Investment climate unattractive in Sri Lanka – World Bank
[TamilNet, Tuesday, 28 June 2005, 10:39 GMT]
Four years after the guns fell silent in Sri Lanka’s conflict, the
investment climate remains unattractive due to continued political
instability, weak infrastructure, and poor access to finance, according to a
recently completed study by the Asian Development Bank (ADB) and the World
The report suggests that steps taken towards establishing a peaceful
solution to the conflict and improving political stability will spur
investment in Sri Lanka. This is despite gains in reducing corruption and
red tape, the report says.
“Achieving a permanent peace is undoubtedly one of the important steps Sri
Lanka can take toward improving its investment climate,” said Peter Harrold,
World Bank Country Director for Sri Lanka.
"If sustainable poverty reduction in Sri Lanka is to be achieved, the
country needs to raise the overall level of investment. This joint report
between ADB and the World Bank presents the first comprehensive scientific
analysis of the factors that are inhibiting investment: domestic and
foreign, urban and rural. As such, its findings offer very important
guidance for priorities," he said.
The report will be launched June 28, 2005, with Mr. Sarath Amunugama,
Minister of Finance and Planning, delivering the keynote address.
Based on an island-wide survey of more than 2,000 enterprises, the report
highlights the difficulties that small-scale rural entrepreneurs face in
starting and growing a business.
The survey found that small businesses in Sri Lanka’s rural areas are
hampered by poor transport, limited access to the formal financial sector,
and frequent power outages.
Although the island boasts a dense road network, as much as 90 percent of it
is in poor condition because of lack of maintenance. The report points out
that this dramatically increases travel times and contributes to almost half
of all agricultural produce spoiling before reaching a market.
Firms in the North and East of the country affected by the conflict have
developed coping strategies, such as reducing their inventory, producing
from a residential location, and increasing outlays on security.
Unreliable supply of electricity leads nearly 75 percent of urban
manufacturing firms in Sri Lanka to purchase a generator, a significantly
higher proportion than competitor countries like China (where only 27
percent do), the World Bank says.
As it can cost 3 to 4 times as much to generate electricity with a
generator, urban firms are only half as productive as they could be with
more reliable power.
“This is a further example that Sri Lanka needs to address squarely the
issue of power supply, cost, and efficiency, through increased generation
according to the least cost expansion plan; reduction of the short-term debt
burden of the power utility; and restructuring of CEB.” said Alessandro Pio,
ADB Country Director for Sri Lanka. “It is like a stool with three legs: it
will not be stable and reliable unless all three are in place,” he added.
While Sri Lanka has to do better in terms of electricity and transport to
catch up with better performing countries in the rest of Asia, there are
areas where the country excels.
Another important constraint exposed in the report is the country’s labor
regulations which can be characterized as inflexible and arbitrary. Offering
no certainty to the investor, they discourage firms, especially local firms,
from job creation, the World Bank says.
The laws have also resulted in distorted business practices such as massive
outsourcing and an increase in the use of temporary and contract labor,
reducing training opportunities, productivity, and the potential to capture
economies of scale, the report says.
The report also urges the government upgrade the energy and transport
sectors so as to benefit both rural and urban firms.