Advice to those
contemplating Investment or Business Opportunities in Sri Lanka
In an expanding
economy, albeit from a low base, one would tend to assume that there would be
untold opportunities for profit! VERY TRUE, but the path is strewn with
landmines in the most unpredictable places. The name of the game is to know how
to skirt the mine fields and achieve one’s expectations. It is therefore NOT
for the fainthearted, but one MUST ask the question, is it worth the risk?
In my opinion many
foreign investments have ended up in failure, because the initial assumptions
upon which the business proposition was placed turned out to be far off the
mark. The few successes have been joint ventures with local partners where
there is TRUST, mututal respect and benefit, and a common goal.
JVs without all these
have failed miserably, as the local party has effectively taken the foreign
investor for a ride and the lack LEGAL PROTECTION has made it easy to WEAR DOWN
the aggrieved into submission and EXIT with forfiture.
You only have to ask
LAFARGE HOLCIM, an international Cement manufacturer about their experience.
They quit in disgust for the most part because their local fixer, later
Chairman, who seemingly came to their rescue as a KNIGHT IN SHINING ARMOR,
proved to be anything but, a comon CRIMINAL bent on enriching himself at their
expense. He, upon being exposed and fired, had the company tied in knots of his
making, that could not be untangled, which resulted in him not even being
prosecuted, due to archaic legal machinations of a faulty legal system that
gives the aggrieved NO justice.
The legal system is TOO
SLOW, it works against the litigant most of the time, and the lawyers charge
the highest fees on EARTH. A President’s Counsel could charge US$10,000 for a
10 minute appearance that would merely postpone, on a pre arranged on a
seemingly just (illegal) reason with the defendant’s lawyers, and the judge
complicit to screw the litigant for all he has got. JUST ASK HOLCIM why they
did not pursue! They have better things to do with their time and money and the
defendent know it too.
The aforementioned
individual is still cohorting in the small cocktail circuit that is Colombo, as
if nothing has happened with NO SHAME and much kudos for seeing the back of that FOREIGN MULTINATIONAL trying to
screw a small man! Irony not lost.
The lawyers assess the
ability of the litigant to pay, and therefore bill them accordingly, and NOT on
a an agreed scale that is fair and consistent like in most countries,
especially the USA, where phone calls and times are even stated on a bill, and
is not arguable due to the detail. Here is a note with an amount with NO
explanation as to what it is for!
Further, continuous
delays (many pre-arranged) extend the case beyond a reasonable period, costing
the litigant appearance fees without shame. It is none other than a legal
conspiracy to fatten their pockets at the expense of the well healed who can
pay, with little urgency in settling, and finally when patience runs out, so
does the case, which fizzles out!
This is compounded by
the fact that few and especially lawyers pay any tax on their hefty earnings,
finding plenty of ways to avoid/evade tax. In a Country where very few people
pay Income Tax, has NO wealth tax, capital gains tax, gift tax, inheritance tax
and many companies enjoy tax holidays, especially with TAX benefits for tourism
and export oriented industries, and especially those that have been granted
special government concessions for dubious reasons of national importance. This
permits around 1,000 wealthy people to amass incredible wealth, which never
gets taxed at any stage. I would argue that there are NO tax havens that are as
generous as Sri Lanka.
IN CONTRAST, very high
consumption taxes especially hitting the middle class, with VAT on almost
everything, except for a basket of 80 items, which anyway carry their own
cesses, like taxes on the imports of essential foods, such as sugar, wheat,
lentils, tinned fish, potato and onions, because it is heavily consumed, and easy
to levy at the point of import and collect upon clearance. The cost of food as
a percentage of average wages is one of the highest in the world, due to this
and the extremely inefficient methods of food production in place today so the
cost per unit produced is high, with none of it due to organic growing
practices.
Another important
matter that needs consideration is that high networth individuals, if they do
not require funds to re invest in their own personal businesses, can receive
15% interest per annum on their deposits, which when compared with the rate of
depreciation of the rupee agaisnt the US $ and rates on $ deposits, is the best
risk free return one can get, without as much as stretching a leg, and this is
taxed at a very low rate, with no taxes on Govt securities that carry comparable
rates.
With returns such as
these why get into risky investments, and no wonder the Stock Market has been
in the doldrums as there are better alternatives at present.
Those who wish to raise
capital overseas for local investment, do not have access to these funds, due
to these high risk free interest rates available to local investors and banks
do not act as Venture Capitalists. Having
said this, the Banks in Sri Lanka are extremely profitable due to the high
spread between borrowing and lending rates as small investors investing savings
do not get anything near what I have just pointed, instead being lucky to get
6% or 7% at their local National Savings Bank where they park their money out
of habit. This NSB is owned by the govt, which then buys Govt. securities with
their money, showing massive profits, effectively meaning the small man is
propping the government’s profligacy.
This opens up the
opportunity to Internet Banking, which is NOT currently permitted, and if
granted could lead to an outcry from the traditional sector. Banks in order to
protect their self interest will
prohibit this route. As you can see this behavior of banks has led to slow
growth in the SME (small and medium enterprises) sector, as entrepreneurs do
not have access to low cost borrowings, and so are less prone to invest in
expansion.
CONTRAST THIS WITH UK’s
BAT, Nestle, Unilever, Chevron, Coca Cola and overseas Banks who earn between
100% and 1000% on capital employed because their original costs were low when
they started, and have not revalued assets for reasons on their own, and
repatriate all their profits back to their parent company, with little
investment in additional capacity in a relative sense, though in absolute terms
they are still large. They trade in inelastic industries with little local
competition, in FMCG goods. They are far more successful than any of their
small local competitors, due to size and ability to kill competition by
anti-competitive practices.
On another different
point, the Sri Lankan Govt. will require to refinance their borrowings in the
next 3 years when they fall due, and we are talking about US$5B. The Govt. will
be looking to obtain the best rates possible in a time of increasing Global
rates and Sri Lanka is NO longer eligible for subsidized loans. Any value
propositions in regards to this will be received favorably, and a go between to
achieve this is definitely a possibility.
Any request to grease
palms on these deals must be immediately exposed to prevent the high levels of
corruption, and the new found media freedom, and the Right to Information Act is hoped will curb
such violations, in the public interest.
Further, the lethargy
of bureaucracy even though leaders at the National Level have inked investments,
is a fact of life. This has disgusted foreign investors for whom time is money.
Any reference by the BIG WHIGS to a ‘one stop shop’ should be treated with
disdain, as it is only in the mind of the promissor, which cannot in practice
be delivered.
I am truly sad that
many foreign investments have floundered due to selfish reasons, and against
the public good. The powers that be cannot see the big picture as a benefit for
the whole country, pandering to a few interests.
A case in point was ten
years ago, where Arne can corroborate this story, when the Hungarian Govt.
through the EU were willing to finance a large project to dredge the deep sea
and supply the whole nation’s requirement of building sand. This was seen
primarily in the international fora as one that will save the environment from
massive illegal sand mining taking place all over the Country, degrading
streams and rivers and in the end the land, and water supply.
This project
could supply sand at 20% of today’s price of sand and would have considerably
reduced the construction cost of all infrastructure projects, to say nothing of
the huge constructions of apartments, and also individual homes that have taken
place over this period. It was prevented by two primary sources, first was the
bureaucrats who demanded a bribe of 40% of the project cost to pass the various
steps, and second was the sand mining industry, primarily in the President’s
own district that saw their livelihoods threatened. If this project went ahead
then, the GNP per capita of the Country, would have been 25% higher, with the
resulting multiplier effects in the economy. Our leaders DO NOT have a vision as
evidenced by the wanton destruction by them of the positive benefits of
projects with foreign collaboration in the
economy, which they have prevented from taking place.
One does not have to
show any more examples to illustrate the reason why Sri Lanka lags the world in
every area, except possibly in life expectancy and infant mortality. A few
structural policy changes to benefit society as a whole is all that is needed.
Currently we have an economy with one million job vacancies with NO takers, and
we are currently even resisting the import of labor to take up those jobs, to
prevent the industries from relocating to places where there is the workforce.
Need I say more?
In Conclusion, my
statements above are MY opinion from an
intense period of 12 years back in Sri Lanka, in study, practice, assisting
numerous organizations on investment and financing propositions, and trust
these practical examples gives you a clear understanding of the ground
realities from which to commence.
