Attracting Regional FDIs Building a Conducive Climate for Entrepreneurship to Thrive COPYRIGHT © 2018

Table of Contents What do Entrepreneurs look for ? FDI Country Comparison FDI Trends in Sri Lanka -1978 to 2017 Why have we lagged behind? Where did we go wrong? Have we missed the bus? Regional Comparison of Investment incentives Sri Lanka’s World ranking in access to Finance Factors that need to be considered to improve FDIs In Sri Lanka How do you create an eco system to attract FDIs and promote entrepreneurship? Key learnings in setting up of SEZs How can Port City help to attract FDIs and promote entrepreneurship?

FDI: What do Entrepreneurs look for? Hardware Software Political stability Airports Access to Finance Roads Connectivity R&D Human Capital Water Internet Utilities Simple taxes Flexible Labour laws Location Electricity Work permits Ports Cross boarder Investment Perspective: Need to have a reasonable amount of hardware Getting hardware sorted is a very costly exercise, hence it is important to target investments in areas it would generate returns. A more weightage is really given to Software; Fixing these would not require a whole heap of funds but a Political Will is essential Why do I say that? We cannot be a regional hub for excellence and have restrictive policies on allowing foreigners to work here.. Relaxed exchange control Telecommunication Stable Legal framework Railways Access to markets Favourable Policies

FDI : Country Comparison Why is HKG, SGP ranked on the TOP? Ease of Doing Business rankings… Why is Cambodia ranked high? Ease of Doing Business ranking is 138. They have 36 Registered SEZs Cambodia rank very high on Access to Finance and they have much better tax incentives to attract Investment. They’re connected to the World’s Supply Chain Source: World Bank, data base

FDI Trends in Sri Lanka – 1978 to 2017 (Annual) In 2016; FDIs from new Projects < 5% In 2017; FDIs from new Projects < 35% USD $ Need to dissect FDIs to really understand what it consist of?

Why have we lagged behind. Where did we go wrong Why have we lagged behind? Where did we go wrong? Have we missed the bus? We failed to evolve beyond the 1978 Greater Colombo Economic Commission Law Lack of export diversification High Income taxes and other Indirect taxes Stringent labour regulations Exchange Control regulations Archaic laws Border Controls Ease of Doing Business ranking is 100 Low investment in R&D Poor intellectual property rights regulations Lack of access to Finance – high interest rates, traditional asset backed funding, infant capital market 1. SL adopted open market economy and transitioning from a Agricultural based to an Industrial based economy 40 years ago; world has changed, Apparel Industry thrived as a result… 2. 2000-2015 – SL has added only 7 new products >$100Mn Whilst China, Thailand, Vietnam added 50-75 new products with Billions of export revenue 3. SL in a small market, entrepreneurs look for sizeable markets.. export oriented …Trade agreements 4. We rank 164 on enforcement of contracts.

Comparison of Investment Incentives

Sri Lanka ‘s World Ranking in Access to Finance - Low Sri Lanka’s ranking (124) on access to credit is low compared to other Southeast Asian Countries . Sri Lanka is ranked overall 100th out of the 190 countries An Ease of Doing Business Environment is essential for Entrepreneurs to thrive . >80% of SMEs in SL unserved or underserved.. Lending based on immovable property…asset light business would struggle… Cambodia: higher credit bureau coverage (% of adult population), more relaxed collateral based lending Enterprise SL

Factors that need to be considered to improve FDIs In Sri Lanka Economic Potential Business friendliness Human capital and lifestyle Cost effectiveness Connectivity Perth; Internationally recognized Energy City and wants to promote it as a global resources hub They also rank high on the quality of living index Most Livable City in South Asia by Merser Source: fDi Asia Pacific cities of the future 2017/2018 : www.fDiintelligence.com

How do you create an eco system to attract FDIs and promote entrepreneurship ? Set up Special Economic Zones; SEZs are innovative testing grounds to rollout new policy initiative to overcome old regulation barriers SEZs provide greater economic freedom from both administrative and legal aspect from Central Government SEZs would introduce a culture with technology, new learning, innovation, higher productivity thus promoting entrepreneurship South Korea has 7 types of SEZs such as : IT zones, Export Processing Zones , R& D Zones ,Enterprise zones and Free Economic Zones. Dubai has 20 free zones in a clustered eco-system based on specialized areas: Dubai Internet city, Dubai Financial Center , Dubai Media City and Heath care city, etc GIFT: Why India had failed Know-how through FDIs

How do you create an eco system to attract FDIs and promote entrepreneurship ? In China; > 20% of GDP, ~50% of FDIs, >50% of exports and > 30Mn jobs; 30yrs ago Huawei was set up in Zengen SEZ with a Seed Capital of USD 3000. China SEZs have evolved; 1st Generation SEZs were more focused on tax Incentives, 2nd Generation SEZs on Ease of doing business and more recently they seem to combine the two Classical Labour Intensive SEZs are transforming to more Knowledge, Innovation and Technology driven SEZs SL does not have the demographic dividend like Bangladesh, Cambodia, etc … labour is scares and expensive….

Key learnings in setting up SEZs: China, South East Asia and Africa Experience SEZs based on Political interest rather than Economic Goals are doomed to fail Quality infrastructure and high set up costs SEZs have to integrate with the local economy SEZs should be targeted specific sectors rather than very generic Should ensure that the FDI benefits should not be outweighed the tax benefits Trade Treaties should be carefully considered when establishing SEZs because they may violate treaty agreements Intentional Arbitration is the key for Investment Protection WTO - SCM Agreement (Article 1 on Subsidy) - Prohibitive Subsidies and Actionable Subsidies Africa; Power outage is xxxx and customs clearance Connecting to the global supply chain

How can Port City help to attract FDIs and promote entrepreneurship Port city will be the 1st special economic zone for Services It is a PPP; Private sector invests in the hardware and the GOSL to augment it by implementing the required software > $1.5 Bn Investment to create the infrastructure and a further $13.5Bn for vertical development It will serve as a pilot bed to test new policy measures and help the government to identify and implement successful programs in the hinterland. i.e BOI Industrial Zones Featured by a transparent Governance structure with best in class regulations, stable and consistent policy environment and an efficient public service, acting as a “one – stop services” The objective of implementing the SEZ law is to do away with the existing bureaucracy and find solutions to provide a speedy service Arrest brain drain: 29. Emigration - in 2017 Data shows that nearly 6,371 left under the professional category. 68,993 went abroad under the skilled labour category

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