Policies alone will not attract foreign investments

One-stop-shop not one-more-stop, the need of the hour

by Dinesh Weerakkody

Many foreign investors I engage with want Sri Lanka to emulate Ireland, or even Vietnam, because they tell me the attractiveness of a country to foreign investors and the feasibility of individual investment projects are not merely linked to a country's policy environment.

According to them, the administrative implementation of these policies are far more important to attract investment. It is no secret that our administrative procedures pose serious obstructions even with our apparently quite liberal investment environment.

Many investors openly complain about the difficulties even after the introduction of broad liberalization measures with respect to Foreign Direct Investment (FDI). Often broad policy reforms do not actually translate into improvements in the various bureaucratic processes investors have to go through.

Therefore, before the government starts signing FTAs it would be wise to seriously look at setting up a one-stop agency to support Sri Lanka's trade and investment needs. The one-stop shop, which can be called Trade Invest Sri Lanka, must have the teeth to provide support to Sri Lankan and foreign businesses, as outlined in our policy framework. Trade Invest Sri Lanka must bring together all support programs including incentives to build strong partnerships with business.

We need to look at an approach of having trade, which is driven by investment not relying only on MOUs and FTAs. Like Ireland, we need to build on our investment capacity and promote trade through investment. We already have a number of MNCs which are some of the largest investors in other parts of the world, and therefore, we need to drive an investment-led trade initiative.

Investor experience

Most investment promotion activities by themselves are not sufficient to attract investors to the country. In fact, such an approach can easily boomerang. A good marketing and public relations effort might well result in a strong response from abroad, with many interested investors visiting the country to explore it first hand as a potential investment location.

But in situations where administrative structures pose a serious problem, potential investors are likely to find out fast and move to another country. Experiences with obtaining visas and entering a country might be taken as the first signal.

Indications and opinions of existing investors who incurred unnecessary costs and losses due to delays resulting from actions - or a lack of action - by government agencies will leave lasting imprints. Should it turn out that administrative practices do pose a serious problem, potential investors are very likely to walk away, never to return, as the country will be seen as not being investor friendly.

It is not that investors essentially dislike government rules and regulations any investor has to follow. In fact, they are used to dealing with government administration procedures in their home countries and other countries they have invested in.

They also do not expect all these procedures to always be straightforward and work seamlessly. But they will be allergic to discretionary behaviour and unpredictability with respect to obtaining approvals.

Serious investors will think twice before committing their money, especially when they find that the success of their venture will, to a large degree, depend on paying kickbacks or relying on personal relations with ministers and well-connected people.

All this means that the government cannot simply rely only on the policy environment to attract investments. The practical implications are far more important for investors. Although the country is advertised through road shows as an attractive investment location, credibility rests with the satisfaction of potential investors and existing investors. Should investors find that their expectations are not fulfilled, they will often feel betrayed and lose trust in the country. Recognizing that existing administrative practices pose a threat to their policy reform efforts, the government needs to find practical solutions to creating a more attractive business environment.

The BOI, being the point of first contact and gate of entry for foreign investors, it would ideally be the most appropriate agency to tackle these issues. During the mid-1980s, the concept of a 'One-Stop Shop' (OSS) came into fashion as a vehicle to deal with administrative barriers and to provide a more streamlined and investor- friendly policy environment.

However, the experience with the OSS concept for Sri Lanka is checkered and not particularly helpful in some instances.

One-Stop Shop (OSS)

When trying to establish an investment project and making it operational, investors need to interact with various government agencies to obtain all the permits, licences, approvals and clearances.

In short, an investor coming to Sri Lanka has to be in contact with a number of different government and local authorities and go through their administrative procedures before operations can begin. Some have even struggled for over two years. A delay can only translate into additional costs and foregone revenue, and any permit, approval or clearance not forthcoming can jeopardize the entire project. Given the complexity of this process, the concept of an OSS still seems very attractive. The basic idea is that an investor would only have to be in contact with a single entity to obtain all the paperwork in one rationalized and coordinated process, rather than having to go through a maze of different government bodies.

In practice, an OSS would effectively mean that one government agency has all the powers to grant the various licences, permits, approvals and clearances. Without such an all-embracing authority, the agency will be unable to wield much control over the process. It could, therefore, not actually provide all the clearances at various stages of the administrative process, having to depend on other agencies instead.

Politically feasible

Today, what is more relevant is, whether a high-powered OSS is politically feasible? The other question is whether a single agency should actually have this much authority and power? It is important to recognize that most agencies and administrative processes were created in response to policy concerns of the government. Be it concerns related to policy, immigration, environmental, tax incentives or health and safety problems, each agency tries to address a particular issue with specialized staff and processes.

Any OSS that hopes to give sanctions in any of these areas, would in fact have to re-build these (or similar) structures in-house. Otherwise, approvals such as tax incentives, environmental impact assessments, or health and safety certificates would most likely not meet the underlying policy objectives.

But such a mirroring of administrative abilities would quickly turn an OSS into a governmental super-agency with massive staff and resource requirements. It is unlikely that any such agency would be able to provide fast and client-oriented services to the private sector.

Governments, therefore, typically shy away from establishing such an OSS in the narrow sense. Instead, they rely on some form of coordination mechanism where the various authorities maintain their existing mandates and responsibilities.

The typical structure of such a coordinating mechanism consists of the delegation of staff from the various ministries and agencies to set up their offices in the same location, frequently a Presidential or Prime Ministerial Coordination Committee will act as the apex body with the OSS reporting to that body with well-established scorecards and MIS.

Way forward

Whatever the solution the government has in mind, the existing One-Stop Shop we have, according to most investors has now actually turned into a 'one more stop', as investors are now forced to interact with one more entity in the process of implementing their projects.

Certainly, it may not be the weakness of the people who the run the OSS, it could be the lack of a particularly strong and all-embracing legal mandate. Well-known examples where an OSS system works well are the Economic Development Board (EDB) of Singapore, the Malaysian Industrial Development Authority (MIDA) and the Industrial Development Authority (IDA) of Ireland.

In all three agencies, investors can rely on the agency to provide practically all the approvals and clearances needed with out much hassle. All these agencies however, have strong support from the Prime Minister.

In the final analysis, the starting point for any effort, therefore, would be to reform the current Economic Affairs Committee of the government (a committee structure launched during President Premadasa's time in the late 80s) and make it more output driven than policy and approvals driven and finally fix the structure and get the talent to reflect the change taking place in the economy and in the UNP- SLFP-led government.

The writer has held senior positions in the public and private sectors.