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 Bank.

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.