes to triple from the current level (USD 0.6 billion per year)

• Improve the trade facilitation and PPP (Private Public Partnership) scheme for the participation of the private sector in infrastructure projects

SEZ Program SEZ Program established under the Presidential Task Force should include the identification of potential areas for SEZ development, legislation of special SEZ Act to cover the areas of tourism, industry, ICT and agriculture, establishment of a labor standard within SEZ, and operation of BOI as an umbrella organization to operate & manage SEZ. Select Priority Projects under SEZ Program

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Six potential areas for SEZ Program have been listed by the Study Team to promote the key sectors intensively. These SEZs will attract not only export market oriented but also domestic market oriented industries. 1 Jaffna Manufacturing and Agriculture Due to its proximity to the Indian Subcontinent, the scope of starting export enterprises and business collaboration linked and serving the industries and businesses in India, especially South India is a good opportunity for Jaffna, the capital of the Northern Province. SEZ in Jaffna would be able to supply components of automobile and electronics to Tamil Nadu where companies have production base. Similarly, low cost garment companies that have become uncompetitive in the Western and Southern Province by facing the higher labor cost could also be relocated in Jaffna. The productivity of agriculture and fishery has been historically high in the Northern Province; therefore, there is scope of developing the agricultural sector by use of modern machines and high yielding seeds. 2 Mannar Logistics and Manufacturing The transport hub development is the main feature of the Mannar city, located closed to India with minimum travelling distance. Manner city’s main function would be India-Sri Lanka Bridge, Enter Port to India, and Transport terminal including bus and railway terminals. Therefore, the city can attract logistics companies as well as manufacturing companies relocating from the South India. 3 Trincomalee Heavy Industry and Tourism Garment and Apparel industries, medium and heavy industries along with Tourism industries have the potential of being located in the Eastern province. As the seafront of Trincomalee has pristine beaches, ancient forts, the largest natural harbor in Sri Lanka along with being known as a destination for whale watching, if properly planned and organized, tourism could well be one of the main income of this province creating meaningful jobs for the locals. 4 Kalpitiya Tourism Kalpitiya region is one of the most beautiful coastal areas located in the Western Province of Sri Lanka. Given the investment opportunities available, in 2008 the Sri Lanka Tourism launched the Kalpitiya Dutch Bay Resort Development Project. By declaring this area as Tourism Specific Zone (Tourism SEZ) will allow it to grow in a controlled and planned township under the guidelines and regulation of Tourism SEZ. 5 Colombo ICT/BPO, Finance, Logistics and Tourism The capital region of Sri Lanka can cater to IT/BPO, finance, tourism in the proposed reclaimed land and transshipment traffic at the port, if brought under the purview of a special economic zone act that is not yet in place.

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6 Hambantota Logistics, Manufacturing, Heavy Industry and Tourism With the construction of Hambantota Port and conceptualized Free Zone in an area of 1700 ha, and the on-going new town development project where new convention centers, roads etc. are under construction, this area in the South could have a good multidisciplinary economic development with proper planning and incentives to attract investment. Review of the Existing FDI Regulations While the SEZ Program is proceeded, the review of existing FDI frameworks shall be implemented simultaneously. The SEZ Program is to be started by setting up an SEZ Act at the initial stage, and shall be incorporated under the new investment law, so that the SEZ Program would function as a nation-wide program. Establishing the new investment law would require a certain amount of time by coordinating with line agencies such as BOI, Urban Development Agency (UDA), Economic Development Board and Tourism Authority, therefore, showing one successful model of SEZ where several investments are attracted would speed up the integration of political interests among parties. Trade facilitation and development of Private Public Partnership (PPP) shall also be accelerated to be competitive in the business environment and FDI promotion. Action Plan Once the successful SEZ model is implemented, the model should be applied to other potential areas of priority projects and shall be revised depending on the type of investment to be attracted. An SEZ Authority should be set up to regulate, operate and manage SEZs in the country. SEZ could be managed by private sector participation using PPP scheme, but certain guidelines shall be applied to manage and operate SEZs. 1) Apply one of the successful models of priority projects to other parts of the country 2) Continue implementing the priority projects by promoting FDI 3) Apply SEZ Act to the whole country and replace with the existing laws 4) Set up SEZ Authority to regulate, operate & manage SEZs 5) Accelerate the trade facilitation project and introduce single electronic window Next Step In this Study, the team is proposing a roadmap to promote FDI by using a method of SEZ, for creating meaningful jobs for the young generation and leading Sri Lanka to be competitive in the global market. The study had been conducted within a short period with limited resources; therefore, the roadmap needs to be upgraded with more detail master planning for implementation. Technical and financial assistance is recommended in the area of detail master planning of roadmap, capacity building to SEZ related officials, and implementation of potential SEZ master planning and development. The government is required to set up the taskforce to proceed with the SEZ program in an urgent manner, at the same time, the detail-planned SEZ program needs to be developed further.

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1) Step 1: Set up a President Task Force for the SEZ Program 2) Step 2: Formulation of the SEZ Program and Reform of FDI and Trade related System 3) Step 3: Implementation of the SEZ and Reform Program

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Six Potential Areas of SEZ (Special Economic Zone) Development  

Area  Types of SEZ  Sector  Other Remarks 1. Jaffna  Manufacturing 

Agriculture   

Light manufacturing, Garment, Fishery & canning, Agriculture 

Collaboration with India for automobile & electronic parts, KKS port development 

2. Mannar  Logistics Manufacturing 

Transit hub between India and Sri Lanka, Light manufacturing 

India‐Sri Lanka bridge 

3. Trincomalee  Tourism Heavy Industry 

Tourism, Heavy Industry (Cement plants, Oil storage facilities, Petroleum based products, fertilizer manufacture) 

Natural deep‐water harbor 

4. Kalpitiya  Tourism  Tourism  Kalpitiya Integrated Tourism Resort Project (KITRP) initiated in 2003 

5. Colombo  ICT/BPO,  Finance, Logistics, Tourism

ICT/BPO, Transit Port, Finance, Tourism 

Port to focus as transit hub and reclaimed land to be developed as financial center 

6. Hambantota Logistics Manufacturing Heavy Industry Tourism 

Manufacturing industrial zone, ship building & repairing, oil refinery, bunkering, LNG 

Free Zone township development in Hambantota Area and Free Port in Hambantota Bring Chinese investment   

   

 

Hambantota

Trincomalee

Kalpitiya

Jaffna

Mannar

Colombo

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  Sri Lanka FDI Promotion & SEZ Development Strategy for Creating Half Million Jobs (2011‐2020)      Opportunities and 

Challenges of Sri Lanka

Opportunities:・ High economic 

growth after the conflict 

・ Strong political will to achieve economic development 

・ Huge international / bilateral assistance to support the economy 

・ High skill level of workers 

Challenges:・ Limited 

employment ・ Complexity of 

legal framework 

・ Poor infrastructure (electricity, roads, water, medical services, telecommunication) 

・ Limited FDI 

Development Scenario

Option1: ・ Remain 

bureaucracy and crony capitalism 

・ Fail to achieve development goal due to no road map 

・ Slower growth after int’l aid decline 

Option2: ・ Achieve 

development goal with high GDP growth by high FDI and New SEZ 

National Target“Mahinda Chintana”

・ Increase GDP per capita to 4,000 USD by 2016, keep GDP growth rate of 8‐10% 

・ Increase private investment to 26‐28% of GDP

・ Achieve 20 bil USD in export by 2020 

Development Strategy 

・ Set up Presidential Task Force on “FDI Promotion & SEZ Development for Creating Half Million Jobs” with several relevant agencies/ministries 

・ Promote FDI: Triple from the current level of 0.6 bil USD/year 

・ Improve trade facilitation 

・ Introduce PPP (Private Public Partnership) scheme for infrastructure projects 

SEZ Program 

・ Identify potential areas for SEZ   development 

・ Set up special SEZ Act to cover the areas of tourism, industry, ICT & agriculture and labor standard 

・ BOI as an umbrella organization to operate & manage SEZs 

Review the Existing FDI Regulations 

・ Review the existing investment related laws by coordinating with agencies such as BOI, UDA, EDB, and Tourism Authority and set up the new investment law which includes PPP scheme 

・ Improve trade facilitation by linking up all relevant stakeholders, both government and private, to move towards a single electronic window 

・ Improve the existing BOI Act to cover all sectors with no export requirement, and set up OSS (One Stop Service) and Trouble Shooting Unit 

・ Make sure Sri Lanka will be competitive in business environment and FDI attraction 

Priority Projects 

1. Jaffna(Manufacturing, Agriculture, Tourism) 2. Mannar (Logistics, Manufacturing) 3. Trincomalee (Tourism, Heavy Industry) 4. Kalpitiya (Tourism) 5. Colombo (ICT/BPO, Finance, Logistics, Tourism 6. Hambantota (Logistics, Manufacturing, Heavy Industry, Tourism) 

Action Plan 1) Apply one of 

the successful models of priority projects to other parts of the country in all sectors 

2) Continue implementing the priority projects by promoting FDI   

3) Apply SEZ Act to the whole country and replace with the existing laws 

4) Set up efficient/competitive SEZ Authority to regulate, operate & manage SEZs 

5) Accelerate the trade facilitation project and introduce single window 

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1. Background and Objectives 1.1 Background 2009 was a remarkable year for Sri Lanka by ending the 26 years of the Civil War which left significant burden to its population, economy, society and environment. For the purpose of reconciliation and reconstruction of the post-conflict situation, the government has initiated the development programs for the Northern and Eastern Provinces under the “Uthuru Wasanthaya” (Northern Spring) and “Nagenahira Navodaya” (Eastern Re-awakening). These development goals were included with the broader national strategy “Mahinda Chintana – Vision for the Future” which led the government to gain a sizeable majority at both the Presidential and Parliamentary elections held in January and April 2010. The government is on a right track with a strong political will to achieve the development target to reach USD4,000 of GDP per capita and become a middle-income country by 2016. Although the strong mandate has been delivered, the more important approach is “HOW” the target can be reached. The roadmap to achieve the target should clearly be addressed and the specific development projects will have to be implemented according to the roadmap. 1.2 Study Objective In this regard, this Study recommends the tools to guide these ventures to a successful economic realization. As other Asian countries have experienced, attracting FDI (Foreign Direct Investment) is the most efficient way of achieving economic growth due to the limitation of domestic funds. Although ODA (Official Development Assistance) plays a significant role at the initial stage of development especially in the conflict affected country like Sri Lanka, it won’t support the economy in a long term. In order to attract significant FDI into the country, the government has to set up a favorable environment to bring investment. In this respect, this Study will focus on the following steps to promote FDI which eventually leads to achieving the development target. 1. Review of the existing laws and regulations of FDI promotion and trade facilitation under the current regulatory bodies. Then, identify problems and weaknesses of the existing laws and regulations and recommend a new more suitable system which includes PPP (Private Public Partnership) scheme. A new PPP promotion strategy with a new regulation is to be recommended specifically. 2. Identify potential areas to realize investments with PPP scheme especially within Free Economic Zone (FEZ) and/or Special Economic Zone (SEZ) in the areas of tourism, industry, ICT and agriculture. Master planned areas are necessary to bring investment as a total package. 3. Select one of the most potential Special Economic Zone projects from the identified long lists and carry out a more detail Master Plan and an implementation plan. 2. Political Stability & Economic Development Trend 2.1 Political Situation 2.1.1 Political Developments The President, Mahinda Rajapaksa of the United People’s Freedom Alliance (UPFA) made a

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significant achievement in defeating the rebel Liberation Tigers of Tamil Ealam (LTTE, Tamil Tigers) in May 2009. Buoyed by its achievement, he was re-elected to a second six-year term by receiving over 57% of all votes at the Presidential Election in January 2010. The UPFA won a large majority at the Parliamentary Election in April 2010, obtaining 144 seats out of 225. The successful election results show that the current president has sufficient political power to lead and guide its economy to prosperity. Moreover, his influence over the bureaucracy has been tightened by appointing himself as several key ministers as well as family members into politics. ・ Mahinda Rajapaksa: President of Sri Lanka, Minister of Defense, Finance and

Planning, Ports & Aviation, and Highways ・ Chamal Rajapaksa (elder brother of the president): Speaker of the Parliament ・ Gotabhaya Rajapaksa (younger brother of the president): Defense Secretary ・ Basil Rajapaksa (the youngest brother of the president): Minister of Economic

Development ・ Nirupama Rajapaksa (cousin of the president): Deputy Minister for Water Supply and

Drainage ・ Shashindra Rajapaksa (nephew of the president): Chief Minister of Uva Province ・ Jaliya Wickramasuriya (cousin of the president): Sri Lanka’s Ambassador to the

United States ・ Udayanga Weeratunga (cousin of the president): Sri Lanka’s Ambassador to Russia Through their portfolios, the president and his brothers control the government budget directly. This family network would maintain the political stability of the country at least during his presidency, on the other hand, the criticism towards bureaucracy and crony capitalism can be easily raised among public. In this regard, achieving manifesto is the desirable task to keep the public support. 2.1.2 “Mahinda Chintana – Vision for the Future” At the Presidential Election in January 2010, the President Mahinda Rajapaksa presented the manifesto “Mahinda Chintana – Vision for the Future” which shows a strong political will to drive the economy to achieve the development goal. It targets a per capita income in excess of USD 4,000 by 2016 from the current level of USD 2,000. In order to achieve the figure, private investment from both foreign and domestic sources has to be increased from the present level of 19-21 percent of GDP to a range of 26-28 percent over the next 6 years. This together with public investment of around 6-7 percent, the total investment can be raised around 25-27 percent to 32-35 percent of GDP, to support the targeted economic growth in excess of 8 percent in the medium term and 10 percent thereafter. For transforming Sri Lanka into a strategically important economic centre of the world, the vision to develop Sri Lanka as five hubs are included (1)Naval, (2)Aviation, (3)Commercial,

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(4)Energy and (5)Knowledge, serving as a key link between East and West. (1) Naval Hub The construction works of several ports are in progress to attract large scale investment into the country. Hambantota Port ・ The first ship to be anchored at the port by November 2012 and the port is expected to

bring 10,000 vessels annually to generate Rs. 50 billion. It is likely to be operated as a free port.

South Colombo Port ・ The new port is expected to be operational by 2012 with the double container handling

capacity. Trade facilitation is likely to be improved. Galle Port ・ The port is expected to bring passenger ships as well as medium and small size vessels

and promote tourism in the region. Other ports development such as Oluvil (Eastern Province), Kankesanthurai (Northern Province) and Trincomalee (Eastern Province) Ports are ongoing for promoting internal transportation and tourism. 50,000 direct employment opportunities will be created by the port developments. (2) Aviation Hub Mattala – Second International Airport ・ the new international airport in Mattala with a runaway of 4 kilometers, will be the

second international airport in Hambantota district. Katunayake Airport Rehabilitation ・ New facilities will accommodate large aircrafts such as A380. Other airports are developed in Palali (Northern Province), Amparai (Eastern Province), and Ratmalana (Western Province) for improving domestic transportation. (3) Commercial Hub By improving the physical infrastructure and upgrading the human resources, Sri Lanka is likely to be a commercial center for commercial services, international banking and investment. (4) Energy New oil refinery will be built in Hambantota and Sapugaskanda, and generating nuclear power is considered. (5) Knowledge Hub The government will introduce a measure to stop brain drain effect of the country and to provide attractive employment opportunities within the country. Training program to target foreign markets will also be set up.

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2.2 Economic Structure 2.2.1 Basic Economic Trend and Data The main social indicators for Sri Lanka are shown in Table 2.1. With the population growth rate of 1.1 percent in 2009, rapid growing population cannot be expected due to the densely populated urban area as well as higher education level. Social indicators have been favorable compared with other South Asian nation, for example, life expectancy is 77.8 for women and 70.2 for men, showing a relatively good health and sanitary level. Additionally, Sri Lanka’s HDI (Human Development Index) has progressively increased up to 0.658 in 2010 compared to 0.513 in 1980, and the current level is above the average of 0.516 for countries in South Asia. This is mainly due to favorable social indicators of literacy and life expectancy.

Table 2.1 Social Indicators of Sri Lanka

Item UnitPopulation (2008) (estimated, 000) 20,061Area (sq.km) 65,610Polulation density (per sq. km) 305.8Population growth rate (2009) (%) 1.1Life expectancy at birth (2007) (years) 74.1Infant mortality rate (2006) (per 1000 live births) 10.0Gross school enrolement ratio (2005) (%) 62.7Adult literacy rate (2005) (%) 91.3Human development index (HDI) (2010) (value) 0.658Gender inequality index (GII) (2010) (value) 0.599Human poverty index (HPI) (2005) (value) 17.8Source: United Nations Statistics Division

23

Table 2.2 shows the basic economic indicators of Sri Lanka.

Table 2.2 Economic Indicators of Sri Lanka

2005 2006 2007 2008 2009Output, labor force and employmentGNP at current market prices Rs.bn. 2,423.0 2,898.0 3,540.0 4,306.0 4,769.0GDP at current market prices Rs.bn. 2,453.0 2,939.0 3,579.0 4,411.0 4,825.0GDP per capita at current market prices USD 1,241.0 1,421.0 1,634.0 2,014.0 2,053.0Labor force mn. 7.3 7.6 7.5 8.0 8.1Labor force participation % 48.3 51.2 49.8 49.5 48.7Unemployment % 7.7 6.5 6.0 5.4 5.8Real output growthGDP growth % 6.2 7.7 6.8 6.0 3.5Agriculture, forestry, and fishing % 1.8 6.3 3.4 7.5 3.2Mining and quarrying % 14.1 24.2 19.2 12.8 8.2Manufacturing % 6.0 5.5 6.4 4.9 3.3Construction % 8.9 9.2 9.0 7.8 5.6Services % 6.4 7.7 7.1 5.6 3.3GDP by SectorAgriculture % 12.5 12.3 11.9 12.1 12.0Industry % 28.1 28.2 28.5 28.4 28.6Services % 59.4 59.5 59.6 59.5 59.3Employment by SectorAgriculture % 30.7 32.2 31.3 32.7 32.6Industry % 24.5 26.6 26.6 26.3 26.2Services % 44.8 41.2 42.1 41.0 41.2Source: Central Bank of Sri Lanka, Annual Report

24

2.2.2 GDP Growth and Prospects Figure 2.1 Quarterly GDP Growth (%)

Affected by the global economic crisis, GDP growth in 2009 was 3.5 percent, even lower than the conflict period of 7.6 percent in 2007 and 8.0 percent in 2008. The slow growth, with the most severely affected sectors being services and industry, was due to the loss of export demands which also affected the domestic demands and consumption. The rebound of GDP growth became significant after the Q4 of 2009 of 6.2 percent, and the highest growth rate has been recorded as 8.5 percent in the Q2 of 2010 since 2002. The rebound of GDP growth was supported by the recovery of the investors’ confidence, the government’s increasing expenditure in infrastructure development, the recovery of the domestic demand, and the export growth in the garment sector. This momentum is expected to be maintained in all sectors of agriculture, industry and services. The central bank forecasts the growth rate of 6.5% in 2010 and 7.5% in 2011.

Figure 2.2 GDP by Province (2008) GDP distribution by province (Figure 2.2) shows that the production activities are concentrated in the Western Province of 45.4 percent of the total GDP, while the formerly conflict-affected Northern and Eastern (N&E) Province consists only 8.4 percent. Reconstruction projects, additional harvest and employment of the N&E are likely to contribute towards GDP growth in the coming years.

‐2.0

0.0

2.0

4.0

6.0

8.0

10.0

09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3

Agricul ture

Industry

Services

GDP

45.4%

10.6%6.4%

9.9%

4.6%

5.5%

10.0%

4.7% 2.9%

Western Southern Sabara ‐gumuwa

Centra l Uva Eastern

North Western North Centra l Northern

Source: Central Bank of Sri Lanka

Source: Central Bank of Sri Lanka

25

2.2.3 External Sector Sri Lanka has been experiencing persistent trade deficit over the years. Figure 2.3 shows that both export and import were affected by the global economic crisis in 2009. Export earnings contracted by 12.7 percent owing to the fall in export of all major products. Import also contracted by 27.6 percent due to the reductions in both volumes and prices. Since the reductions of import was larger than the export earnings, the trade deficit contracted by 47.8 percent in 2009. Trade rebounded in 2010; export earnings expanded by 15.4 percent and import also grew by 32.3 percent during the eleven months of 2010. Import recovery was faster than the export rebound during the first nine months of 2010, however, the figure of October and November 2010 shows that the growth rate of export exceeds the import growth rate reflecting substantial increases in some of the relatively newer categories of exports, such as boats, bicycles, electrical equipment, rubber products, petroleum products, food, beverages and tobacco. Rising exports, notably of newer industries, to emerging markets such as India and China will help to offset the declining demand in the US or EU markets, ensuring that export growth remains relatively strong.

Figure 2.3 Trade

‐800

‐600

‐400

‐200

0

200

400

600

800

Jan‐08

Mar‐08

May‐08

Jul‐0

8

Sep‐08

Nov

‐08

Jan‐09

Mar‐09

May‐09

Jul‐0

9

Sep‐09

Nov

‐09

Jan‐10

Mar‐10

May‐10

Jul‐1

0

Sep‐10

Nov

‐10

‐80

‐60

‐40

‐20

0

20

40

60

80

Trade Deficit Import (YoY) Export (YoY)

(mil USD)  (%) 

Source: Central Bank of Sri Lanka

26

Figure 2.4 Major Export and Import Products in 2009

Figure 2.5 Direction of Trade in 2009

Import

12.2%

7.1%

21.2%

14.1%1.9%9.9%

4.3%

7.0%

22.2%

Agriculture goods Durables

Petroleum Textiles

Ferti liser Machinery

Transport equipments Building materials

Others

Export

46.2%

1.9%5.4%4.5%

16.7%

1.4%

2.3%

3.4%

1.0%

17.2%

Textiles and Garments Petroleum Products

Rubber Based Products Diamonds

Tea Rubber

Coconut Products Minor Agricultural  Produ

Gems Other

Export

22.2%

14.4%

6.2%5.1%4.9%

4.5%

3.0%

2.7%

2.2%

2.1%

32.7%

USA UK Italy Belgium

Germany India UAE Russia

Netherlands Iran Others

Import

17.8%

10.4%

10.1%

8.8%5.1%

4.0%

2.8%

2.7%

2.7%

2.5%

33.1%

India Singapore China Iran

Hong Kong UAE Malaysia Canada

Thailand USA Others

27

In respect of the Balance of Payment, the current account recorded deficit of 633.4 million USD in 10Q1 due to the trade deficit in goods (Table 2.3). However, high remittance flows supported the current transfer and fairly offset the current account deficit. Capital and financial accounts surged due to the inflow of portfolio investment which boosted stock market and domestic currency. Upward pressure on the exchange rate appreciated the Sri Lanka Rupees of 6.1 percent in 2009.

Table 2.3 Balance of Payments (mil USD)

2.2.4 Foreign Direct Investment FDI had been stagnated until 2008 due to the 26 years of the Civil War. FDI reached a record high of USD 889 million in 2008 reflecting the recovery of investor sentiments, but it fell to USD 601 million in 2009 affected by the global economic crisis (Figure 2.4). The highest FDI inflow was recorded from Malaysia amounting to USD 165 million followed by UK and India amounting to USD 89 million and USD 78 million respectively during 2009 (Figure 2.5). The telecommunications and, power and energy sector attracted most of FDI inflows. Achieving the political stability by the end of the conflict, FDI flows are expected to be realized with the initiation of infrastructure development especially in the Northern & Eastern provinces. More importantly, FDI inflows to manufacturing sector would bring spill-over effect to other industries which will lead sustainable FDI inflows in a longer-term. Figure 2.4 FDI Volume (1978-2009, mii USD) Figure 2.5 FDI by Country in 2009

09Q1 09Q2 09Q3 09Q4 10Q1　Goods -665.1 -697.8 -654.2 -1105 -1461.3　Services 79.6 44.2 181.2 85.8 178.3　Income -126.3 -46.4 -85.9 -229 -136.2　Current Transfer 698.7 797 814.1 694.7 785.8　Current Account -13.1 96.9 255.3 -553.5 -633.4　Capital Account 35.6 86.4 60.1 50.8 46.1　Financial Account -184.1 251.7 1467.7 826 1021.7　Capital and Financial Accounts -148.4 338.1 1527.7 876.7 1067.9

‐

100

200

300

400

500

600

700

800

900

1,000

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

27.4%

14.8%

12.9%7.3%

4.4%

4.0%

3.6%

3.6%

3.3%

3.3%

3.2%

12.3%

Malaysia  UK India Netherland

Hongkong Luxembourg Singapore USA

Sweden China Japan Others

Source: Central Bank of Sri Lanka

28

2.2.5 Donor Financing The total financial disbursement up to the end of September 2010 was USD 1,460.3 million, focusing on the infrastructure development such as roads and transport, ports and airport development, and water & sanitation. The volume will surge further this year with the precise role of foreign aid in supporting reconstruction of the conflict-affected Northern and Eastern Provinces. The government of China, Japan and the Asian Development Bank were the three main donors which consist 73.5 percent of the total disbursement (Table 2.4). China initiated Hambantota Port Development Project of USD 87.4 million together with the bunkering facility and tank farm of USD 12.1 million. Table 2.4 Projects with Disbursements over USD 10 million in 2010 (up to end September) (mil USD)

Donor/Creditor Project AmountBunkering Facility & Tank Farm Project at Hambantota 12.1Supply of 13 nos of Diesel Multiple Units to Sri Lanka 29.9Hambanota Port Development Project 87.4Puttalum Coal Power Project ‐ Phase I 98.7Puttalum Coal Power Project ‐ Phase II 445.5Colombo Prot Expansion Project 47.9Conflict Affected Areas Rehabilitation 16.4National Highway Sector Project 21.0Southern Highway Construction Project 15.3

ADB/EuropeanCommission Tsunami Affected Areas Rebuilding Project 22.7

Colombo City Electricity Distribution Development Project 19.6Greater Colombo Transport Development Project 35.1Lunawa Environment Improvement and Community Development Project 12.7Pro‐poor Economic Advancement & Community Enhancement Project 12.9Southern Highway Construction Project 24.5Upper Kotmale Hydro Power Project 41.2Water Sector Development Project 40.9Provincial Roads Project 14.6Emergency Northern Recovery Project 23.4Second Community Development & Livelihood Improvement Project 15.2Rehabilitation of Wimalasurendra and New Laxapana Power Stations 14.2Trincomalee Integrated Infrastructure Project 25.2

HSBC Emergency Purchase of Container Handling Equipments for Jaya‐ Terminal 35.0Netherlands Development of Dikkowita Fishery Harbour 22.3UK Regional Bridge Project 16.9Sweden Ratmalana and Ja‐Ela Waste Water Treatment Facilities Project 15.9Denmark Oluvil Port Development Project 15.8Source: Department of External Resources

World Bank

France

China

ADB

Japan

29

3. Challenges and Opportunities of Sri Lanka 3.1 Challenges 3.1.1 Migrating Workers Figure 3.1 Workers’ Remittance Sri Lanka has experienced a brain drain problem of a steady increase in immigration and remittance flows over the last couple of decades. Foreign employment industry has become the highest net earner of foreign exchange compared with the inflows of FDI and ODA. In 2009, the remittance inflows reached USD 3,332 million, 59.9 percent from Middle East, 18.1 percent from EU and 6.1 percent from East Asia (Figure 3.1). Figure 3.2 Foreign Employment by Categories

In respect of foreign employment by manpower categories, 79.7 percent of the employment opportunities are either professional level, middle level, clerical & related, skilled, semi skilled or household which would contribute to the output of the economy. Although remittance supports macro economy in terms of the stability to the balance of payment, it should be noted that the foreign employment has reduced the labor force growth and caused labor shortage especially in the high skilled industry, which could affect the economy adversely.

2.4%

46.0%

20.3%

24.8%

2.7%2.6%1.1%

Professional  Level Middle Level Clerical  & Related

Skil led Semi  Skilled Unskilled

Household

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2005 2006 2007 2008 2009Middle  East EUEast As ia Europe  OtherNorth America Southeast As iaAus  & NZ South As iaSouth & Centra l  America Eastern EuropeOther

(mil  USD)

Source: Sri Lanka Bureau of Foreign Employment

Source: Sri Lanka Bureau of Foreign Employment

30

3.1.2 Unemployment Figure 3.3 Unemployment Rate (1993-2009)

Figure 3.3 shows that the unemployment rates in Sri Lanka have declined over the years. The total unemployment rate in 2009 was 5.7 percent; the female unemployment rate of 8.2 percent is higher than the male of 4.3 percent. The declining unemployment rates show the favorable labor market in Sri Lanka, however, the employment to population ratio for Sri Lanka has

remained at around 45 from 2003 to 2008, indicating that the ability of the economy to create jobs have stagnated over the years1. The Table 3.1 shows that the unemployment in younger generation is significant. The highest unemployment was from the age between 15-29 years of 21.3 percent, of which the male for 17.1 percent and the female for 27.9 percent. The lowest unemployment in age category was over 40 years of 1.4 percent. This implies that the younger generation has fewer opportunities in the job market and the availability of productive work is limited, the situation has not been changed over the years.

Table 3.1 Unemployment Rates by Age Group The Western Province faces a shortage of skilled labor force in services sectors such as IT, Tourism and Trading, while the Northern and Eastern Provinces are facing a lack of employment caused by the conflict. Developing physical infrastructure of roads or railways would provide significant job opportunities for the young generation in the Northern and Eastern Provinces, in a meanwhile; upgrading the education level and establishing a vocational center to meet the increasing demands of IT sector are required for job creation of the younger generation.

1 Sri Lanka State of the Economy 2010, Institute of Policy Studies

0

5

10

15

20

25

1993

1995

1997

1999

2001

2003

2005

2007

2009

Total 

Male 

Female 

(%)

Gender Male Female

Total 5.8 4.3 8.615 - 24 21.3 17.1 27.925 - 29 10.3 6.8 16.730-39 3.7 2.2 6.3Over 40 1.4 1.2 1.6

Age group(Years) Total

Source: Sri Lanka Bureau of Foreign Employment

Source: Sri Lanka Bureau of Foreign Employment

31

3.1.3 Labor Regulations and Higher Wages According to the JETRO business survey in 20102, one of the biggest problems Japanese companies facing in Sri Lanka is the tight labor regulations. With reference to the Termination of Employment of Workmen Act, the cost of severance payments for a worker is very high especially for those who worked in a company for longer term (Table 3.2). Protection of workers is the main concern for the government; however, the rigid labor regulations are the disadvantage for a company to consider setting up a factory within a liberalized global environment.

Table 3.2 Payment of Compensation Number of Years if Services Completed at the Date of Termination

Number of Months Salary to be Paid as Compensation for each Year of Service

Maximum Compensation (Cumulative) Month Salary

1 to 5 2.5 12.5 6 to 14 2.0 30.5

15 to 19 1.5 38.0 20 to 24 1.0 43.0 25 to 34 0.5 48.0

Increase in wages also cause problem in hiring labors. The average monthly wages of workers in Sri Lanka is USD 120, which is higher than Vietnam, Cambodia, Bangladesh and Myanmar where labor intensive manufacturing sector has the competitiveness with its cheaper labor force (see Figure 3.4). Figure 3.4 Monthly Wages of Workers and Engineers (USD)

Compared with China, Indonesia and India enjoying large scale of economy as well as having huge domestic market and countries like Vietnam and Bangladesh enjoying lower cost of labor and huge younger population, the competitiveness of Sri Lankan labor market is rather weak. Source: JETRO Survey 2010

2 http://www.jetro.go.jp/world/asia/kh/reports/07000386

41

54

101

107

120

174

182

212

263

269

298

303

0 100 200 300 400

Myanmar

Bangladesh

Cambodia

Vietnam

Sri Lanka

Pakistan

Indonesia

Philippines

Thailand

India

Malaysia

China

Source: BOI

32

3.1.4 Problems of Doing Business According to the Doing Business Report 2011 elaborated by World Bank3, Sri Lanka was placed 102nd out of 183 economies in the rankings on the ease of doing business, which is higher than 111th of Bangladesh or 134th of India, but lower than East Asian countries like Vietnam and China. In respect of paying taxes and the tax burden for local enterprises, Sri Lanka is ranked as 166th, one of the worst countries due to the complexity of tax or mandatory contribution in setting up business. 62 separate tax payments and 256 hours of compliance hours a year are required to enterprises, as said in the report. East Asian countries have simplified tax payment by unifying the account methods and introducing electronic tax filing system which has took decades to reach the current level. Sri Lanka also needs to pay a serious attention in improving the complex tax system. 3.2 Opportunities 3.2.1 Budget 2011 The government has announced the 2011 budget on 22nd November 2010 to reveal several tax cuts on targeted sectors to improve the business confidence which in line with the government target “Mahinda Chintana”. Several measures will be effective towards 2011: • Reduce personal income tax rates from the current 5 to 35 percent to 4 to 24 percent • Cut corporate income taxes from 35 to 28 percent except for tobacco, alcohol and casinos • Export Sector: Reduce income tax of all export companies from 15 percent to 12 percent,

reduce income tax on profits from 35 percent to 28 percent • Tourism Sector: Reduce tax on income earnings from tourism and related business from

15 percent to 12 percent, reduce duties and taxes on passenger transportation vehicles by 25 percent

• Financial Sector: Abolish the bank debit tax on withdrawal and VAT on financial services from 20 percent to 12 percent.

• IT and BPO Sector: Establish a knowledge city in each province linked to university townships, remove VAT and Nation Building Tax on software

• Apparel Industry: Exempt import duties and VAT for machinery and equipment in manufacturing textile, leather, footwear and bags

The budget deficit in 2011 will amount to Rs. 434 billion which is 6.8 percent of GDP. The government targets to minimize the budget deficit to 5 percent of GDP in the medium term. The expenditure for infrastructure development is likely to be increased to meet the demand; therefore, the way to increase the revenue sources shall be clearly addressed.

3 http://www.doingbusiness.org/

33

3.2.2 Agro-Forestry in Business Figure 3.5 Proposed Highly Productive Agricultural Area

Agriculture is one of the key sectors of the economy which consists 12 percent of GDP and 32.4 percent of total employment. 31.8 percent of the total exports are agricultural products in 2009; the main products are tea, rubber and coconut products. In stead of exporting basic food commodities, value addition to the agro-forestry products is necessary to be competitive in the export market. Processing and canning of food and fish to utilize the natural resources have big potentiality, especially in the Northern and Eastern Provinces where the productivity of agriculture and fishery products have been historically high. More private sector participation with foreign capital is required to accommodate the harvesting, processing and storage facilities. Several key areas should be identified in the agro-forestry sector which shall be based on the Figure 3.5 of proposed highly

productive agricultural areas. Highly profitable primary products such as corn, cassava, beans, and woodchips shall also be considered to be developed in Sri Lanka. 3.2.3 Up-Skilled Garment Sector Textiles and Garments Sector consisted 46.5 percent of total export in 2009. Although the export earnings contracted by 3.1 percent in 2009 due to the global demand drawdown, the export data in November 2010 shows that the textile and clothing exports increased by year-on-year 25.6 percent. Withdrawal of GSP-plus concessions by EU may not have a direct impact on the garment sector immediately; however, the garment sector would not be a main export component in the long term with the higher labor wages of Sri Lanka and the global competition from Bangladesh, Cambodia and Myanmar where cheaper and abundant labor force is available.

Source: National Physical Planning Policy and Plan

34

Upgrading the sector to produce higher valued textiles and garments are necessary to keep the competitiveness of the sector. 3.2.4 ICT/BPO Sector ICT and BOP services sector is the emerging sector in Sri Lanka. According to the government estimation, ICT and BPO industry is projected to grow by 26% in 2011 with export earnings estimated at USD 390 million for 2010. Sri Lanka has set a target of US$ 1 billion revenue with employment of 100,000 by 2015 in the IT/ BPO industry. There are nearly 300 IT BPO companies currently operating in Sri Lanka which include global firms like HSBC, WNS Global Services, Aviva, Microsoft, Motorola, Industrial & Financial Systems (IFS), Amba Research, RR Donnelley, Quattro, Virtusa, eCollge, Valista, Millennium Information Technology and Innodata Isogen.

Figure 3.6 Top Ranking Destinations in ICT/BPO

In IBM’s Global Location Report for 2010, Sri Lanka is ranked as 12th destinations for ICT/BPO sector. Philippines and India have remained in the leading position for decades in attracting services industries by providing favorable business environment for international business support functions. Establishing a university curriculum to support the growing demand as well as setting up a business friendly environment is necessary to fully reap the potential of Sri Lankan in the IT/BPO sector.

Source: IBM Global Location Report for 2010

35

3.2.5Tourism Figure 3.7: Tourism Development in Sri Lanka

Increasing attention has been paid on Sri Lanka’s tourism sector with the end of the conflict. Sri Lanka attracted 654,000 tourists in 2010, recording the highest number. The government targets the tourist arrivals to 2.5 million by 2016. The latest statistics of January 2011 showed the tourist arrivals rose year-on-year 46.2 percent led by the increasing number of Europeans and Indians visiting Sri Lanka. The Sri Lanka Tourist Board introduced the concept of Tourism Zones. The objective was to set specific guidelines and to manage these Zones efficiently to avoid ad-hoc tourism development. Several zones have been identified: • Dedduwa Lake Resort • Eastern Region Development • Kalpitiya Project • Passikudah Resort Detail master plan and integrated infrastructure development would make the tourism zone development success in attracting private investment and foreign tourists.

3.2.6 Cooperation with India Using the geographical location, closer economic integration with India would open doors for new opportunities in both goods and services for the Sri Lankan economy. India has better access with other Asian counties such as Singapore, Korea and ASEAN as India has signed several free trade agreements. Sri Lanka should proceed with the negotiation for concluding Comprehensive Economic Cooperation Agreements (CECAs) with India to tap into the growth potential of India as well as the rest of the world. Political ties have been strengthened after the end of armed conflict. Several rehabilitation and reconstruction projects have been initiated by India at the political dialogue between the two countries. Private Public Partnership (PPP) project is expected to be seen to realize the cooperation politically and economically.

Source: Tourism Development Authority

36

4. Industrial Park (IP) and Export Processing Zone (EPZ) Development of Sri Lanka 4.1 BOI Regime Sri Lanka was one of the first countries in Asia introducing IP/EPZ. In 1978, the government started to take the economic liberalization policy and set up the Greater Colombo Economic Commission (GCEC) with wide ranging powers to facilitate foreign direct investment in the fully export-oriented ventures. The immediate goal for the country was to generate foreign direct investment, exports, foreign exchange, and employment. The Commission was authorized to set up EPZs (Export Processing Zones). In 1992, all FDI promotion activities were placed under GCEC with a view to creating a one stop investment promotion centre and the reformed GCEC was renamed the Board of Investment (BOI). The BOI took over the functions of Foreign Investment Advisory Committee (FIAC), the Industrial Development Board (IDB) and the Local Investment Advisory Committee. Thus the scope of BOI operations was extended to include all FDI (export oriented and domestic market seeking) and domestic large scale operations.4 The principal law applicable to foreign investment is BOI Law No. 4 of 1978 and amendments introduced in 1980, 1983 and 1992 and Regulations made under the Act. The BOI Act provides two types of investment approvals: (1) Under Section 17 of the Act The BOI is empowered to grant special concessions to companies satisfying specific eligibility criteria, which are designed to meet strategic economic objectives of the government. The mechanism through which such concessions are granted is the Agreement, which modifies, exempts and waives identified laws in keeping with the BOI Regulations. These laws include Inland Revenue, Customs, Exchange Control and Import Control. (2) Approval under Section 16 of the BOI Act Permits foreign investment entry to operate only under the ‘normal laws’ of the country; that is, for such enterprises, the provisions of the Inland Revenue, Customs, Exchange Control Laws shall apply. (BOI)

4 Aradhna Aggarwal (2005) "Performance of Export Processing Zones: A Comparative Analysis of India, Sri Lanka and Bangladesh"

37

4.2 BOI Incentives Investment incentives are offered to the following target investments to attract export oriented FDI:

Table 4.1 BOI Incentives

BOI approves investments located within EPZ as well as outside EPZ. Their incentives are designed mainly to attract export oriented FDI. The incentives include tax holiday, concessionary tax, import duty exemption on capital goods and raw materials, and exemption from exchange control. These incentives are given to projects located inside EPZs which qualify certain criteria such as minimum investment volume and minimum export requirement (portion of output/income). For projects located outside EPZs, fewer incentives are provided, however, certain investment and export volume is not required.

Source: Board of Investment

1 Manufacture of non-traditional goods except for black tea in bulk, crepe rubber, coconut oil,etc., or such other commodity as determined by BOI

2 Export-oriented services which include・ Garment washing and finishing plants・ Embroidery services・ Ship repairs and ship breaking・ Textile dyeing and finishing plants・ Textile printing・ Testing of fabric・ Computer aided designs for garment and other industries・ Bunkering services・ Production of films・ Air cargo services・ International passenger services・ Repairing of containers・ Vacuum packing of garments

3 Manufacture of industrial tools, equipment components and/or machinery4 Small scale infrastructure projects5 Information Technology (IT) and/or IT related services

・BPO industry・Training institute

6 Regional operating head quarters7 R&D8 Agriculture and/or agro-processing9 Export trading house

10 Large-scale (new/existing) projects11 Textile/fabric manufacturing printing, dyeing, washing and finishing

38

4.3 EPZs/IPs Figure 4.1 EPZs/IPs in Sri Lanka

The first EPZ became operational in 1978 in Katunayake (Katunayake EPZ), which is located closely to Colombo. The second EPZ was set up in Biyagama in 1983 near Colombo in Gampaha district (Biyagama EPZ). Currently BOI manages 12 EPZs/IPs in Sri Lanka where 271 projects are in operation generating 85,243 employment opportunities. The total number of projects is 1,726 with 346,516

employment opportunities including outside zones. Investors are required to pay non refundable land premium for initiating the investment as well as ground rent per year for operating their factories. Lease period is usually for 30 years (Table 4.2). Foreign investors may also locate enterprises outside EPZs/IPs. They may lease the site or purchase land outright and the BOI will assist potential investors in choosing a site. State land is allotted usually on a 30-year lease; 99 year leases may also be approved on a case-by-case basis depending on the nature of the project.

Table 4.2 EPZs/IPs Statistics

Non RefundableLand Premium

(USD)

Ground Rent peryear (USD)

Katunayake EPZ 99 14,490 40,828 50,000.00 3,850.00　Biyagama EPZ 67 23,490 14,993 50,000.00 3,850.00　Kandy IP 13 1,392 3,533 15,000.00 3,700.00　Mirigama EPZ 13 1,264 1,572 20,000.00 3,700.00　Mirijjawila IP 0 0 0 5,000.00 3,700.00　Wathupitiwala EPZ 14 3,832 3,150 40,000.00 3,700.00　Malwatte EPZ 6 770 1,895 15,000.00 3,700.00　Koggala EPZ 20 2,491 9,812 15,000.00 3,850.00　Seethawaka IP 22 7,097 6,871 20,000.00 3,850.00　Mawathagama EPZ 1 80 500 15,000.00 3,700.00　Polgahawela EPZ 4 228 853 20,000.00 3,700.00　Horana EPZ 12 4,210 1,238 20,000.00 3,700.00　12 EPZ Total 271 59,344 85,245 　Outside Zones 1,455 4,060,802 261,271 　Total 1,726 4,120,146 346,516

Charges Per Acre

No. of Projects FDI/DDI(Rs.Mn.) Employment

Source: Board of Investment

Source: Board of Investment

39

Table 4.3 FDI by Sector (2005-2009) (mil USD)

Source: BOI Table 4.4 TOP 25 Investors

Sector 2005 2006 2007 2008 2009Manufacturing 135.321 234.777 174.016 189.183 163.22Food, Beverages & Tobacco 29.382 34.1 25.932 14.742 10.088Textile, Wearing Apperal & Leather 47.278 103.479 62.6 72.281 51.398Wood & Wooden Products 0.916 4.392 0.769 2.208 1.693Paper,Paper Products& Printing 8.156 0.76 0 0.858 20.773Chemicals, Petroleum, Coal & Plastics 4.305 10.89 1.14 5.248 1.754Rubber Products 15.831 32.267 47.897 34.679 13.644Electronics & Electricals 5.901 6.875 7.669 14.605 23.153Non-Metalic & Mineral Products 5.901 5.266 4.712 12.769 11.178Fabricated Metal, Machinery & 15.337 14.078 12.544 14.383 14.035Other Manufactured Products 2.314 22.67 10.753 17.41 15.504Agriculture 0.473 0.672 0.417 2.652 3.689Vegetables 0.473 0.672 0.417 2.652 3.689Infrastructure 140.957 329.56 526.47 660.821 381.536Housing & Property Development 13.433 58.321 30.157 19.864 17.74Telephone & Telecommunication 111.74 263.426 403.632 553.097 296.064Power Generation 15.784 7.813 92.681 87.86 67.732Services 10.453 38.677 33.459 36.279 52.805Hotels & Restorants 2.426 6.193 7.825 3.133 5.495IT and BPO 2.155 14.341 8.712 15.219 12.468Other Services 5.872 18.143 16.922 17.927 34.842GRAND TOTAL 287.204 603.686 734.362 888.935 601.25

Foreign Local TotalDIALOG TELEKOM PLC Malaysia 96,443.2 4,445.0 100,888.2WEST COAST POWER (PVT) LTD. Sri Lanka 22,313.5 11,868.0 34,181.5ETISALAT LANKA (PVT) LTD. Luxembourg 20,591.0 4,182.0 24,773.0BHARTI AIRTEL LANKA (PVT) LTD. India 21,287.6 0.0 21,287.6MOBITEL (PVT) LTD. Sri Lanka 7,036.1 13,663.2 20,699.4

SRI LANKA TELECOM PLC Japan,Netherlands,Sri Lanka 16,850.5 0.0 16,850.5LOADSTAR (PVT) LTD. Belgium,Sri Lanka 12,940.5 2,812.0 15,752.5

SUNTEL LTD. Hong Kong,SriLanka,Sweden,UK,USA 11,525.5 2,128.0 13,653.5

PRIMA CEYLON LTD. Singapore,Sri Lanka 13,548.2 48.0 13,596.2HUTCHISON TELECOMMUNICATION LANKA P.L. Hong Kong 11,881.9 0.0 11,881.9HOLCIM LANKA LTD. Switzerland , Sri Lanka 1,647.2 9,537.0 11,184.2AES KELANITISSA (PVT) LTD. USA,Sri Lanka 10,657.3 260.0 10,917.3

SRILANKAN AIRLINES LTD. United Arab Emirates , SriLanka 7,420.4 2,901.2 10,321.6

OVERSEAS REALTY (CEYLON) LTD. Singapore,Sri Lanka 9,723.1 414.0 10,137.1

SOUTH ASIA GATEWAY TERMINALS (PVT) LTD. Netherlands,SriLanka,Taiwan, China,USA 6,546.4 1,562.8 8,109.2

LANKA IOC (PVT) LTD. Sri Lanka 4,276.3 3,576.0 7,852.3DIALOG BROADBAND NETWORKS (PVT) LTD. Sri Lanka 5,815.5 1,934.0 7,749.5MAS CAPITAL (PVT) LTD. Sri Lanka 2,876.9 4,667.5 7,544.4SERENDIB FLOUR MILLS (PVT) LTD. United Arab Emirates 4,308.4 1,671.3 5,979.7BRANDIX LANKA LTD. Sri Lanka 3,541.5 2,297.0 5,838.5LANKA BELL LTD. Sri Lanka 0.0 5,494.0 5,494.0TRELLEBORG LANKA (PVT) LTD. Netherlands 5,287.8 0.0 5,287.8ANSELL LANKA (PVT) LTD. Australia 5,220.5 0.0 5,220.5TEXTURED JERSEY LANKA (PVT) LTD. China,Sri Lanka 3,092.3 2,105.0 5,197.3MERBOK MDF LANKA (PVT) LTD. Malaysia 5,067.6 0.0 5,067.6

Name of the Enterprise CountryRealized Investment(Rs.Mn.)

as at end 2009

40

4.4 Environment Aspect of SEZ in Sri Lanka 4.4.1 Environmental Impacts by SEZ Environmental impacts to be caused by a SEZ depend very much on its location/types/scale of industries/enterprises as well as on environmental protection measures taken. A formal Environmental Impact Assessment (EIA) will assess environmental impacts to be caused by SEZ development. The worldwide experiences show that the environmental pollution by small and medium scale industry could be effectively controlled within SEZs or industrial parks as compared to isolated factories due to the following reasons:

1. Within SEZs or industrial parks, pollutants (industrial effluent and solid waste) could be jointly treated by common treatment facilities.

2. Higher standard could be introduced for pollution control and treatment within SEZs. 3. There are cases of waste exchange where some waste generated by a factory could be

used as a useful material by other factories within a SEZ or industrial park, which then will contribute to recycling and waste minimization.

4. High energy efficiency could be achieved within SEZs in terms of electricity transmission and consumption.

5. It is easier for the environmental authority to monitor emission and treatment compliance within SEZs than isolated factories.

6. Environmental law enforcement is easier within SEZs or industrial parks. 4.4.2 Environmental Consideration for Attracting Foreign Investors and Diffusing Pollution Control Technology In connection with development of SEZs, environmental consideration should go beyond the environmental protection within SEZs. From environmental aspect, the following issues should be addressed:

• Attracting foreign investors • Serving as a model for technology diffusion • Promoting environmental pollution control industry/business

Attracting Foreign Investors Environmentally-well designed SEZ would attract foreign investors because investors view that they could minimize environmental risks associated with the investment. Environmental compliance (with relevant laws and regulations) is a matter of concern for foreign investors. Serving as a Model for Technology Diffusion An environmental pollution control system within a SEZ or industrial park could be designed in such a way as to serve as a model system for Sri Lanka. This case exists in Japan and some other Asian countries. Model systems should be attractive enough for industrial managers and engineers to visit and see the systems. This will contribute to diffusion of environmental

41

pollution control technology in Sri Lanka. A SEZ could accommodate models in the following systems:

• Industrial effluent treatment system • Waste minimization and recycling • Solid waste disposal • Hazardous waste manifest system • Utilization of environmentally-acceptable materials (avoidance of

environmentally-harmful materials such as asbestos) • A combined system of on the job skill training and use of trained workers

Promoting Environmental Pollution Control Industry/Business Creation of SEZs or industrial parks will create a new demand for environmental pollution control technology. Such demand will help Sri Lankan enterprises to improve their pollution control technology and give birth to consulting/engineering business in this field. This has been the case with China and some other countries. This will help Sri Lankan industries to move towards knowledge-based industry. 4.4.3 Environmental Impact Assessment (EIA) in Connection with SEZ a. Positive Use of EIA In Sri Lanka, a formal Environmental Impact Assessment (EIA) is required in connection with SEZ development. An EIA should be carried out not only to satisfy a legal requirement, but also to be helpful for the following:

• Deciding on a suitable location of SEZ • Designing of SEZ • Designing of environmental protection measures and facilities

b. EIA Procedure Based on EIA results, a project proponent would obtain an Environmental Clearance (EC) before deciding on a SEZ location. Within a SEZ, an investor/enterprise must submit a Building Plan, and obtain a Certificate of Conformity (COC), after which, they would apply/obtain an Environmental Protection License (EPL), which must be obtained before commencement of operation of factory/business. The Board of Investment (BOI) actively involves itself in the all the process of the above EIA, EC and EPL. BOI acts both as an EIA executing agency and an EIA approving agency. This is understandable considering that the BOI’s main objective is promotion of investments. Having such dual function system would pose both advantages and disadvantages; i.e. procedural efficiency (advantage) and a possible lack of objective judgment (disadvantage). This issue needs a review of BOI’s responsibility/role in connection with EIA in terms of both operational and legal aspects (Figure 4.2).

42

Figure 4.2 Site Approval and EIA Procedure

4.4.4 SEZ Location in Conformity with a Land Use Plan a. Maximizing Land Use Value A SEZ requires a large land. Therefore, its location should be decided in conformity with a comprehensive land use plan. Sri Lanka has untapped vast land, especially in the Northern and Eastern regions that have high potential for development of agriculture, manufacturing industry, housing or tourism. Most parts of such land are under the control of the Sri Lanka government. The land must be used in such a way as to maximize values arising from the land use. For this purpose, it is best to use land and select suitable types of industries based on characteristics of land. b. Comprehensive Land Use Plan To know land characteristics, it is advisable for Sri Lanka to carry out a comprehensive study of the unused land, especially in Northern and Eastern regions. Key aspects to be covered in such a comprehensive study are

• Natural conditions (geographic condition, resources, climate, soil productivity, disaster

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: BOI

Grants Investment Approval

Screening

Highly polluting typePrescribed projects under EIA Regulations

Other projects

Refer to CEA for EIA procedure

Inspection by BOI/CEA (Central Environment

Authority)

Site inspection by BOI

Refer to “H&M” (High & Medium Polluting

Industries) Committee

Decision of Project Approving Agency to be

conveyed to BOI

Decision of the Committee to be conveyed to BOI

CEA’s concurrence to be conveyed to BOI

BOI grants/rejects site approval

Investor submits application to BOI

43

area, coastal conditions, and geology – wherever necessary) • Environmental conditions (surface/ground water, soil, forest, wildlife, environmentally

sensitive/vulnerable area, etc.) • Historical conditions, and • Current land use and human settlement areas

According to BOI, an Integrated Strategic Environmental Assessment has been carried out by the Central Environmental Authority (CEA) and Disaster Management Center in the Northern Province. The assessment is supported by UNDP. Results of the study will possibly provide very useful data for the planning. c. Environmental Study as Part of a Comprehensive Land Study Environmental study/consideration is an important part of the comprehensive land study. Therefore, the environmental study should be well integrated in the comprehensive land study. The comprehensive land study is useful for drafting 1) a grand and strategic master plan for land use of the regions, and 2) a phased development plan of industries including SEZs in terms of locations, types and scale of industries and of SEZs. The environmental study, as part of the comprehensive study, should cover the following aspects:

• Surface/ground water distribution and Soil condition • Forests, wildlife, bio-diversity • Natural resources including building materials • Coastal resources • Disaster vulnerable areas

Surface/ground water distribution, and Soil condition A Surface/ground water study should be conducted in terms of both its availability and vulnerability to water pollution. In Sri Lanka, especially in the Northern region, surface water is a main source of potable water. If a land is used for industrial development, utmost care must be taken to protect surface/ground water quality. Surface/ground water study should be accompanied with geological and soil condition studies wherever necessary. Forest, Wildlife, Bio-diversity The forests and wildlife in Sri Lanka have not only environmental value but also touristic value. It is advisable that Sri Lanka will protect its forest and wildlife in such a way as to be beneficial for both environmental protection and eco-tourism. Eco-tourism in Sri Lanka has a high potential for growth. Natural Resources including Building materials Natural resources study is to be conducted not only for knowing natural resources availability,

44

but also for finding ways to minimize effects of natural resources exploitation. A practical issue is where and how to obtain building materials that will be in a great demand once development starts. Coastal Resources Both Northern and Eastern Regions of Sri Lanka are very rich with beautiful coasts and beaches. Some of those coasts and beaches have a high potential for tourism development. In terms of natural beauty and water cleanliness, they are far more superior to famous beach resorts in some other Asian countries. A coastal resource study will be useful to identify valuable coastal resources as well as potential area to be developed for tourism. Disaster vulnerable areas Purposes of disaster vulnerable area study are: 1) to identify areas where disaster may occur, 2) to assess types and level of vulnerability, 3) to identify pre-caution measures against possible disasters. Results of the study would be useful for planning on development areas for housing or industries.

45

5. Global Trends of SEZ (Special Economic Zone) 5.1 Asian Experiences in SEZ The East Asian countries have attained remarkable economic growth in the past 30-40 years. One of the major factors of economic growths in forerunning ASEAN countries (Singapore, Malaysia, Thailand, the Philippines, and Indonesia) and China can be attributed to their massive foreign direct investment (FDI) in specific areas (see Figure 5.1). In the forerunning ASEAN countries, industrial estates had been built mostly in the suburban areas of capital cities. With several incentives provided by the governments, many foreign companies have invested and set up their factories in these industrial estates since the second half of the 1980s. In the first half of 1980s, the government of China designated five cities as Special Economic Zones (SEZ). Figure 5.1 FDI in ASEAN Countries (1995-2009) (bil USD)

5.2 Necessary Factors to Implement SEZ Program Several incentives to attract investors are recommended in introducing an SEZ program. The incentive package includes software as well as hardware as the key elements of implementing successful SEZ program. Necessary components should be provided to investors which in turn generate various benefits to the country.

5.2.1 Investment Laws A national legal framework which provides guarantee for long term stability for investors’ business operation is essential to attract foreign investments. Within investment laws, definition of the development of SEZ, organization and function of the SEZ authorities, incentives in certain industries, incorporation process, and land ownerships/lease policy should be described specifically. Investment laws must be competitive and transparent enough to follow the rapidly changing global market in order to attract investors from different nations. Investment laws represent the strong political will to bring in foreign investments into a country. 5.2.2 Organization A national SEZ authority which determines an investment policy of a whole country is mainly

‐5

0

5

10

15

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2007

2008

2009

‐15

‐5

5

15

25

35

45

Indones ia   Malays ia   Thai land Viet Nam  Singapore  (rhs ) 

Source: ASEAN Secretariat

46

responsible for foreign investments. Assisting all local SEZ administrations by a single SEZ authority is not possible; therefore local administrative operations are conducted by several agencies. Besides a state level authority, investment agencies in a provincial level and an each SEZ level can be set up and their functions should be clearly distinguished. Staff of an organization should be proactive in investment promotion by visiting customers individually or holding investment road show in overseas. They are expected to deal with different languages to meet various customers’ needs. 5.2.3 OSS (One Stop Service) An SEZ authority should have an OSS mechanism to streamline business administration processes in a single window environment. OSS services are provided in two stages: pre-operation stage and post-operation stage. At the pre-operation stage, investors can obtain local information, investment license, tax certificates, work permit for expats, and staff/worker recruitment supports. At the post-operation stage, investors are provided with supports to get land use right certificates, register a company, and consult on labor related matters. Investors can also utilize the SEZ operation, such as security guards and waste collection. Trouble shooting mechanism after investment is one of the most important factors to sustain longer term investments. Problems related to labor or land should be addressed with immediate measures and actions. 5.2.4 Basic Infrastructure Basic physical infrastructure must be set up before investors decide on operating factories. A full set of infrastructure from power, telecommunication, access by air, road and sea, water/waste water treatment, and industrial waste treatment must be prepared to get the basic condition to start production in a factory. Since it is not possible to develop all of infrastructure with the central government budget at the initial stage of economic development, utilizing infrastructures in neighboring regions can broaden connectivity. For example, in Indonesia and Malaysia, Batam Island and Iskandar Malaysia is closely located to Singapore. Therefore, they can have the greater accessibility to the Singapore’s established infrastructures such as airports and seaports. 5.2.5 Services In many SEZs, manufacturing sector is not the single target industry. Service industry such as banking, insurance and logistics shall facilitate total operation in SEZs. Comprehensive banking system can bring domestic as well as foreign commercial banks which finance operating capital of factories in SEZs. Allocating logistics companies in SEZs would facilitate transportation costs and time frame. 5.2.6 Market-Oriented Skilled Workers SEZs should provide decent skilled workers to meet targeted sectors. Governments’ strong

47

initiative in implementing human resource development is necessary to keep competitiveness of work force. Singapore and Malaysia’s experiences could be a good example: they have successfully provided skill development programs since 1970s and 1980s respectively when they faced a shortage of skilled workers to upgrade the industrial structure. 5.2.7 Tax Incentives Tax incentives on VAT, duty and income tax could be an incentive to attract foreign investors at the initial stage of SEZ development; however, as Vietnam experienced, tax incentives would no longer be attractive after entering into WTO because investors are equally treated inside/outside SEZs. After the tax advantages are eliminated, OSS function or accumulations of similar industries locating in SEZs become tools for attracting investment. Incentives as a total package would satisfy investors’ demands. 5.2.8 Relationship with neighboring Regions Complementing with neighboring regions to develop SEZ could be driven by a strong political will of the two countries. Both countries can leverage on the close proximity to create ‘win-win’ strategy in developing SEZs. Generally and historically, neighboring countries have political boundaries; however, full commitment of the top leaders to share the same view of achieving economic development can overcome the obstacles. 5.3 Assessment and Proposal of Sri Lanka’s SEZ DevelopmentAlthough BOI assesses and approves the investment within EPZ and outside EPZ, BOI Act is not the single regulation that investors have to go through. Several agencies are involved in investment arrangement, which include Urban Development Authority (UDA), Economic Development Board (EDB), Public Utilities Commission (PUC) and other authorities depending on the sector. Different taxes and documentations are required by different authorities. This complexity is a big disadvantage in attracting investors who prefer more transparent and simple business environment. Since BOI Act was enacted in 1978, upgrading the Act to meet the current competitive global marketplace is essential. EPZ should be upgraded to SEZ to cover various target sectors not just export oriented or manufacturing. The SEZ Act should be placed under the nation wide new investment law which also includes PPP model, and 99 year lease term should be applicable. BOI is expected to enhance the capacity as an umbrella organization for overseeing the approval, operation and management of SEZs as a total package and certain guidelines should be set up for attracting targeted investment. As proposed in “Mahinda Chintana”, setting up a Presidential Task Force will be an immediate action to coordinate with the relevant agencies.

48

6. Six Potential Areas of SEZ (Special Economic Zone) Development   

  

Area  Types of SEZ  Sector  Other Remarks 1. Jaffna  Manufacturing 

Agriculture   

Light manufacturing, Garment, Fishery & canning, Agriculture 

Collaboration with India for automobile & electronic parts, KKS port development 

2. Mannar  Logistics Manufacturing 

Transit hub between India and Sri Lanka, Light manufacturing 

India‐Sri Lanka bridge 

3. Trincomalee  Tourism Heavy Industry 

Tourism, Heavy Industry (Cement plants, Oil storage facilities, Petroleum based products, fertilizer manufacture) 

Natural deep‐water harbor 

4. Kalpitiya  Tourism  Tourism  Kalpitiya Integrated Tourism Resort Project (KITRP) initiated in 2003 

5. Colombo  ICT/BPO,  Finance, Logistics, Tourism

ICT/BPO, Transit Port, Finance, Tourism 

Port to focus as transit hub and reclaimed land to be developed as financial center 

6. Hambantota Logistics Manufacturing Heavy Industry Tourism 

Manufacturing industrial zone, ship building & repairing, oil refinery, bunkering, LNG 

Free Zone township development in Hambantota Area and Free Port in Hambantota Bring Chinese investment   Hambantota

TrincomaleeKalpitiya

Jaffna

Mannar

Colombo

49

6.1 Jaffna

Figure 6.1 Projects in Jaffna Due to its proximity to the Indian Subcontinent, the scope of starting export enterprises and business collaboration linked and serving the industries and businesses in India, especially South India is a good opportunity for Jaffna, the capital of the Northern Province. Initially, assembling of electrical goods and automotive parts that are labor intensive in nature would be a good beginning in this direction followed up by going into a little up-scale assembly of parts. This is possible as India and Sri Lanka have Free Trade Agreement (FTA) and as per initial discussions with some enterprises in and around the Chennai area, the labor cost of production of the electric, electronic and automotive industries have a good a chance to be located in the nearby areas where the labor is cheaper. The capital of the Northern Province, Jaffna has KKS port, Point Pedro

and Airport; that the government of India announced the initiative to provide rehabilitation and construction. The availability of port and airport can bring about saving in time and cost and make the manufactured goods competitive. Currently, there are no dedicated industrial areas in the Jaffna peninsula and the Achuveli Industrial Area measuring around 65 Ha seemed to be a good location for starting such industry, other areas around the KKS port and Point Pedro could also be identified and promoted for industries. According to Board of Investment (BOI), out of 65 ha of land belonging to the Industrial Development Board, 25 ha will be allocated to BOI for opening up industries. This

Area  Types of SEZ  Sector  Other Remarks 1. Jaffna  Manufacturing 

Agriculture  

Light manufacturing, Garment, Fishery & canning, Agriculture 

Collaboration with India for automobile & electronic parts, KKS port development 

Source: National Physical Planning Policy and Plan

50

may be a good start-up project for the people of Jaffna and shall be followed by other labor intensive industries if the beginning is properly guided, infrastructure to be correctly set-up, and made attractive to investors. South Asia's largest intimate apparel manufacture, MAS Holdings, a leading apparel company in Sri Lanka has expressed interest to launch an apparel factory in the zone following approval from BOI. Figure 6.2 Map of Proposed Atchuvely Industrial Zone

Source: BOI

51

Figure 6.3 Economic Corridor between India and Sri Lanka Similarly, low cost garment companies that have become uncompetitive in the mainland area around Colombo and are facing the wrath of high labor cost could also be relocated in the Northern Province where the unemployment rate is high (around 300,000). The labor intensive garment industries could easily create a good number of jobs and still manage to survive for a few more years in Sri Lanka where the labor cost is favorably lower than Colombo. Automobile companies like Ford, Hyundai, Nissan-Renault, Caterpillar, Komatsu, Kobelco, Toyota

has set up their production base in/bordering Tamil Nadu that could easily be reached from Jaffna in a very short span of time at a very nominal cost. Automotive industries need many parts and the labor intensive auto component manufacturing has a good potential to be located in and around Jaffna. Similarly, in the field of electronics, India has become one of the largest manufacturers of mobile handsets, CTVs, and DVD players. Reputed companies as Nokia, Moser Baer, Foxconn, Flextronics, Samsung, Motorola, and Dell Computer, Sanmina, Signet Solar, BYD, Salcomp, Perlos, Wintek, Jabil, Laird Technologies, Shinetsu, TVS etc. have their production base in Tamil Nadu. The integration of such industries’ labor intensive parts from India to adjoining Jaffna could be a good opportunity for Jaffna to catch up with the rest of the country in industrialization. As of now, even the basic infrastructures are missing in Jaffna leading to shortage of proper and dependable power, good roads, treated water, good hotels, and even the connectivity with the rest of the country is by road that has yet to be developed to good standards. Mother plants like Nokia, DELL, Motorola, Sanmina, Samsung, etc., import about 80% to 85% of their components. Since they operate on “Just-In-Time” principle, there is huge potential to manufacture and supply components manufactured in the northern province of Sri Lanka to the

Tamil Nadu

Jaffna

Chennai

52

manufacturers located in South India especially in Tamil Nadu. Estimated import requirement of electronic components shall be about US $ 26.60 billion by 2012. There is huge potential to produce and supply components to Indian market (source: Guidance Bureau, Tamil Nadu) and opportunity of Jaffna to cater to such industries. Collaborative initiative is needed to move forward. Similarly, there is scope of developing the agriculture sector by use of modern machines and high yielding seeds. The Northern Province, the rice bowl of Sri Lanka, can increase the productivity by using modern methods of increasing productivity. Proper facilities for storage and value addition of fruits, fishery product and vegetables should be encouraged as it can bring about both employment and higher revenue. These products can either be sold in the domestic market or exported to neighboring India.

53

6.2 Mannar

Figure 6.4 Development Plan of Mannar The transport hub development is the main feature of the Mannar city, located closed to India with minimum travelling distance. Manner city’s main function would be India-Sri Lanka Bridge, Enter Port to India, and Transport terminal including bus and railway terminals. Therefore, the city can attract logistics companies as well as

manufacturing companies relocating from the South India.

Area  Types of SEZ  Sector  Other Remarks 2. Mannar  Logistics 

Manufacturing Transit hub between India and Sri Lanka, Light manufacturing 

India‐Sri Lanka bridge 

54

6.3 Trincomalee Figure 6.5 Map of Trincomalee

Garment and Apparel industries, medium and heavy industries along with Tourism industries have the potential of being located in the Eastern province. As the seafront of Trincomalee has pristine beaches, ancient forts, the largest natural harbor in Sri Lanka along with being known as a destination for whale watching, if properly planned and organized, tourism could well be one of the main income of this province creating meaningful jobs for the locals.

Due to its natural harbor around Trincomalee, other medium and heavy industries as steel mills and cement factories, have the potential of being located here. The raw materials for such industries could be imported, finished product manufactured and either sent to the domestic market or exported. For the apparel industry to survive rather than wait for the business to become uncompetitive leading to natural closures, it is imperative that such industries be relocated to cost effective locations, and the areas near Trincomalee is another option. As it is, apparel and garment industries are sun set industries for Sri Lanka unless it moves up to upscale market and as other neighbouring countries as Bangladesh, China and Myanmar are slowly taking over this business due to the cost factor. This has happened in countries like Nepal, where after the quota system was abolished; these industries could not compete and had to shut down. In Trincomalee, BOI informed that a garment park is proposed but no details of the park were

Area  Types of SEZ  Sector  Other Remarks 3. Trincomalee  Tourism 

Heavy Industry Tourism, Heavy Industry (Cement plants, Oil storage facilities, Petroleum based products, fertilizer manufacture) 

Natural deep‐water harbor 

The Proposed SEZ Site

55

made available. Trincomalee has nice and attractive beaches and there is good scope of opening up this area for marine sea based tourism service industry. Though a few hotels do exist, there is good scope of further development of quality hotel industry and allied services and attractions with the growth of tourists and publicity. Similarly, promotion of scuba diving and Marine Park related activities should be explored and market driven approach applied to promote marine tourism. In line of tourism based industries, professional training institutes divulging internationally recognized courses could be a good area for exploration and implementation. The team was informed that as part of the ODA from India, NTPC of India was constructing a 500 MW Thermal Power Plant and it was projected to be located in Trincomalee with its own dedicated coal berth. Similarly, a Cement Plant is in operation next to a jetty. The past existence of industries next to the sea is understandable but a new thermal power plant to be located next to the touristic beaches and marine parks being set up and its nearness to the marine based tourism industry may have a negative impact on the number of arrival of tourists as the tourists prefer to be around environment friendly and natural environment. Similarly, other non polluting industries, marine based value added product (as canned fish in sauce) and garment and leather industries (leather goods etc.) should be planned targeting the unemployed.

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6.4 Kalpitiya Figure 6.6 Development Plan of Kalpitiya

Placed 150 km north of the capital, Colombo, the Kalpitiya region is one of the most beautiful coastal areas located in the Western Province of Sri Lanka. Kalpitiya is a peninsular that separates the Puttalam lagoon from the Indian Ocean and is a marine sanctuary with a diversity of habitats ranging from bar reefs, flat coastal plains, saltpans, mangroves swamps, salt marshes and vast sand dune beaches. Given the investment opportunities available, in 2008 the Sri Lanka Tourism launched the Kalpitiya Dutch Bay Resort Development Project. Proposed zone is situated at Kalpitiya in the Puttalam District of North Western Province,

Sri Lanka. There are 14 Island covering an area of 1672.67 ha (4133.19 Acres) in the proposed zone. Though this area has been proposed for development as a tourism zone, by declaring this area as a Tourism Specific Zone (Tourism SEZ) will allow it to grow in a controlled and planned township under the guidelines and regulation of Tourism SEZ that is yet to be practiced.

Area  Types of SEZ  Sector  Other Remarks 4. Kalpitiya  Tourism  Tourism  Kalpitiya Integrated 

Tourism Resort Project (KITRP) initiated in 2003 

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6.5 Colombo The capital region of Sri Lanka can cater to IT/BPO, finance, tourism in the proposed reclaimed land and transshipment traffic at the port, if brought under the purview of a special economic zone act that is not yet in place. Under the SLPA, several mega projects are ongoing in Sri Lanka, the main two projects being expansion of the Colombo port to make it as a transship center and the Hambantota Phase II which concentrates on industrial and logistics development. SLPA authorities informed that part of the Colombo port will be reclaimed. The team was informed that the area of 400 ha, adjacent to the Colombo port has been proposed for reclamation from the sea and has been earmarked to become another economic zone which focuses on finance, IT and tourism. This area could well be brought under the purview of the Special Economic Zone, after enactment of SEZ Law. This will open the scope of inviting IT/ BPO institutes, deregulate the financial sectors for opening their centres and start tourism based hospitality industries in a tax free regime. The proposed Colombo South Harbour will be located west of the present south west Breakwater in an area of approximately 600 hectares with 4 terminals of over 1,200m in length each to accommodate 3 berths alongside depths of 18m and provision to deepen to 23m to accommodate deeper draft vessels of the future. The channel width of the harbour is to be 560 m and depth of 20m, with harbour basin depth of 18m and a 600m turning circle. The development of Phase-1 of the Colombo South Harbour is to be carried out in two stages. The first stage of development involves the infrastructure with public funds (US$. 300 Million) and the second stage involves terminal facilities (US$. 700 Million) with private sector participation (PPP, Private Public Partnership). The harbour infrastructure works i.e., dredging, breakwater construction, and other works, have been already commenced by Hyundai Engineering and Construction Co. Ltd.

Area  Types of SEZ  Sector  Other Remarks 5. Colombo  ICT/BPO,  Finance, 

Logistics, TourismICT/BPO, Transit Port, Finance, Tourism 

Port to focus as transit hub and reclaimed land to be developed as financial center 

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6.6 Hambantota

Figure 6.7 Hambantota Port Plan With the construction of Hambantota Port and conceptualized Free Zone in an area of 1700 ha, and the on-going new town development project where new convention centres, roads etc. are under construction, this area in the South could have a good multidisciplinary economic development with proper planning and incentives to attract investment. The team was informed that in addition

to the 1700 ha in the Port Zone, additional 1100 ha outside of the port zone has been earmarked for development of Industrial Zone. Hambantota port will have a free-port concept within the zone, however, due to the lack of legislation, the free zone concept has not been announced in public yet. Another zone is planned closed to the airport. On call for RFP, 27 proposals (13 from overseas and 14 from domestic) have been received. It was informed that 10-12 will be selected depending on the phase of development. The team was informed that Free zone concept will have a simplified model in tax. Other than the port tariff, no other tax will be introduced. EIA is not necessary within the zone and investors need a certificate from the zone authority. BOI is in charge of the tax concession and the SLPA is working closely with them. Out of the 13 investment proposals submitted, 6 investments are likely to be implemented, as cement plant, sugar refinery, iron refinery, 500MW LNG plant, ship building & repairing facility and bunkering facility. It is envisaged that within this year, basic infrastructure and legislation should be finalized and from 2012, to start attracting large scale investments.

Area  Types of SEZ  Sector  Other Remarks 6. Hambantota Logistics 

Manufacturing Heavy Industry Tourism 

Manufacturing industrial zone, ship building & repairing, oil refinery, bunkering, LNG 

Free Zone township development in Hambantota Area and Free Port in Hambantota Bring Chinese investment   

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7. Infrastructure Development 7.1 Airport

Figure 7.1 Map of Airport Development There are twelve paved airports and two unpaved airstrips in the country. Sri Lankan Airlines is the official national carrier, partly owned and operated by Emirates Airline. Sri Lankan Air Taxi is the smaller, domestic arm of the national carrier, while Expo Aviation and LankAir are private airline companies. The Bandaranaike International Airport, currently the country's only international airport, is located in Katunayaka, 22 kilometres (14 mi) north of Colombo. Second international airport will be constructed at Weerawila, in the Hanbantota District. This airport development is in line with the Hambantota port development and will serve as alternate aerodrome to Bandaranaike International Airport. This airport is

scheduled to be completed in 2011 costing SL Rs. 13.5 billion. The team was also informed that another international airport was planned in the Mattara region in the Southern Province.

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7.2 Railways Figure 7.2 Existing and Proposed Railway Network

The first railway line was inaugurated on 26 April 1867, linking Colombo with Kandy. Most Sri Lankan cities and towns were connected by the Sri Lanka Railways (total: 1,447 km), the state-run national railway operator, until the civil war broke out and the railway connectivity especially to the Northern and eastern Provinces became non-operational. There are 172 major stations and 161 sub stations. Due to the high density in the urban area, developing railways is more reasonable option than expanding existing roads, since resettlement of residents requires time and cost. The main railways projects that are under construction are:

1. Construction of Matara –Kataragama Railway line: This coastal railway line project is divided into 3 stages as under: Stage 1 - Matara to Beliatte (27 km) Stage 2 - Beliatte to Hambanthota (48 km) Stage 3 - Hambanthota to Kataragama (39.5 km) After completion, the railway connectivity will enhance movement between Hambantota Port, the airport and Colombo, contribute to the development of Hambantota area and facilitate efficient and economical transportation services. It is estimated to cost USD 363 Million and is

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scheduled for completion by end 2014.

2. Construction of Northern Railway Line: Contract Agreement has already signed with India Railway Construction International Ltd. (IRCON) for construction the track section from Omanthei to Pallei. The re-construction of track has been divided into two sections: i. Omanthai – Pallai (96 km) – USD 185,346,708.- ii. Pallai – Kankasanthurai (56 km) – USD 245,041,184.- It is expected to complete the project by end 2012. At present, trains are operating up to Thandikulam on Northern Railway Line. The rail track from Thanikulam to Omantai is being constructed now by the Railway Department. The team was informed that agreement for construction the other track section will also be signed soon.

3. Upgrading of Coastal Railway Line: The total estimated cost for the project is US $ 212.4 Million of which US$ 167.4 million is expected from Indian Government. Already US$100 million has been granted for phase 1 under Indian Line of credit. The remaining US $ 67.4 million will be granted later from the Indian Government. The balance US $ 45 million will be financed by the Government of Sri Lanka. This project is to upgrade the Costal Railway Line to run trains at a speed of 100 km per hour. It is implemented in two phases. The main activities of the phase 1 are supply of materials for rail track rehabilitation from Colombo to Kalutara and Galle to Matara, execution of work for the rail track rehabilitation from Galle to Matara, supply of plant & machinery for Diesel Multiple Units (DMU) maintenance, purchase of 15 DMUs, three locomotives, spare parts for existing M8 class locomotives and human resources development. The Sri Lanka Railways will carry out rehabilitation of railway track from Colombo to Kalutara. The main activities of the phase II will include supply of materials and execution of work for the rail track rehabilitation from Kalutara to Galle, and purchase of 5 DMUs.

4. Introduction of Rail Buses for Eastern Railway Line This project is to operate Rail buses covering Batticaloa, Polonnaruwa, Galoya Junction and Trincomalee on the Eastern Railway Line. At present, two Rail Buses are operating from Batticaloa to Pollonnaruwa and Trincomalee to Galoya Junction twice a day. Each rail bus carries about 150 commuters at a time. More rail buses are expected to be added to the service in near future.

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7.3 Roads Figure 7.3 Existing and Proposed Roads Network

The total length of Sri Lankan roads exceeds 11,000 kilometres (6,840 mi), with a vast majority of them being paved. The government has launched several highway projects to bolster the economy and national transport system, including the Colombo-Katunayake Expressway, the Colombo-Kandy (Kadugannawa) Expressway, the Colombo-Padeniya Expressway and the Outer Circular Highway to ease Colombo's traffic congestion. There are also plans to build a major bridge connecting Jaffna to the Indian city of Chennai. In addition, it was learnt that the expressway from Katunayaka to Mattara is 80% complete and is scheduled to open later this year and that it will also connect Hambantota Port in future. Other road Projects in the pipeline are: 1. Name of the Project: ADB Funded Eastern and North Central Provincial Road Project Coverage/ Project Area Eastern Province Cost US $34Mn Period 2010 January -2012June 2. Name of the Project: Provincial/Rural Road Development Project( Eastern Province) Coverage/ Project Area Eastern Province Cost Rs.4,000 Mn Period June 2010 to March 2013 3. Besides the above there are several other roads widening/ maintenance projects undertaken either by the government own resources and /or under assistance/loan from donor agencies.

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7.4 Ports Figure 7.4 Existing Ports to be Expanded

Being an island country, there are several Ports in Sri Lanka either in operation, undergoing expansion or in planning stage for implementation. Amongst these ports, each one has been identified for specific activities and is enlisted below. 1. Port of Colombo A. The Current Port and its Terminals Colombo Port is located in an artificial harbor formed by three breakwaters constructed more than a century ago. The port basin covers 200 hectares and is dredged to depths of up to 15 meters (m). Access to the harbor is provided on the western and northern sides. The entire perimeter of the harbor is occupied with berths, terminals, and vessel-related activities. The port is connected to the national rail

network; however, virtually all cargo movements in and out of the port are by road transport. Because of the physical constraints, any growth in the capacity of the existing port is severely limited. Currently the majority of container operations are organized through the three terminals – JCT, UCT and SAGT. Present container throughput for the port as a whole exceeds 2.5 million twenty-foot equivalent units (TEU) per annum and the maximum capacity that could be developed within the confines of the existing harbor after taking account of improvement in all forms of productivity is assessed at 3.7 million TEU per annum. Other cargo-handling facilities operated by SLPA within the harbor include a tanker berth, cement and bulk grain-handling facilities, quays used for vehicle imports, general cargo and military goods, and a

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passenger/cruise berth at the southern end of SAGT. The majority of container traffic is handled at three container terminals –JCT, UCT & SAGT (i) Jaya Container Terminal (JCT) on the eastern side comprises four berths totaling 1,292 m, the latest completed in 1996. Depths alongside range from 12 m to 15 m. The terminal area covers 45.5 hectares, has 6 super-post panamax and 8 panamax gantry cranes, with capacities of 35.5 tons (t) to 41 t service weight limit to serve the berths. The backup area varies in width from 330 m to 380 m forming the container yard with capacity of 9,800 ground slots, served by 39 rubber-tired gantry cranes (RTGs) and 4 rail-mounted gantry cranes (RMGs). In addition, two feeder berths total 352 m with depths of 8 and 9 m. The terminal, which is owned and operated by the Sri Lanka Ports Authority (SLPA), is fully self-contained with its own reefer stacks, offices, workshops, amenities, and substations. (ii) Unity Container Terminal (UCT) is located at the northern end of the harbor. Opened in 2004, it comprises two berths for feeder vessels of 340 m with depths alongside of 9 and 11 m, and is served by three panamax gantry cranes of 41 t service weight limit. Eight RTGs serve two stacking areas with 1,020 ground slots. SLPA owns and operates the terminal as a satellite terminal for JCT. (iii) South Asia Gateway Terminal (SAGT) located inside the western breakwater became fully operational in 2003. The terminal comprises three berths totaling 940 m, all dredged to a depth of 15 m and served by 9 gantry cranes of 40 t service weight limit. The backup area is 200 m wide and the terminal area covers 22.2 hectares. The container yard is served by 28 RTGs and comprises 5,430 ground slots. The terminal, which is owned by a private consortium of local and foreign parties, is fully self-contained. SLPA has 15% equity in SAGT. Port Related Development Projects 1. Colombo South Harbour Development Project The proposed Colombo South Harbour will be located west of the present south west Breakwater in an area of approximately 600 hectares. The proposed harbour will have 4 terminals of over 1,200m in length each to accommodate 3 berths alongside depths of 18m and provision to deepen to 23m to accommodate deeper draft vessels of the future. The channel width of the harbour is to be 560 m and depth of 20m, with harbour basin depth of 18m and a 600m turning circle. The development of Phase-1 of the Colombo South Harbour is to be carried out in two stages. The first stage of development involves the infrastructure with public funds (US$. 300 Million) and the second stage involves terminal facilities (US$. 700 Million) with private sector participation. The harbour infrastructure works i.e., dredging, breakwater construction, and other works, have been already commenced by Hyundai Engineering and Construction Co. Ltd of Korea. Container- Handling capacity will be increased by 7.2 million TEUs on completion of

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all 3 terminals. 2. Development of the Galle Port as a Regional Port The Galle Port is the only Sri Lankan port that provides facilities for pleasure Yachts. The International Yacht Society has recognized the Galle Port as one of the world's best attraction. The increase in arrival of these yachts has revived the tourism industry of the country in general and Galle in particular. The facilities of Yachts provided at Galle Port had been damaged during the tsunami and the proposed development is to provide a fully fledged Yacht Marina for the Galle Port to facilitate the calling yachts as well as to attract more Yachts. This development of Port of Galle as a tourist destination will act as a catalyst to economic growth of Southern Region of Sri Lanka. At the next stage, berthing facilities will be for passenger cruise ships (Phase II). The yacht lifting facility & yacht repair workshop will be provided Objective To develop the Galle port as a regional port by constructing a multi-purpose terminal to meet future demands and re-allocate break-bulk cargo handling from Colombo port. Construction Period: 2008 – 2012 Estimated cost: US$ 150 million Source of funding: JBIC Expected benefits Provision of 12 berths in the port will ensure that the Galle harbour will be able to handle future generations of general cargo vessels, provide more economical freight rates to users, open up the old harbour for yachts with a boardwalk linking the harbour to the heritage city of the Galle Fort, provide facilities to handle cargo including the few containers likely to be attracted to the Koggala Free Trade Zone and enhance the break bulk activities and tourism activities of the port of Galle. 3. Hambantota Port Development Project Port of Hambantota, under advanced stage of completion, is planned to develop as a Services and industrial port. Hambantota is one of the lowest per capita income regions in Sri Lanka. Thus, the construction of a Port in Hambantota will be an important catalyst for a major economic development in Sri Lanka and further reducing the prevailing higher unemployment percentage in the Hambantota region. Total estimated construction cost of the Phase 1 of the project is US $ 361 million and out of which, 85% has been funded by the Ex-Im Bank of the People's Republic of China. The main construction work of the phase I was officially commenced on 15th January 2008 and the project duration is 39 months. The project is planned to be completed by 15th April 2011. New international-class air and ocean facilities funded by China are currently under construction in the Hambantota area of southern Sri Lanka, and planners expect to benefit from short transit times to India, Africa and the Gulf region, as well as the close proximity to international trade lanes.

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Eventually, the port is expected to have 60ha of of yard area adjacent to some 10km of quay with berthing capacity for up to 33 large ships. The estimated project cost is US$ 528 Million and is funded by Exim Bank of China and the SLPA. 4. Construction of Oluvil Harbour Development of Port in Oluvil This port will form the southeastern link in the developing chain of coastal harbours in the country and will provide more convenient and cost effective access to and from the southeastern region for goods and cargo originating on the west coast. The proposed project comprises the construction of a Commercial harbor and a basin for the fishing crafts and it covers a land area of 60ha in the first stage and 105ha in the second stage. The harbor basin would cover an area of 16ha of the sea and would spread 1.2km along the coast line. The estimated project cost is Euro 46 million and is funded by the Government of Denmark under a government to government loan agreement without interest with payback period of 10 years. 5. Trincomalee Harbour Trincomalee harbour is the second best natural harbour in the world and the available water and land area is about 10 times as much as the Port of Colombo. Trincomalee was tentatively identified to cater for bulk and break bulk cargo and port related industrial activities including heavy industries, tourism and agriculture etc. At present SLPA is in the process to re-develop Trincomalee as a metropolis growth centre. SLPA has completed zoning plan to utilize the huge amount of existing unutilized land under its judurisdiction on the outcome of the analysis with other sectors of the development, such as UDA, BOI, and Tourist Board etc. SLPA plans to advertise internationally and locally to call for proposals from potential investors for Industrial Park and Tourism Zone under Trincomalee Port City Development Project. Drafting of the RFP has been assigned to a Project Committee and will call tenders for the surveying of the SLPA owned lands shortly. 6. Port Of Kankasanturai (KKS) and Point Pedro Rehabilitation and improvement project is planned for Kankasanthurai (KKS) Harbour, to include the repair of the breakwaters, piers and roads, including dredging and wreck removal and the harbour basin by SLPA. In the meantime the government of India has indicated to grant US$. 23m for removal of wracks and construction of a New Pier. Feasibility of developing Point Pedro in to a SLPA regional port for the Northern Province is yet to be explored.

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Sri Lanka FDI Promotion & SEZ Development Strategy for Creating Half Million Jobs (2011‐2020)      Opportunities and 

Challenges of Sri Lanka

Opportunities:・ High economic 

growth after the conflict 

・ Strong political will to achieve economic development 

・ Huge international / bilateral assistance to support the economy 

・ High skill level of workers 

Challenges:・ Limited 

employment ・ Complexity of 

legal framework 

・ Poor infrastructure (electricity, roads, water, medical services, telecommunication) 

・ Limited FDI 

Development Scenario

Option1: ・ Remain 

bureaucracy and crony capitalism 

・ Fail to achieve development goal due to no road map 

・ Slower growth after int’l aid decline 

Option2: ・ Achieve 

development goal with high GDP growth by high FDI and New SEZ 

National Target“Mahinda Chintana”

・ Increase GDP per capita to 4,000 USD by 2016, keep GDP growth rate of 8‐10% 

・ Increase private investment to 26‐28% of GDP

・ Achieve 20 bil USD in export by 2020 

Development Strategy 

・ Set up Presidential Task Force on “FDI Promotion & SEZ Development for Creating Half Million Jobs” with several relevant agencies/ministries 

・ Promote FDI: Triple from the current level of 0.6 bil USD/year 

・ Improve trade facilitation 

・ Introduce PPP (Private Public Partnership) scheme for infrastructure projects 

SEZ Program 

・ Identify potential areas for SEZ   development 

・ Set up special SEZ Act to cover the areas of tourism, industry, ICT & agriculture and labor standard 

・ BOI as an umbrella organization to operate & manage SEZs 

Review the Existing FDI Regulations 

・ Review the existing investment related laws by coordinating with agencies such as BOI, UDA, EDB, and Tourism Authority and set up the new investment law which includes PPP scheme 

・ Improve trade facilitation by linking up all relevant stakeholders, both government and private, to move towards a single electronic window 

・ Improve the existing BOI Act to cover all sectors with no export requirement, and set up OSS (One Stop Service) and Trouble Shooting Unit 

・ Make sure Sri Lanka will be competitive in business environment and FDI attraction 

Priority Projects 

1. Jaffna(Manufacturing, Agriculture, Tourism) 2. Mannar (Logistics, Manufacturing) 3. Trincomalee (Tourism, Heavy Industry) 4. Kalpitiya (Tourism) 5. Colombo (ICT/BPO, Finance, Logistics, Tourism 6. Hambantota (Logistics, Manufacturing, Heavy Industry, Tourism) 

Action Plan 6) Apply one of 

the successful models of priority projects to other parts of the country in all sectors 

7) Continue implementing the priority projects by promoting FDI   

8) Apply SEZ Act to the whole country and replace with the existing laws 

9) Set up efficient/competitive SEZ Authority to regulate, operate & manage SEZs 

10) Accelerate the trade facilitation project and introduce single window 

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8. Roadmap for Sri Lanka FDI Promotion & SEZ Development Strategy for Creating Half Million Jobs (2011-2020) 8.1 Opportunities and Challenges of Sri Lanka Opportunities: ・ High economic growth after the conflict ・ Strong political will to achieve economic development ・ Huge international / bilateral assistance to support the economy ・ High skill level of workers Challenges: ・ Limited employment ・ Complexity of legal framework ・ Poor infrastructure (electricity, roads, water, medical services, telecommunication) ・ Limited FDI 8.2 Development Scenario Option1: ・ Remain bureaucracy and crony capitalism ・ Fail to achieve development goal due to a lack of road map ・ Slower growth after int’l aid decline Option2: ・ Achieve development goal with high GDP growth by high FDI and New SEZ Law 8.3 National Target “Mahinda Chintana” ・ Increase GDP per capita to 4,000 USD by 2016, keep GDP growth rate of 8-10% ・ Increase private investment to 26-28% of GDP ・ Achieve 20 bil USD in export by 2020 8.4 Development Strategy For creating a consensus among ministries/agencies and showing a strong political will to the public, we recommend the government to set up the Presidential Task Force on “FDI Promotion & SEZ Development for Creating Half Million Jobs” with several line agencies/ministries. Several benchmark should be set to start the program:

• Target to increase the FDI volumes to triple from the current level (USD 0.6 billion per year)

• Improve the trade facilitation and PPP (Private Public Partnership) scheme for the participation of the private sector in infrastructure projects

8.5 SEZ Program We propose to start the SEZ Program while upgrading the existing investment related regulations due to the fact that coordinating among line agencies to create a consensus takes time in all countries. Taking advantage of the SEZ nature of “bird sanctuary”, implementing

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SEZ Program only within the SEZ would be easier to take actions. Successful model case of SEZ Program implementation would expand to other SEZ developments. SEZ Program shall be established by the Presidential Task Force, which should include the identification of potential areas for SEZ development, setting up special SEZ Act to cover the areas of tourism, industry, ICT and agriculture, and establish a labor standard within SEZ, and functioning BOI as an umbrella organization to operate & manage SEZ. 8.6 Priority Projects Six potential areas for SEZ Program have been listed by the Study Team to promote the key sectors intensively. These SEZs will attract not only export market oriented but also domestic market oriented industries. 1 Jaffna Manufacturing and Agriculture Due to its proximity to the Indian Subcontinent, the scope of starting export enterprises and business collaboration linked and serving the industries and businesses in India, especially South India is a good opportunity for Jaffna, the capital of the Northern Province. Jaffna would be able to supply components of automobile and electronics to Tamil Nadu where companies have production base. Similarly, low cost garment companies that have become uncompetitive in the Western and Southern Province by facing the higher labor cost could also be relocated in Jaffna. The productivity of agriculture and fishery has been historically high in the Northern Province; therefore, there is scope of developing the agricultural sector by use of modern machines and high yielding seeds. 2 Mannar Logistics and Manufacturing The transport hub development is the main feature of the Mannar city, located closed to India with minimum travelling distance. Manner city’s main function would be India-Sri Lanka Bridge, Enter Port to India, and Transport terminal including bus and railway terminals. Therefore, the city can attract logistics companies as well as manufacturing companies relocating from the South India. 3 Trincomalee Heavy Industry and Tourism Garment and Apparel industries, medium and heavy industries along with Tourism industries have the potential of being located in the Eastern province. As the seafront of Trincomalee has pristine beaches, ancient forts, the largest natural harbor in Sri Lanka along with being known as a destination for whale watching, if properly planned and organized, tourism could well be one of the main income of this province creating meaningful jobs for the locals. 4 Kalpitiya Tourism Kalpitiya region is one of the most beautiful coastal areas located in the Western Province of Sri Lanka. Given the investment opportunities available, in 2008 the Sri Lanka Tourism launched the Kalpitiya Dutch Bay Resort Development Project. By declaring this area as Tourism

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Specific Zone (Tourism SEZ) will allow it to grow in a controlled and planned township under the guidelines and regulation of Tourism SEZ. 5 Colombo ICT/BPO, Finance, Logistics and Tourism The capital region of Sri Lanka can cater to IT/BPO, finance, tourism in the proposed reclaimed land and transshipment traffic at the port, if brought under the purview of a special economic zone act that is not yet in place. 6 Hambantota Logistics, Manufacturing, Heavy Industry and Tourism With the construction of Hambantota Port and conceptualized Free Zone in an area of 1700 ha, and the on-going new town development project where new convention centers, roads etc. are under construction, this area in the South could have a good multidisciplinary economic development with proper planning and incentives to attract investment. 8.7 Review the Existing FDI Regulations While the SEZ Program is proceeded, the review of existing FDI frameworks shall be implemented simultaneously. The SEZ Program is to be started by setting up an SEZ Act at the initial stage, and shall be incorporated under the new investment law, so that the SEZ Program would function as a nation-wide program. Establishing the new investment law would require a certain amount of time by coordinating with line agencies such as BOI, Urban Development Agency (UDA), Economic Development Board and Tourism Authority, therefore, showing one successful model of SEZ where several investments are attracted would speed up the integration of political interests among parties. Trade facilitation and development of Private Public Partnership (PPP) shall also be accelerated to be competitive in the business environment and FDI promotion. 8.8 Action Plan Once the successful SEZ model is shown, the model should be applied to other potential areas of priority projects and shall be revised depending on the type of investment to be attracted. An SEZ Authority should be set up to regulate, operate and manage SEZs in the country. SEZ could be managed by private sector participation using PPP scheme, but certain guidelines shall be applied to manage and operate SEZs.

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BOX I. Trade Facilitation in Sri Lanka5 Currently there is no government institution driving trade facilitation initiatives in the country, which is unfortunate given that Sri Lanka economy is highly dependent on international trade. The Global Competitiveness Report shows that the overall quality of infrastructure in Sri Lanka is below average with road, railroad and air transport infrastructure quality below mean level. While Sri Lanka scores low in terms of quality of road and railway infrastructure, it performs better with respect to port infrastructure. The Customs Department of Sri Lanka introduced the ASYCUDA (Automated Systems of Customs Data – a Customs software developed by UNCTAD) in 1994, updated to ASYCUDA ++ in 1998, and EDI (Electric Data Interchange) facility was introduced in 2002 which allows traders and customs agents/brokers to electronically process trade related documents. However the EDI system has only been partially implemented with the progress being poor as the customs and the port are partially connected to the system while most regulatory agencies function outside of the system. Moreover, important trade documents as the manifest and the shipping note cannot be submitted electronically. Recommendation To increase or let alone maintain Sri Lanka’s export competitiveness and its transshipment position within South Asia, it is necessary to accelerate the implementation of the EDI project in the country. In this regard it is necessary to link up with all relevant stakeholders, both government and private institutions concerned, which would eventually allow the country to move towards a single electronic window in the future.

5 Excerpts from IPS Publication: Impact of Information Technology in Trade Facilitation on SME in Sri Lanka.

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BOX II. PPP (Private Public Partnership) in Sri Lanka Huge infrastructure gap places in Sri Lanka caused by the gap between the demand side of increasing infrastructure development and the supply side of the lack of government funding and multilateral / bilateral loans. The volume of Official development assistance (ODA) will decrease as the country progresses to a middle-income status and issuing sovereign bonds is limited with the tight pressures on the fiscal deficits. The government has recognized the importance of the private sector participation to infrastructure development which secures the sustainable economic growth and industrialization. In fact, the government has targeted to increase private investment from both foreign and domestic sources from the present level of 19-21 percent of GDP to a range of 26-28 percent over the next 6 years. This target will not take place without Private Public Partnership (PPP). Developing infrastructure by PPP scheme under Build, Own, and Operate (BOO), Build, Operate and Transfer (BOT) or Build Own Operate Transfer (BOOT) concessions enables the private sector to build and operate infrastructure as commercial operations under long term agreements (Figure II).

Figure II: Private Sector Participation in Projects

Source: JICA PPP Project Study In Sri Lanka, the legal framework of PPP has started to be set up since 1990s. Succeeding to the Bureau of Infrastructure Investment (BII) established in 1996 under BOI to facilitate the private sector projects, PPP Unit was established in 2006 within BOI to assist private sector and government agencies to implement PPP projects. The Unit is regulated under the guideline of Private Sector Infrastructure Projects covering PPP projects in power plants, highways, ports, airports, telecommunications, railways, transport systems, industrial parks, solid waste management, water supply and drainage, warehouses, land reclamation and other economic infrastructure. Sri Lanka has PPP project portfolios of sectors in power, ports, roads and railways. The pipeline BOT port project is the USD 500 million South Terminal in Colombo Port implemented by a joint venture of China Merchant Holdings, local conglomerate Aitken Spence and SLPA. PPP Unit also promotes SEZ development where the private sector can set up the infrastructure, manage and operate SEZ and promote investment in the zone.

Works &ServicesContracts 

Management & Maintenance  Contracts

Operation & Management Concessions

Project Finance Scheme

BOT/BOO Concessions

Full Privatization

Private Public Partnership

Low HighExtent of Private Sector Participation

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To enhance the role of PPP to speed up the infrastructure development, the two recommendations would be proposed: 1. Streamline the existing regulations under Public Utilities Commission and provide total

package of PPP matters to private sector that should include providing finance, technology, know-how and services from the initial stage of feasibility studies to implementation stage of the projects.

2. Establish an infrastructure fund, the equity participation of both private and public to

finance PPP infrastructure projects. India, having known as utilizing PPP scheme for economic development and industrialization for decades, has India Infrastructure Finance Company (IIFC) to provide financial assistance to infrastructure projects. It would be a model to support projects by direct loans and co-finance with other financial institutions like World Bank and Asian Development Bank.

スリランカ直接投資促進政策レビュー及び経済特区戦略構想調査 (2011-2020年50万人雇用創出プログラム) 和文要約

要約

スリランカでは 09 年 5 月の内戦終結をうけ、これまで政情不安を理由に実現されなか

ったインフラ開発と民間投資拡大の機運が高まっている。政府による反政府武装組織

「タミル・イーラム解放の虎(LTTE)」の軍事制圧後、10 年 1 月に行われた大統領選挙

では国民和平と戦後復興を公約に掲げたマヒンダ・ラージャパクサ大統領が再選され、

4 月の総選挙でも与党が圧勝を収めた。国内の政治的安定確立と同時に世界経済減速の

回復による投資家マインドの好転をうけ、官民共同で経済開発を推進する動向が注目さ

れる。

政府は戦後経済復興計画として、荒廃した北部州、東部州の社会・経済開発を重点的に

行うことを目的とした北・東部インフラ開発計画を発表した。道路網の整備と鉄道の改

修が既に着手されており、今後は港湾の改修・拡張、電力網の整備、上下水道の整備も

実施される方針である。また、大統領選の際に発表されたマニフェスト“Mahinda Chintana -将来への展望”では国全体として所得倍増(現在の 2,000 米ドルから 2016 年ま

でに 4,000 米ドルまで引き上げる)と中進国入りを目標に掲げ、民間投資、公共投資を拡

大し経済成長を達成する指針が示された。

本調査はプロポーザル段階ではスリランカの雇用不足と経済構造のインバランスを是

正するための手段として、北部州地域における経済特区 (SEZ)開発を進めることを提案

していたが、第1回目の現地調査時の現地経済開発省、投資庁(BOI)との議論の中で、①

国家全体としてマニフェストを達成するための具体策が提示されていないこと、②既存

の輸出加工区(EPZ)が内戦以前と同じ状態であり見直しが必要であることが課題として

挙げられたため、本調査の焦点は「スリランカ直接投資促進制作レビュー及び経済特区

戦略構想調査(50万人雇用創出プログラム)」へ、より国全体を調査対象とすることとな

った。 本調査では東アジアでのSEZ開発の成功をモデルに、SEZ開発を手段として直接投資を

促進し、雇用創出と経済の持続的成長を下支えするロードマップを以下提言する。 開発戦略 直接投資促進とSEZ開発を推進することを目的とした大統領特別委員会を早急に設け、

関係省庁間で合意を形成し、ベンチマークとなる目標数値を設定する。 • 直接投資の流入額を現在の1年に6億ドルから3倍に増加させる

• 貿易円滑化と官民連携(PPP)スキームを改善し、インフラ開発における民間セク

ターの役割を高める

SEZ プログラム 大統領特別委員会の下でSEZプログラムを策定する。プログラムではSEZ開発を推進す

る数箇所を選定し、観光、工業、ICT、農業など様々な産業をカバーするSEZ法を制定

し、SEZ開発に適用させる。またBOIを、SEZを管理・運営する中心的な省庁として機

能させる。 現在のEPZでは投資家に対してBOI法が適用され、VATや輸入税免除などのインセンテ

ィブが付与されるものの、BOI以外に都市開発局や地方政府など様々な省庁の定める税

制に従う必要があり非常に複雑な構造となっている。またEPZに入居する企業は一定の

輸出額を満たしEPZの年間使用料を支払う企業に限られており、投資家にとってEPZに入居するメリットは限定的となっている。これら現状の課題を克服するため、SEZ法は

産業、企業の規模などより広い範囲をターゲットとし、BOIは各省庁との調整や投資家

の抱える問題を対処するワン・ストップ・サービス(OSS)を提供するものとする必要が

ある。またスリランカでは労働者を保護する傾向が強いが、労働者の確保を容易にする

ため、SEZ内では労働法も柔軟に対応できるものとする。 SEZプログラムの中で優先プロジェクトを選定 以下6つの優先プロジェクトと対象産業を選定し、優先的にSEZプログラムを開始する。

SEZでは輸出指向型産業だけでなく国内需要向けの産業・企業も積極的に誘致する。 1 ジャフナ 製造業、農業

インドに近い立地条件を活かし、北部州の首都であるジャフナではインドとの産業連携

を構築できる。インド南部タミルナードゥ州には自動車・電気電子関連の日系企業の裾

野産業が広がっているため、スリランカ北部州地域の港湾を拠点にインド向けの輸出を

拡張し、将来的には自動車・電気電子関連の部品産業を誘致することにより、インド南

部との経済圏が形成される公算が高い。また、労働賃金の上昇を問題に抱えるスリラン

カ西部、南部の繊維産業が北部に移転することも視野に入れる。農業、漁業も歴史的に

生産性が高い産業のため、機械を導入し加工も行うことにより付加価値の高い農作物を

生産できる可能性が高い。

2 マナー 物流、製造業 マナーはインドと近距離に位置し、橋の建設によりインドとスリランカの経済連携が促

進されることが期待されている。物流拠点として、製造業をインドから移転することを

視野に入れる。 3 トリンコマレー 重工業、観光 トリンコマレー港はスリランカで最大の自然港であり、現在製鉄所が稼動しており、火

力発電所建設の計画も発表されており、重工業を中心とした産業が集積する可能性が高

い。またクジラの観察、ビーチなど観光地としても注目されている。 4 カルピティア 観光 カルピティアでは地域全体の観光開発が2008年から進められており、観光SEZにするこ

とでより総合的な観光都市開発を行うことが出来る。

5 コロンボ ICT/BPO、金融、物流、観光 現在コロンボ港の拡張計画及び埋立地にICT/BPO、金融の特区を形成する計画が進行し

ており、これら特定分野の産業を誘致できる可能性が高い。コロンボ周辺では賃金上昇

が大きな問題となっており、労働集約型から知識集約型へと産業構造を転換する必要に

迫られている。SEZ開発によりサービス業への移行が図られることが見込まれる。 6 ハンバントタ 物流、製造業、重工業、観光 ハンバントタ港の開発とその周辺を1700haの自由貿易区にする構想が港湾局を中心に

進められており、港を要とした総合都市計画が発表されている。現時点では省庁間の合

意が形成されていないが、輸出入関税を免除する自由貿易区設立によりスリランカの物

流ハブ機能の強化が期待されている。 既存のFDI関連規制のレビュー SEZプログラムを先行して実施すると同時に、既存のFDIのフレームワークについてレ

ビューを行う。SEZ法は最終的には国全体の投資法の中の一部に組み込まれ、SEZプロ

グラムが国家全体に適用されることが望ましい。既存のFDIのフレームワークには、BOIだけでなく都市開発局、経済開発庁、観光局など様々な省庁が関係しており、国全体の

投資法の改善には時間を要することが容易に想像される。よって、SEZプログラムを先

行して進め外国投資誘致の成功例を提示することで、省庁間の摩擦が徐々に解消され合

意形成につながる公算が高い。貿易円滑化とPPPスキームの促進も投資法に含まれる必

要がある。 実施計画 SEZの成功例が確立できた後は、成功モデルを他の地域の優先プロジェクトに適用し、

投資の種類や産業によってモデルをその都度改善するプロセスが重要となる。SEZを管

轄する機関を設立し、国全体のSEZの管理・運営を行う。SEZは民間企業によって管理・

運営されることも可能だが、ガイドラインに従う必要がある。 今後の展望 本調査では、SEZ 開発をツールとしてスリランカの FDI 促進を行い雇用創出、持続的経

済発展を推進するロードマップが提言された。本調査は短期間で限られた人的リソース

の中で行われたため、より詳細なマスタープランと実施計画を早急に進める必要がある。

詳細なロードマップ作成、SEZ 開発関連の政府職員に対するキャパシティー・ビルディ

ング、SEZ 優先プロジェクトの詳細なマスタープランと実施計画において、技術協力、

資金協力の可能性がある。