FDIs – old wine in new bottle

Sarath Amunugama, the new minister in charge of investment promotion, is attempting to be better than what his predecessor – Rohitha Bogollagama - promised.

The latter had a target of US$1 billion for 2006 which fell short to US$600 million-plus but was hoping to raise the ante this year until the cabinet reshuffle saw him elevated to the foreign minister’s job.

Amunugama says FDI (Foreign Direct Investment) is the only way out of the quagmire that Sri Lanka is placed in. There isn’t sufficient capital internally for economic development – so we need to attract capital from abroad. In the minister’s own words …. “I don’t think anyone in Sri Lanka will envisage a future where we can sustain our economy based entirely on domestic savings. So we have no option but to go for a rapid expansion of foreign direct investment.”No one denies that foreign investment is important but is the ground situation practical and condusive to raise hopes of attracting such massive sums of investment? Or – even if it happens – are we benefiting from this investment which comes with strings attached?

A respected economist, asked to comment on the latest attempt to raise the level of foreign investment, had this to say; “Wanting to increase foreign investment is rhetoric. We have had plenty of that. The realisation of the target would depend on how foreign investors perceive the economic and political situation. It’s terrible at the moment.”

The minister says two big investments like the refinery in Hambantota and a power project by the Chinese will itself bring in US$1 billion each – closer to his target of US$4 billion in the next two to three years.

Yet how much of this capital would be net investment? For example, the Havelock Town property development project by Singapore investor S.P. Tao has a surfeit of Chinese workers – so there is no employment generation for locals. The apartments are sold to Sri Lankans and Sri Lankan expatriates and most of the profits would be repatriated.

In BOI projects while repatriation of profits is permitted the investment comes in the form of equipment for use in the project. Often much of the investment as stated in the agreements has already been absorbed before it arrives in Sri Lanka for the purchase of equipment in the investor’s country of origin and shipped to Colombo.

In the tourism industry, numbers don’t mean anything. For instance Malaysia is trying to attract 20 million tourists this year but its tourism minister during a visit to Colombo earlier this week said: “Numbers are nice but receipts (how much they spend) are more important.”

A lot of the investment that goes into the annual FDI numbers is re-investment by companies already existing here like Dialog for example which probably accounted for more than 20 percent of the total foreign investment raised last year. Dialog is a unique case of pumping in money year-on-year in an industry that is rapidly growing largely due to the mobile giant’s dynamism that has taken the sector to new levels.

That’s not a bad idea since money comes in but where are the new investors? The BOI will trot out the number of new projects to prove a point but are they the ‘big guys’ and are they large investments?

Earlier this week, news agency reports quoted an international investor as saying that he was selling his stocks due to uncertainty in the security and political situation, a point raised by the Sri Lankan economist.

Bloomberg quoted Colin Kingsnorth of Laxey Partners Ltd as saying he sold a vast majority of his Sri Lankan stocks this year. “The stock market isn't reflecting the political situation in the country,'' said Kingsnorth, who manages about $500 million in south Asian equities for Laxey in London. ``The security position is as bad as I can remember it. I am surprised the (Colombo stockmarket) index is at these levels.''

On the other hand, there are foreign investors – like the Malaysian’s, Sri Lanka’s biggest investors for the past three years – who have faith in Sri Lanka despite the uncertainty. Some weeks back, we suggested that the BOI should use established investors like Dialog, Unilever, De La Rue (the currency printers based in Biyagama) and so on as investment ambassadors to woo their investment colleagues here.

Foreign investors are prone to listen to other investors – a tactic used by many countries including Singapore – than government officials. Big delegations led by ministers and their officials will often come back with the ‘good’ news that everyone wants to invest but that’s a case of investors trying to please ministers and not pursuing it thereafter.

The closure of the IMF office in Colombo is also a negative to investment promotion efforts because investors often rely on the advice of institutions like this to feel the pulse of a nation.

Security and political uncertainty is not the only issue however. Recently an IT specialist spoke of how Sri Lanka is lagging behind in the IT sector.

“There are foreign companies wanting to invest but they have problems with consistency in policy, lack of infrastructure and quick processing of applications,” he said adding that these are bigger issues than security and political stability. Another problem area is foreign exchange swings and an unpredictable rupee! Points to ponder for Amunugama as he reaches for the sky !