Key takeaways from the Colombo Port City discussion

PwC Sri Lanka recently hosted a webinar on Colombo Port City and its potential impact to the Sri Lankan economy. 
The event speakers included Thulci Aluvihare, Head of Strategy and Business Development – CHEC Port City Colombo (the “Project Company”), Aruna Perera, Director – Corporate Finance & Valuation Consulting and Dr. Wignaraja Ganeshan, Executive Director – Lakshman Kadiragamar Institute of International Relations and Strategic Studies (LKI), PwC said in a media release. 
 

Can Port City be positioned as a modern services hub? 
Dr. Wignaraja spoke about the published research study conducted by LKI which looked at the state of play of the services industry globally and Sri Lanka role in modern services development. The study also looked at scenarios on how the Port City Colombo could evolve over the next 20 years given alternative assumptions about domestic and international factors. Finally, the study benchmarked national policies and SEZ conditions in Sri Lanka against those in Asia and the Middle East including Malaysia, India, South Korea and United Arab Emirates. 
He said that findings suggested that traditional services (such as public administration, education, trade, investment, retail and construction) are a foundation for many economies looking at modern services (such as IT, finance, insurance and professional services) to drive economic growth and structural transformation. Modern services are important because they're associated with better productivity, growth and exports which are critical for a country like Sri Lanka which has a foreign exchange constraint and needs to provide high value jobs for its people.

Economic impact from the Port City to Sri Lanka
Aruna Perera explained the basis of which PwC Sri Lanka evaluated the economic impact of the Port City to the Sri Lankan economy. The project was divided into three distinct stages; 1) Reclamation, Infrastructure Development and land lease, 2) Construction, 3) Operation. The impact was analyzed using the parameters; 1) of Employment, 2) Foreign direct investments, 3) Balance of payments, 4) Value addition, and 5) Government revenue.
According to the Project Company, the reclamation of land has already completed, and the construction stage is to start in 2021 and complete by 2041.
The Reclamation and Infrastructure Development and Construction stages have a one-off impact during the project period. But more importantly, the operational stage has a recurring impact every year. To measure the impact of the operational stage, PwC looked at the impact that would have been there in a mature year of operation of the businesses to be located within the Port City. For the impact assessment, data collection was conducted at micro, meso and macro levels.
Three types of impacts were measured, namely 1) Direct, 2) Indirect, and 3) Induced. For an example, assume that there's a hotel in the Port City that adds value to the economy, generates revenues and employment. Such contribution is the direct impact to the economy. The indirect impact is something slightly beyond. Assume the same hotel in the Port City buys vegetables from farmers in Kandy. The farmers will get an income and will grow to supply to the hotel in the Port City. It is called the indirect impact. The induced impact goes even beyond that.  Let's say that a farmer in Kandy employs five labourers in his field. The farmer will pay money to the employees who in turn will go on to create a demand for goods and services (e.g. buy a shirt).

Employment 
PwC evaluated potential employment, foreign indirect investments, balance of payment impact, value addition and finally government revenue at different stages of the project. Based on our estimations, during the Construction and Operational stages, the Port City will generate 175,000 and 200,000 jobs respectively.
Another important aspect that has to understood is the knowledge transfers. As the foreign employees that are expected to be employed in the Port City might have been exposed to state of art technology and knowledge, such knowledge may get shared with local employees. This will improve productivity and increase the income generating capability of local employees.

Value addition
In terms of Value addition during the Reclamation and Infrastructure Development stage, PwC considered the excess of leased value of land (approximately 178 hectares) over various input costs to reclaim such land. Similarly, during the Construction stage, when the apartments are sold, excess of sales proceeds over the material cost contributed mainly to the value addition.  For the Operational stage, PwC looked at the difference between the revenues generated and various intermediate expenses to arrive at the value addition. The value addition in the first two stages (USD 4.6 billion in reclamation stage and USD 13 billion in the construction stage) are one-off impacts. During the operational stage, USD 12 billion of value addition is estimated to occur annually as companies produce as services, export and trade. For the estimation, PwC looked at both direct and indirect impact when computing the value addition. 

Foreign direct investments 
During the land reclamation foreign direct investments will come from two specific sources; 1) Port City’s investment of USD 1.4 bn, 2) FDIs from leasing the land. During the construction stage, developers will invest in developing the building infrastructure to boost FDIs. Finally, in the operational stage, there will be recurring FDIs due to reinvestment of profits.

Challenges for the Port City
Thulci Aluvihare stated that the reclamation work was completed during 2019 and now the Project Company has commenced the construction of infrastructure such as utilities, road network and the landscaping of public spaces. He further stated that due to the COVID-19 pandemic there has been some slowdown in activity but with the country getting back to normalcy, the project can also commence construction activities to get back on schedule. 
He further mentioned that the Project has floated 10 Requests for Proposals (RFPs) for 10 land slots. The Memorandum of Understanding (MoU) was signed on the Marina with a local party as a temporary arrangement for two years to create the footfall that is required until the Port City signs with an international marina operator. Another RFP is for the investment in a mixed-use development project which consists of office, residential and retail space on a three-hectare land extent. However, he further mentioned that during these challenging times it is important to instill investor confidence. The project company which had already invested USD 1.4 billion on the reclamation works, has come forward to invest another a billion dollars on the vertical development.
However, based on their market sounding exercise, he further stated that the investor reactions have been mixed. This was mainly due to Easter Sunday attacks last year and then obviously the recent pandemic. Some investors are adopting a wait and see approach on how the current situation transpires albeit some are quite confident that given the long-term nature of the project, the COVID-19 impact will only be short-term.
He further stated that it is important to recognize that there is intense competition in the region and for the Port City to be positioned as an attractive proposition, the project needs to be competitive to attract foreign capital flow. 

Developing of the policy framework for Colombo Port City 
Dr. Wignaraja Ganeshan said that the LKI Research showed that investors require a law that’s clear and transparent with regard to property rights of investors, tax concessions and also market access to large economies in India and East Asia. The negotiations with India on the upgraded trade agreement will be crucial for attracting investments from Indian investors. Likewise, he further stated that Sri Lanka needs to have a trade agreement with China and make the Sri Lanka-Singapore trade agreement active to bolster investor confidence from wealthy Southeast Asian economies including Singapore, Malaysia, Thailand and Indonesia.
The signal that Sri Lanka is “open for business” needs to be clearly articulated not just by statements made but also by concrete actions on the ground such as laws, infrastructure, and education. Dr. Wignaraja argued that potential investors pay careful attention to Sri Lanka’s annual ranking in cross-country benchmarking exercises of investment climates like the World Bank’s Doing Business Index and the World Economic Forum’s Competitiveness Index.