(July 05, Colombo, Sri Lanka Guardian) The title reads harshly, but that is the reality we face for it has outlived its purpose and no longer resonates with our economic needs when they conduct business as usual. Sri Lanka no longer has any regional bragging rights for its export oriented foreign investment destination.
It is said that the dynamics of Foreign Direct Investment (FDI) should be reasonably proactive to fill the resource gap, foreign exchange gap, efficiency gap and technical and management know-how gap. Perhaps this was thinking that lead to the Board of Investment of Sri Lanka being instituted in 1992 to exploit our one or more potential comparative advantages entice significant amount of FDI, increase employment and exports. To successfully offer and trade our skills sets and resources in exchange for FDI requires significant investment from government in knowledge, skills and training needed to develop industries and exploit our future comparative advantage. We have hardly addressed any of these to fulfill the criteria of successful FDI. To that end, we ought to have had well established links to education and industry skills development agencies to offer a significant pool of skilled talent to complement the efforts of the BOI to reach out to diverse industries. Instead, we offered cheap labour and ground facilities, such as for the garment industry to mushroom and it was destined to exhaust eventually since the strategy had a restricted scope.
Failures or lack of genuine measurable success is highlighted by the limited amount of true growth as presented in the Table. Our export-oriented Industrialization or export substitution industrialization under the leadership of BOI should have been an economic policy aimed at accelerating our industrialization process through export of quality finished goods for which we could have a comparative advantage, provided that we had build up the right specialization. Any export-led growth in a democracy implies opening domestic markets to foreign competition for healthy competition in exchange for market access in other countries enabling us to exploit future comparative advantage.
The law of comparative advantage refers to as having “the ability of a country to produce a particular good or service at a lower opportunity cost than another country. It is the capacity to produce a product with the highest relative efficiency given all the other products that could be produced.” There is no clear evidence over a period of 29 years if the BOI ever attempted to model the concept for our greater benefit. In fact, what we had pursued during last two decades was an absolute advantage in the manufacturing sector, which refers to the ability of a country to produce a particular good at a lower absolute cost than another – case and point is our steadfast belief in the garment industry to bring perpetual forex revenues.
This focus neglected the potential development of our service sector capacity to profit from the lucrative “back office” operations, which India has capitalized well. The BOI’s one-horse-trick relied upon unskilled labour en masse in one single sector - specialization in manufacturing cloths. Therefore, our primary commodity dependency also ties to the theory of “weakness of excessive specialization” as primary commodities have incredible price volatility. Conventional wisdom dictates that export orientated industrialization has limited success if the economy is experiencing a decline due to diminishing competitive advantage.
For the sake of argument let’s assume that the BOI followed the concept of comparative advantage to target net gains from international trade, but evidence suggests that from the inception they lacked a diversified industry portfolio as other flourishing economies pursue their comparative advantage. It generally results in making economies potentially unstable if demand for their specialization or skills falls. In our case, we never established our specialization base, therefore, the likelihood of failure is pretty high. There is growing number of global examples in which it has not yielded the expected results; however, they appeared to have shifted their policies strategically to meet growing global challenges as they pursue goals purposefully.
ASSESSING OUR PERFORMANCE
Every activity can be measured with performance indicators for its success or failure to quote several clichés: “what gets measured gets done,” “if you don’t measure results, you can’t tell success from failure and thus you can’t claim or reward success or avoid unintentionally rewarding failure.” At the BOI under successive leaderships they have failed to use basic tools, metrics and benchmarking, and analyse results to gauge its own performance against regional capabilities of internal/external investment. Had they done so, they would have been directed to many red flags.
Judicious self-assessments not only involves gathering own data to garnish its investment headlines, but also adopting evolving research and analysis techniques as well to remain updated helps to stay ahead of competition. Participation in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning, but more importantly full disclosure of investment bring high degree of transparency – thus, enhance confidence in our country as a destination for investment. Academic and other research on this theme also helps develop consistent investment mandates, monitoring procedures and incentive structures accordingly.
The BOI’s objective is clearly defined – increase employment via FDI with emphasis on exports to generate forex revenue on a consistent basis. It was based on the assumption that investors would have the right product manufactured here utilizing progressive technology to meet the requirement of the marketplace. Economists would dearly appreciate this as sound policy to boost the GDP with focus on employment creation along with local production geared towards export. As such, wealth distribution among the employed is the most fundamental, not the corporate profits deposited in banks. Therefore, promoted as an attractive investment destination despite the war during 2003-09 period, there should have been accruing employment relative to incremental growth in investment as has been recorded. For Sri Lanka, the bottom-line is higher employment refers to money retained and mostly spent in the country, which means wealth generation among the population.
Data for the period 2003-09 show a flaw in that policy when we were shown an increase in investment, though marginal and inconsistent, the employment capacity hardly correlates and suggests to us that elevated FDI even in difficult circumstances did not bring the desired employment to us. It seems that high investment seems to reflect on capital expenditure instead of productivity and quality enhancement of goods or services originating from BOI ventures have not yielded marketable merchandise in relation to investment. This is seriously problematic since we exclusively rely on BOI venture exports (70 percent of total national exports).
A good indicator is the investment per thousand employees, when compared to Bangladesh BOI’s effort we are embarrassingly lagging in this respect. This is despite the fact that Bangladesh receives less FDI and employed in their BOI ventures, yet they were far more efficient in profiting from BOI ventures than we can boast.
Source: BOI Statistical Unit/Research & Policy Advocacy DeptFurther analysis exposes that we have let investment value be the lead instead of employment numbers and it is astonishing how the Employment Capacities drop drastically from BOI’s own Approval to Realized stages. This seems like a regular occurrence and dare we query why would investors downgrade it own employment capacity figures during this process? This is one of the questions the BOI has failed to answer during the course of this write-up.
Looking at investment values and employment one can easily conclude that we have let investors inflate their investment cost either through plant and machinery or capital expenditure. If investment is the criterion, then there ought to be significant efficiency in manufacturing to produce quality products for export. That concept falls apart when we do not record proportional swell in export figures to support it. Further, it shows that higher investment do not necessarily results in higher employment if the investment is misdirected to other areas and not related to productivity improvement. So what has gone wrong? Clearly without subjecting to careful scrutiny, we have let the BOI publicize higher investment at the expense of true employment. In short, it is an awkward mismatch that had detrimental consequences for our economy when it is tax-free holidays that denied our rightful economic prosperity.
Source: BOI Statistical Unit/Research & Policy Advocacy DeptFAILED TAX-FREE CONCEPT
Paying corporate taxes is a “social responsibility” when it is this revenue that a government relies upon to provide meaningful opportunities for social and economic growth of the disadvantaged sectors of the population in order to develop them into productive and self-reliant citizens and promote social equity. In addition, governments use these revenues to finance much needed development of infrastructure for economic development activities to function smoothly. Therefore, the collection of revenues from commercial activities is an indispensable for wide variety of reasons if a country to record growth.
Well developed countries like Canada do not offer tax-free concessions because they see tax revenues as the way to progress and yet, they have a vibrant private sector that draws investors regardless. They have exceptionally well-educated and creative workforce and solid business climate build on tax revenues, proving that fair tax revenues spur economic growth and still retain market competitiveness.
Tax-free holiday is a godsend for those who wish to evade taxes and the “social responsibility” superceding the off-shore tax heavens giving legitimacy to operation.
Even Pakistan, India and China while promoting investment opportunities, do not offer tax-free concessions to entice investors and headline their investment promotion with an average 30 percent tax. It seems they have a better understanding of how their economies ought to work for their benefit by not giving a free ride for investors from Western economies, who apparently come to invest here to avoid their “social responsibility” in Sri Lanka. If the Treasury attempts to calculate the loss in tax revenue from BOI ventures over the last two decades to us (say, at low 15 percent) it is a considerable shortfall. Not much as been written about this shortfall, but it has a catastrophic burden on the local enterprises and individuals having to bail out the government when there is budget deficit via numerous taxes while the BOI ventures with mediocre exports are given a free pass.
WHERE TO GO FROM HERE
The BOI ventures to-date has a workforce of over 400,000 and boasts for nearly 70% of Sri Lankan exports and 80% of the country’s industrial exports. This is a staggering supremacy for a failed tax-free industry to rely-on to prop up our economy on the long-haul. With all the efforts in place our exports ought to be at minimum 50 percent more than what the BOI claims. It is amazing that the Central Bank to this day has not scrutinized to bring to the notice of the government to change course and instead should have helped the local tax paying industries who are striving to perform better against all odds? At a time when our traditional exports have reached its limits, we have to depend heavily on contemporary industries through innovativeness to bring economic prosperity. To claim that the BOI is “a significant agent of change” and to have “radically transformed Sri Lanka both economically and socially” is an irony when the facts do not support that notion.
Successive governments’ far-reaching economic policy changes, reforms of deregulation and liberalisation alone cannot propel an economy; it requires highly skilled human resources - an educated, hard-working, skilled and ambitious workforce. These reforms could have unlocked our enormous growth potential and unleashed powerful local entrepreneurial forces. The BOI never attempted to liaise or establish vital links to aid the development our education and industry skills development to encourage investors to view Sri Lanka a superior destination and increase the FDI per 1000 employment and Exports per 1000 Employees ratios.
Fifteen years ago, the writer submitted proposals to the BOI on to how to develop our workforce to attract investors, instead the BOI relies on the investors to train our unskilled at their cost. At the same time, the writer proposed the establishment of ventures for “receiving/re-processing/re-packaging” of commodities for local enterprises by making Sri Lanka a hub to take full advantage of the increasing EU-China trade to enter each others markets. However, there was no response to either from the BOI. Again In 2008, the writer approached the BOI and handed over a dossier that detailed British Columbia Governments’ Asia Pacific Initiative (API) to study how Sri Lanka can encourage British Columbian firms to exploit the FTA with India by operating from Sri Lanka. At the same time, informed them that the writer will do all possible from that end help Sri Lanka’s cause. However, there was not a single communiqué from the BOI showing any interest to pursue.
Their elusive approach to investment promotion has brought the country to a non-competitiveness position over two decades of operation and it is high time the government take good look at this farcical investment promotion venture. Occupying the eighteenth and nineteenth floor in the WTC is a significant liability to the government when the results are failing grade. It has become monolithic and fails to listen to good ideas or change direction for the sake of economic growth.
During 2008-2009, the war on terror cannot be used as an excuse for mediocre investor interest in Sri Lanka. Pakistan, for example, with all the political drama and terrorism on their borders has received significant FDI. If there are lesson to be learnt we do not need to look further. That said, lessons can be learnt only if the BOI has the capacity to conduct an evaluation of its own performance and ask the very questions as the writer does. Furthermore, this analysis revealed the BOI also do not possess the internal capacity measure the investors’ claims of export potential and the employment capacity. A college student can do a rough estimate - if X is the market potential then based on their capital investment Y, and then there must be an employment of Z. The real issue with the BOI is that they lack industry knowledge to assess investors’ bona fides prior to approving to know if they are hoodwinking the authorities here and in home countries.Given what we know now of our investor attraction accomplishments, working in earnest, it is time to end the tax-holiday for investors for we desperately need that revenue to meet vital expenditure like improving education and health services. Attraction to Sri Lanka ought to be based on our highly trainable workforce and profitability through efficiency and certainly not via tax incentives.
Why mask the truth? The role of the BOI has been a failure to entice the right investment to benefit Sri Lanka and to continue in the same vain is piling ambiguity upon disaster. Some would argue that revamping the BOI strategies is a good option, (excuse the pun) but that is like giving oxygen to a brain-dead, sadly, with no hope of recovery. Instead, when the tax-free incentives are no longer in place, naturally the role of the BOI becomes redundant, the Inland Revenue can assume the full responsibility of overseeing the collection taxes from all investors and the Min of Enterprise Development and Investment Promotion still can implement critical policies bringing order to our economic development through right type of FDI not junk investments.
( The writer is former Senior Policy Analyst, Ministry of Trade and Economic Development , Govt of British Columbia, Canada )
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